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IFRS for Small and Medium-sized Entities

Date recorded:

At this meeting the Board started its redeliberations of the proposals in the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED).

The staff presented the key issues that were raised in comment letters on the ED, the reports prepared by field test entities and the IASB SME Working Group meeting in April 2008.

At this meeting the Board was asked to make decisions on general issues and issues relating to some specific sections of the ED. The staff noted that all disclosure issues and specific requests for additional implementation guidance will be combined and addressed separately at a future meeting.

 

General issues

Stand-alone IFRS for SMEs, Accounting policy options, and Omitted topics

The three issues were discussed together since they are related.

The Board decided that the IFRS for SMEs should be a fully stand-alone standard.

This decision implied all cross-references to full IFRSs being removed. Currently the ED contains two types of cross references:

  • Accounting policy options: The ED generally includes the simpler option and allows application of the more complex option by cross-reference to full IFRSs
  • Omitted topics: The ED does not address certain topics that are presumed not to be encountered by typical SMEs but allows application by cross-reference to the respective full IFRS

The Board then discussed to what extent the cross-referenced topics should be included in the standard.

By majority vote the Board affirmed its decision that all accounting policy options should be available to SMEs. The Board also decided that the options that the ED had proposed to allow by cross-reference to full IFRSs should be included in an appendix to the standard, that is, not in the main text of the respective section. No decision was made regarding the question whether and to what extent the (more complex) options should be simplified for use by SMEs.

Regarding the nine omitted topics identified in the staff analysis the Board decided by majority vote to include five of them and to be silent on the remaining four:

The topics to be addressed (simplified as appropriate) in the standard are:

  • Lessor accounting for finance leases
  • Equity-settled share-based payment
  • Share-based payment transactions with cash alternative
  • Financial reporting in a hyperinflationary environment
  • Determining the fair value of agricultural assets
The topics to be deleted completely are:
  • Segment reporting
  • Earnings per share
  • Interim reporting
  • Insurance contracts (insurers would not be eligible to use the proposed IFRS for SMEs)

No decision was made in relation to the information an SME needs to provide if it presents information on the deleted topics in its financial statements. However, there seemed to be a consensus that this issue should not be addressed in a pervasive disclosure requirement. The staff was asked to bring back a proposal for discussion at a future meeting.

Anticipating changes to full IFRSs

The Board discussed whether the standard should include a principle that the IFRS for SMEs should not try to anticipate evolving changes to full IFRSs but that if a genuine simplification of full IFRSs that is appropriate for SMEs happens to coincide with the direction that the IASB appears to be following in one of its projects, this should not prevent inclusion of this simplification in the IFRS for SMEs.

By majority vote the Board decided not to address this issue since such a principle would not be operational and could put constraints on the development of a separate, fully stand-alone IFRS for SMEs.

Entities that receive funds in a fiduciary capacity

The Board principally agreed to a staff analysis that an entity whose primary business is holding funds in a fiduciary capacity is publicly accountable and hence should be out of the scope of the IFRS for SMEs. This decision implies that an entity that holds funds in a fiduciary capacity as a sideline to its principal business should be permitted to use the IFRS for SMEs if it otherwise qualifies.

However, the Board asked the staff to further elaborate the meaning of 'primary' and to consider consequential adjustment to the definition of scope in section 1 of the ED.

Replace the term fair value

Some constituents noted that the term 'fair value' belongs to the language of valuation experts and is not easily understandable. These constituents suggested replacing the term fair value by a description of what the basis for measurement is in each specific case.

At first a majority of Board members disagreed with this proposal. One Board member noted that the term fair value is currently deliberated as part of the fair value measurement project on full IFRSs and that any decisions in the SME project could be precedential. Other Board members raised the concern that such descriptions could have unintended consequences since they may result in diverging definitions in IFRS for SMEs and full IFRSs.

Finally, the Board agreed to a staff proposal to bring back a draft wording of such descriptions for discussion at a future meeting.

Post-issuance assessment and ongoing review of the IFRS for SMEs

The Board was reluctant being specific regarding the timing of such reviews.

The Board agreed to undertake a post-issuance assessment of implementation problems after two years of financial statements using the IFRS for SMEs are available. Thereafter reviews should be performed when deemed necessary which would be expected to be on a three-year cycle.

Other general issues

In addition, the Board made/confirmed the following decisions without discussing the issues in detail:

  • Change the title of the standard to 'International Financial Reporting Standard for Private Entities' with private entities defined similarly to the ED's definition of small and medium-sized entities.
  • The standard should not explicitly exclude micro entities (such as fewer than 10 employees). Consequently, no very simple set of standards for micros (a third tier of standards) should be developed.
  • The standard should not include special exemptions for entities at the small end of the SME spectrum
  • Small listed entities should not be included in the intended scope of the standard.
  • No 'undue cost or effort principle' should be included in the impracticability exemption when the standard requires restatement.
  • Regarding fair value measurement:
    • An overall 'undue cost or effort' principle should not be added for fair value measurement,
    • The condition 'intent to dispose' should not be added whenever a fair value measurement is required and
    • A condition such as 'is readily realisable' or 'has an observable market price' should not be added whenever a fair value measurement is required.
  • Not to change the overall structure of the standard.
  • No formal process for developing official interpretations of the IFRS for SMEs should be established.

 

Issues relating to specific sections of the ED

At this meeting the Board discussed issues relating to sections 1 to 3.

Use by a subsidiary of a full IFRS company (section 1)

The Board agreed that a subsidiary of an IFRS entity should not be allowed use the recognition and measurement principles in full IFRSs but make only the disclosures required by the IFRS for SMEs in its published general purpose financial statements.

Objective of financial reporting and qualitative characteristics (section 2)

The Board deferred most of the decisions in light of the forthcoming exposure draft on Phase A of the conceptual framework project. In particular, the Board deferred the decision whether the final IFRS for SMEs should reflect the changes expected to be proposed to the IASB framework on objectives and qualitative characteristics.

The Board agreed with the staff recommendation that determination of taxable income and distributable income should not be added as objectives of the financial statements of an SME.

Financial statement presentation (section 3)

The Board decided that the IFRS for SMEs should:

  • not prescribe financial statement formats, subtotals, minimum line items, sequencing, and note disclosures with more specificity than currently in the ED,
  • incorporate the new requirements in IAS 1 (revised 2007) Presentation of Financial Statements, and
  • not require two prior years of comparative data.

The incorporation of the requirements in IAS 1 (revised 2007) implies, among other things, that an SME would be required to present a statement of comprehensive income. Additionally, the new titles of financial statements would be used in the final standard but would, similarly to full IFRSs, not be mandatory.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.