Use of IFRS for SMEs by publicly accountable entities

At its March 2013 meeting the IASB started to discuss whether the scope requirements of the IFRS for SMEs are currently too restrictive for publicly accountable entities (Issues 1 and 2 for that meeting). No decisions were made at that meeting.

The Staff asked the following questions to the IASB Board:

1. Does the IASB agree with the staff recommendations that paragraph 1.5 of the IFRS for SMEs should be deleted and replaced with the disclosure requirement set out in paragraph 26?
2. Does the IASB agree with the staff recommendation that the IFRS for SMEs should remain clear that its intended scope is entities that do not have public accountability (as defined) and its requirements should not be amended to cater for publicly traded entities or entities holding assets for a broad group of outsiders as one of their primary business?
3. Does the IASB agree with the staff recommendation that additional guidance should be provided to jurisdictions as set out in paragraph 24?

One member answered no to this question as the expansion of scope is contra to the original purpose of the standard and it raises the risk that publicly accountable entities will not be comparable to those preparing full IFRS accounts. If an entity has fiduciary responsibility such as a small bank or a credit union should be deemed to be publicly accountable and it would be reasonable to expect these type of entity to follow the guidance under full IFRS.

Another member noted that if an entity meets the definition of a publicly accountable entity but they choose to use the IFRS for SMEs (as allowed by their regulator) they should be allowed to and clearly disclose it.

A member notes that paragraph 26 needs improving by including under “(a) a statement saying that applying IFRS for SMEs even though that accounting under IFRS for SMEs is designed to be adopted by non-publicly accountable entities” to make it absolutely clear they are using a framework which was not designed for non-publicly accountable entities.  Another member noted that it should also include that if entities want to include any additional disclosures these should be consistent with full IFRS and highlight which accounting policy they have used.

Another member opposed the removal of para. 26 which is consistent with the recommendation made by the Staff, which would be detrimental to the public and might be perceived as thought the IASB is encouraging entities to use IFRS for SMEs in public markets. Suggested taking out the barrier and leaving the decision with the local regulators and assist regulators to make an informed decision of how this can be used in their market and provide them with an analysis of the differences in recognition and measurement between IFRS for SMEs and full IFRSs.

A member did not perceive this to be a big risk even though there is no size limit or consideration for complexity. Those entities that are not listed on a regulated market should be allowed to use IFRS for SMEs which is better protection for investors instead of the local GAAP. The ESMA letter says the board should not commit that companies not listed on the regulated market should not be allowed to use IFRS for SMEs instead of full IFRS.

Another member raised the issue that small entities which are thinly traded (e.g. having only two or three investors holding their debt or shares) will still be classified as being a publicly accountable entity and would push them into full IFRS.

A member noted that publicly accountable entities may be using local GAAP which does not have the same standing of IFRS for SMEs and this prohibition would deter them from using a better set of standards or only from prohibiting them from calling them IFRS for SMEs.

7 out of 16 board members voted in favour to remove para. 1.5 so the Staff recommendation was not supported.  The Staff will, however, follow up on the definition of ‘fiduciary’ and provide some recommendations to the board.

New and revised IFRSs

At its March 2013 meeting the IASB considered the framework for how to deal with new and revised IFRSs during this comprehensive review and future reviews of the IFRS for SMEs. At that meeting the IASB developed the following principles:

1. New and revised IFRSs should be considered individually on a case-by-case basis to decide if, and if so how, their requirements should be incorporated in the IFRS for SMEs.
2. New and revised IFRSs should not be considered until they have been published. However, it would generally not be appropriate to wait until the post-implementation reviews have been completed.
3. Minor changes to IFRSs, e.g. as part of the IASB’s Annual Improvements project, should also be considered on a case by case basis.
4. In order to provide a stable platform for SMEs, the IFRS for SMEs should only be updated for changes at the next three-yearly review.

The Staff asked the board how should they address the following new or revised IFRS?

