IFRS for Private Entities (formerly Small and Medium-sized Entities, or SMEs)

Date recorded:

The Board continued its redeliberations of the proposals in the February 2007 Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities (the ED). At this meeting the Board discussed the key issues relating to section 4 to 12 excluding any disclosure issues and requests for additional implementation guidance. The main decisions are outlined below.


Balance sheet (section 4)

With regard to the presentation of the statement of financial position (balance sheet) the Board decided to:

  • Retain the requirement that a private entity should present the statement of financial position based on liquidity if this presentation provides information that is reliable and more relevant than a current/non-current presentation. The Board was nearly equally split on this issue but finally a majority of Board members was of the view that private entities should not be precluded from presentation based on liquidity.
  • Not simplify the criteria for current/non-current classification of assets and liabilities, that is, not to exclusively base this classification on the 12 months criterion.
  • Retain the requirement that the current portion of a non-current liability should be presented separately as part of current liabilities


Income statement (section 5)

The Board decided to delete the requirements in paragraph 5.10 for additional disclosures if an analysis of expenses by function is chosen since these disclosures are already required by other sections.

No decision was made on whether changes in fair values should be presented separately on the face of the statement of comprehensive income (income statement). The staff was asked to further elaborate the implications of such a presentation requirement.


Statement of changes in equity and statement of income and retained earnings (section 6)

The Board agreed that a combined statement of comprehensive income and retained earnings should only be permitted if the changes to equity during the period arise from profit and loss, payment of dividends, corrections of prior period errors and changes in accounting policies. In case other equity transactions with owners occur, a separate statement of changes in equity would be required.


Statement of cash flows (section 7)

The Board reaffirmed its decisions that all private entities should be required to present a statement of cash flows and that operating cash flows should be presented using either the direct or indirect method.


Consolidated and separate financial statements (section 9)

The Board agreed the following:

  • Not to provide exemption from the requirement to present consolidated financial statements, i.e. the Board reaffirmed its decision that all private entities that are parent entities should prepare consolidated financial statements.
  • Not to provide a temporary control exemption.
  • To retain and probably enhance the guidance on combined financial statements. A majority of Board members was of the view that quite often two or more private entities are controlled by a single investor and, therefore, private entities should be encouraged (but not required) to prepare combined financial statements.
  • To allow in the separate financial statements different accounting policies for categories of investments, for example, to measure associates at fair value through profit and subsidiaries at cost. This decision is a consequence of the general decision made at the May 2008 meeting that all accounting policy options in full IFRSs should also be available for private entities.


Accounting policies, estimates and errors (section 10)

The Board in principle confirmed the accounting policy hierarchy in paragraphs 10.2 to 10.4. However, the Board decided to amend paragraph 10.4 to clarify that an entity may, but is not required to look at full IFRSs and to exclude pronouncements of other standard setting bodies from the hierarchy.


Financial assets and financial liabilities (section 11)

The Board had a thorough debate on the guidance regarding financial instruments. The Board decided to reorganise the section to make application easier. In particular it should be clarified by use of examples that the cost model will be appropriate for most of the financial instruments usually held by private entities. In this context the Board decided not to define cost/amortised cost as the default measurement basis since this would require explicit guidance for financial instruments that are to be measured at fair value such as derivatives and embedded derivatives.

Among other things the Board also decided to:

  • Remove the option in paragraph 11.1 to apply IAS 39 and IFRS 7 in full instead of section 11. However, the Board acknowledged that this is a tentative decision and decided to redeliberate this decision after Section 11 has been reorganised as outlined above.
  • Not add an 'available for sale' category for financial assets to section 11.
  • Not permit straight-line amortisation of discounts and premiums as an alternative to the effective interest rate method.
  • Not permit a 'shortcut method' for hedge accounting.
  • Not include additional guidance on measuring hedge effectiveness. Instead, such guidance should be included in the training materials developed by the IASC Foundation.
  • Add additional guidance to clarify which types of risks can be hedged in accordance with paragraph 11.31.
  • Add guidance on accounting for factoring and similar transactions.
  • Clarify that interest rate swaps must be measured at fair value through profit or loss.
  • Clarify that an impairment loss for an equity instrument carried at cost because it is not publicly traded and its fair value cannot otherwise be measured reliably should be the difference between the asset's carrying amount and the best estimate (which will necessarily be an approximation) of the amount (which might be zero) that the entity would receive for the asset if it were to be sold.

The staff was asked to redraft section 11 accordingly for discussion at a future meeting.


Inventories (section 12)

The Board decided to:

  • Not permit using IAS 2 in full instead of section 12.
  • Allow measuring inventory at the most recent prices if the results approximate costs.
  • Not allow LIFO as an inventory cost method.

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