1. IFRS 10 Consolidated Financial Statements
2. IFRS 13 Fair Value Measurement (and whether guidance should be moved from Section 11 into a separate section
3. IFRS 11 Joint Arrangements
4. IFRS 3 (2008) Business Combinations
5. IAS 19 (2011) Employee Benefits

The Staff asked the board to take account of two key points when considering the individual IFRS standards during this review, firstly the staff think there is an additional need for more stability during the initial review and hence to limit non-essential changes. Even though the IFRS for SMEs has been issued during 2009, in the 80 plus countries it has been adopted this has been effective for a much short period of time (e.g. 2012/2013) and for many SMEs these are relatively new standards. Secondly, the staff believes that changes should be weighed against the primary aim of the IFRS for SMEs and the staff of the IFRS for SMEs implementation group believe that the aim to have a standalone simplified standard for entities without public accountability with less complex transactions limited in resources to apply full IFRS and where comparability with entities applying full IFRS is not so important.  The Staff has made recommendation to the board standard–by-standard and the reasoning for recommending no changes to IFRS 3, 10, 11, 13 and IAS 19.

One member noted that it would be more appropriate to adopt the changes now when the standards have not been widely adopted rather than wait two or three years when more entities would have adopted the standards and introduce a wave of changes later.  Another member notes that when changes are available these should be put through to facilitate the process and not create a back log.  IFRS 10, 11, 12 and 13 by the time they have been simplified for application in IFRS for SMEs the extent of the changes might not be so burdensome. IAS 19 for example would actually make things simpler because it will remove options at the moment under the current standard in IFRS for SMEs, actuarial losses are put through the profit or loss account or OCI and the revised standard just says to put it into one place.  It is understood that there is more complexity in the other standards however it would be useful to have an analysis to understand the simplifications to evaluate if these are going to be burdensome or not.

The Staff noted that there will be changes in the definition of termination benefits in the short term and with many of these standards one may think that there will be a lot of changes but it may be that when making the overall changes there would not be much differences to the actual outcome and a better assessment may be made once the full IFRS standards have been adopted.

A member noted that waiting for post-implementation could create enormous time lags.  The timing of IFRS 10, 11, 12 and 13 is very unfortunate in that we have virtually no experience and hopefully for other standards there will be a year or so in between when they will be going live and when they are getting into the process of reviewing, therefore the timing might not always be an issue.

The Staff noted that in the case of IFRS 10 is more on the boundary of controls so for most of the simple parent subsidiary they won’t be affected, similarly for IFRS 11 many of the jointly controlled entities and also with IFRS 13 maybe the overall effect of these standards won’t need to change the amount of fair value.

This could also mean that it would help the SMEs as they would have a clearer definition of what is fair value and clearer guidance, however simplified it may be.  There is simplified guidance of fair value measurement which makes it less burdensome.

One member agreed with the staff recommendations but had one comment in relation to “the presentation of actuarial gains and losses under full IFRSs may be revisited” where the word maybe is in conflict with the conclusions reached on the conceptual framework and will not be considered at this meeting and avoid might raise some concerns in peoples mind.

The board voted in favour of the Staff recommendations including a window for stability.

Issues relating to accounting policy options

There are three questions in the Request for Information (“RFI”) that relate to whether SMEs should be able to apply a more complex accounting policy based on requirements currently required or permitted in the full IFRSs.  These questions are as follows:

1. Revaluation of property, plant and equipment (“PPE”);
2. Capitalisation of development costs;
3. Capitalisation of borrowing costs on qualifying assets.

The Staff asked the Board:

1. Should be an option to use the revaluation model for PPE be added to the IFRS for SMEs?

The Staff have received a lot of feedback that not having a revaluation option is a barrier to adoption of IFRS for SMEs. For example in jurisdictions where SMEs already revalue PPE and where there is significant inflation.  The Staff recommend why they don’t support the complex option of adding revaluation to the IFRS for SMEs and they have concerns that if they add one they will have to add others.

One member noted that adding the revaluation model would add the complexity of issues such as how often an entity needs to revalue its PPE and adds other complexity around tax accounting.

The Board all agreed with the staff recommendation.

2. Should the IFRS for SMEs be changed to permit or require capitalisation of development costs meeting criteria for capitalisation on a similar basis to IAS 38?

The Board all agreed to not permit or require capitalisation of development costs meeting criteria for capitalisation.

3. Should the IFRS for SMEs be changed to permit or require capitalisation of borrowing costs on a similar basis to IAS 23?

The Board to not permit or require capitalisation of borrowing costs.

Optional fall back to IAS 39 Financial Instruments: Recognition and Measurement

The Staff noted that the IFRS for SMEs currently permit entities to elect to apply either Section 11 or 12 of the IFRS for SMEs in full or the recognition and measurement provisions of IAS 39 and the disclose requirements of Section 11 and 12 and this is the only fall back to full IFRS in the IFRS for SMEs. One of the main reasons to give SMEs the fall back was that to give them the same accounting policy options as IAS 39 pending completion of the Financial Instruments project. This reason is expected to remain valid based on the principles the IASB developed on the new revised IFRS 9 will not be considered for incorporation during this review as it is not yet completed. IAS 39 will have to be maintained separately for this purposes and perhaps the only reason for keeping IAS 39 is if later they did not drop the fall back to full IFRS then if an entity was currently applying IAS 39 it would need to change to IFRS 9 and then when the fall back is dropped to IAS 39 in the next review then it would need to move to IFRS 9 so it would adopt IAS 39 to IFRS 9 for the first few months and then move to Section 11 and 12.

One member noted that IAS 39 is there to stay for some time and consider in the future how the incurred loss model impacts SMEs and should be tweaked.

The Staff asked the IASB board members how should the current option to use IAS 39 in the IFRS for SMEs be updated once IFRS 9 has become effective?

The Board all voted in favour of the staff recommendation.

Accounting for income tax

There are three questions in the RFI on income tax.  The staff suggested that the IASB discuss these questions together:

1. Approach for accounting for deferred income taxes;
2. Consideration of exemption from recognising deferred taxes and other differences under IAS 12 Income Taxes;
3. Rebuttable presumption that investment property at fair value is recovered through sale

1. Should SMEs recognise deferred income taxes and, if so, how?

The Staff noted that people are complaining that the overall temporary difference approach is too complex and it’s not just the difference between IAS 12 and the current standard.  The main two comments received by the Staff are one being that IAS 12 is a better standard and that SMEs are not familiar with the temporary differences approach altogether and would prefer to use a simpler standard than IAS 12.

One member noted that from experience SMEs do not have tax experts and have difficulty with the notion that somehow there is a tax basis that is in liabilities in jurisdictions that don’t have that concept.

Assuming a temporary difference approach is followed for SMEs:

2. Should Section 29 be revised to conform it to IAS 12, modified as appropriate to reflect the need of the users of SME financial statements?

3. Should Section 29 include an ‘undue cost or effort’ exemption for some or all of its requirements?

The Board advised the Staff develop a way of simplifying IAS 12 to reflect the needs of users of SME and agreed with the staff recommendations.

4. Should Section 29 be revised to incorporate a rebuttable presumption that the carrying amount of investment property measured at fair value will be recovered entirely through sale?

The Staff noted that in December 2012 the IASB amended IAS 23 to introduce this rebuttable presumption which is a new and revised IAS issue since the IFRS was published and the Staff is recommending to introduce this into the standard as it is already effective with what implementation experience as some entities have adopted this early and results in simplification and if they are aligning Section 29 to IAS 12 it would make sense to incorporate this at this time.

The Board all agreed with the Staff recommendation.

Other issues addressed by individual questions in the RFI

The following are the remaining questions in the RFI:

1. Amortisation period for goodwill and other tangible assets
2. Presentation of share subscriptions receivable
3. Inclusion of additional topics in the IFRS for SMEs
4. SMEIG Q&As

The Staff noted that the first issue related to the amortisation period for goodwill and other intangible assets. Currently the IFRS for SMEs requires that, if an entity is unable to determine a reliable estimate of the useful life it is presumed to be a fixed life of ten years, however they have been told that firstly in some cases even though a reliable estimate cannot be determined it is clear that ten years may be too long also the fixed life causes a problem in some jurisdictions as the laws may require a different default life for example five years. The SME Implementation Group (“SMEIG”) have recommended alternative wording for the IASB to consider that is ‘If an entity is unable to make a reliable estimate of the useful life of an intangible asset, the useful life shall be determined based on management’s best estimate and shall not exceed five years’.

The Staff supports this but suggests retaining the ten years so that there will be adjustments to the financial statements with the ten year being an upper limit when management cannot make a reliable estimate.

The Staff asked the Board the following questions:

1. Should paragraph 18.20 be modified?

One member noted that the concern is that the way this was originally worded entities would have a fairly short date of intangible that would not be able to say how many years but they would know its four or five years and the standard obviously forced them to take ten years even though the gut feel was that four/five years was more appropriate but not auditable. The revised approach is to go for the lower number even though it is not auditable as long as it does not exceed ten years.

Another member recommended it should be an accounting policy election with a limit to not exceed ten years.

The Board voted in favour of the Staff recommendation.

2. Should paragraph 22.7(a) be modified or deleted?

The Staff noted that this relates to the presentation of share subscriptions receivable where the IFRS for SMEs currently requires the offset against equity and received mixed views from respondents on whether receivable should be presented as an asset or as an adjustment to equity.  Also some national laws require presentation as an asset and the requirement in IFRS for SMEs was added as an additional guidance whereas full IFRSs is silent.

The Staff is suggesting that paragraph 22.7(a) should be deleted.

One member opposed the recommendation because (1) the big book is silent and most people would say that showing a receivable for share subscription as an asset would be against the accounting in many jurisdictions (2) in the conceptual framework they are thinking they will not allow this. This would be good to bring consistency and by removing this it could imply that entities can recognise this as an asset which is not necessarily the right answer.

The Staff commented that this was included in the standard as some laws require it to be presented as an asset and also a difference between the IFRS for SMEs and the EU directives.

Another member commented that the guidance will need to make it very clear that there should be a legally enforceable right to the cash.

8 of 16 Board members voted in favour of the staff recommendations and no decision was taken at this stage.  It will be discussed again at another meeting.

3. Are there any topics that are not specifically addressed in the IFRS for SMEs that should be covered (i.e. where the general guidance in paragraph 10.4-10.6 is not sufficient)?

The Board voted in favour of the Staff recommendation.

4. Should the Q&A programme continue after this comprehensive review is completed?

5. If so, does the IASB agree with the two tier system recommended by the Staff and SMEIG?

The Staff noted that there was a mixed response on Q&As. Those expressing concern noted that they add another set of rules on top of the IFRS for SMEs and  could create conflicts with full IFRS as they deal with issues relevant to both IFRS for SMEs and full IFRSs. They also commented that Q&As do not go through adequate due process and documents are issued under the control of the Board and some respondents think that these should go through the same process as Interpretations. The Staff consider these Q&As as non-mandatory and educational in nature unlike Interpretations. The Staff recommend a two tier system for Q&As: in rare cases a full due process should apply and would become authoritative guidance and would be included in the Interpretations; and tier two would be the norm constituting educational material.

A member highlighted the potential impact of IFRIC interpretations for IFRS for SMEs and should formally state that these should not be incorporated in IFRS for SMEs and remaining silent on this point will be perceived as an omission and seen as ignoring all the work done by IFRIC. The Staff clarified that the intention was not to ignore them but to bring in the five Interpretations that were considered to be most significant for IFRS for SMEs based on what was in the standard at the moment and they did not say in the paper that they will be bringing the others to future meetings.

The board all voted in favour to continue with the Q&A program and adopt a two-tier system.

6. Should the IASB establish a procedure for constituents to submit issues to SMEIG via its website?

It was noted that the Staff and the SMEIG believe that the IASB should establish a procedure for constituents to submit issues to the SMEIG via the IASB website. It was proposed by the Staff that issues are not posted online and instead, say, that they be dealt  as part of the the development of the IFRS Foundation’s education material and only significant issues that are raised be forwarded to the SMEIG for consideration (ie those meeting the three criteria in the terms of operation of the SMEIG).

The Board voted in favour of the staff recommendations.

7. How should Q&As be incorporated into the IFRS for SMEs?

One member commented that these Q&As should be incorporated into the educational material but not maintain them as they are a separate supplemental stream of information about the SME standard and inform entities that there is one standalone document and there is educational material to support it.

The Board voted in favour of the above proposals.