IFRS for SMEs
The Senior Technical Manager introduced the session by summarising the first of two agenda papers. That paper provided Board members with an overview of the comprehensive review, the SMEIG report, ongoing outreach activities as well as with an indicative timetable of the next steps. She indicated that the feedback obtained in the outreach was consistent across participants and did not provide additional issues to those proposed by the staff. However, she said that the participants had reported difficulties in identifying users of the IFRS for SMEs. She indicated that before moving forward to conduct further outreach activities it would be important to identify those users.
Several Board members raised comments about the users of the IFRS for SMEs. They indicated that, in general, lenders and banks were users of this information; however, they did not have extensive knowledge about the IFRS for SMEs. The Senior Technical Manager said that staff had spoken mainly to lenders and indicated that, usually, these would not analyse the financial statements in detail so they were not familiar with the IFRS for SMEs. The Vice-Chairman made a similar comment. Another Board member also pointed out that he participated in some outreach activities and identified that in South Africa there was a general understanding of the IFRS for SMEs but no more than that. He said that users obtained the audited financial information and did not make any adjustments. Another Board member indicated that in his jurisdiction in Latin America the differences in reporting pre- and post-implementation of the IFRS for SMEs would still not be well understood. He said that banks would just take the information from the financial statements and would focus only on a few topics, such as liquidity, credit history etc. The Chairman indicated that the fact that the IFRS for SMEs was simpler was probably the explanation. Another Board member said that there could be international organisations such as the World Bank that are users of the IFRS for SMEs and that could provide suggestions for amendments to the IFRS for SMEs. The Senior Technical Manager said that staff had not received comments letters from those organisations. Another Board member indicated that for her, the conclusion would be that users of the IFRS for SMEs did not want to make adjustments to the numbers provided, and this should be the key message to consider in evaluating options for the IFRS for SMEs.
The Senior Technical Manager continued saying that the agenda paper also included the recommendations of the SME Implementation Group (SMEIG), which had been gathered over the summer. The final report had just been approved and would be uploaded to the IASB’s website shortly.
The Senior Technical Manager then introduced the second agenda paper on scope, accounting policy options and new and revised IFRSs. The first topic discussed concerned the scope restriction. The Senior Technical Manager indicated that some users had requested to remove the scope restriction. She explained that the staff did not agree on the grounds that jurisdictions could unilaterally change the scope of the IFRS for SMEs, in which case entities would have to state compliance with local GAAP instead of with the IFRS for SMEs. The staff believed that by keeping the restriction the Board could avoid inappropriate use of the standards that were specifically designed for non-public entities.
The Vice-Chairman said that the UK had taken the IFRS for SMEs as published, but had made some changes for legal reasons. Given these mandatory changes it was decided to open up the standard for some credit unions. Whilst the basis of preparation had to be called UK GAAP, everyone knew that it was based on the IFRS for SMEs. The Senior Technical Manager pointed out that the primary aim for the IFRS for SMEs was to provide simplified accounting principles for entities that had less complex transactions and limited resources; comparability among entities applying the IFRS for SMEs was not a key consideration. She said that most members of the Advisory Council members and the SMEIG had supported retaining the scope restriction. She also said that there had also been support at their recent world standard setters meeting for retaining the scope restriction. Consequently, the staff did not recommend any change to the scope.
There was extensive debate among the Board members as to whether the scope should be changed. One Board member said he agreed with the primary aim of the IFRS for SMEs, but said that the world was more complex and that diving entities into two groups did not seem reasonable. He believed that national jurisdictions that had adopted IFRSs should decide on the scope. The Vice-Chairman pointed out that this had been exactly the case in the UK, now that the standard could not be called ‘IFRS for SMEs’. The former Board member said that this was what he was disagreeing with. In Europe, there was a growing group of entities that were public entities but would not seek to list in a regulated market, so they would not (and possibly never) apply full IFRSs. It is these entities that he was concerned about as they would not be allowed to apply the IFRS for SMEs; he said that prohibiting certain entities from applying the IFRS for SMEs would require more careful consideration. The Chairman pointed out that he did not see any sign from securities regulators requesting changes to the scope. The Board member responded that there was still a market of entities that were not regulated and they had not heard from them. Another Board member also pointed in that direction. He said that he heard concerns from entities, for example credit unions, that would like to apply the IFRS for SMEs. That being said, he still believed that the IFRS for SMEs would not cover all the necessary disclosures that users of financial statements of credit unions would expect. He suggested that the Board should work closer with the jurisdictions that were interested in the IFRS for SMEs so as to understand how they wanted to use the standard to maybe amend the standard at a later stage. Currently, he believed that the IFRS for SMEs was fit for purpose in that it had a very precise and limited scope.
Another Board member suggested that a potential solution could be that entities could apply the IFRS for SMEs, but would need to provide a warning about the IFRS for SMEs’ purpose (provided they had obtained permission from their regulator) and explain why they considered it was appropriate for them to use the standard. The Chairman pointed out that users of the IFRS for SMEs did not consider disclosures to be relevant and said that the feedback received was not in that direction; however, he suggested that still the Board needed to discuss with regulators whether they would like some middle ground.
The Chairman called a vote and eleven Board members agreed with the staff recommendation not to change the scope of the IFRS for SMEs.
The Senior Technical Manager then opened up the discussion for the accounting policy options, particularly on whether to allow for the revaluation option of property, pPlant and equipment (PPE), and for the capitalisation of development and borrowing costs. She said that respondents had indicated that they believed that not having these options was a barrier for IFRS for SMEs adoption. The staff concluded that there was no new information obtained from their outreach activities to support adding those options. However, she said that SMEIG members and world standard setters were divided, particularly on the revaluation of PPE. The Chairman wondered whether the concern could be traced back to entities that operate in inflationary environments. The Senior Technical Manager confirmed this and said that another reason was lending. The Vice-Chairman said that in most cases lenders would take security over PPE, but it would probably be more convenient for them to have that information on the face of the balance sheet. He also reminded that on the issue of borrowing costs the Board had also been split.
Another Board member agreed that the lack of option to revalue PPE in particular was a barrier for the adoption of the IFRS for SMEs. However, he said that the Board, based on the feedback obtained, had concluded that users did not want to make adjustments, that they relied on the fact that the financial information was audited and that they did not want accounting options. He said that users would likely eliminate the revaluation from their cash flow analysis because it would not be derived from the entities’ operations. He said that in most cases, lenders tended to rely on their own valuations whenever they needed them. The Vice-Chairman said that in his experience, lenders were interested in having the information on PPE on the face of the balance sheet but agreed that providing an option could create more confusion given that the purpose of the IFRS for SMEs was to provide simplicity.
One Board member said that he would support providing the revaluation option given that it was seen as a barrier to adoption of the IFRS for SMEs. He also said that users would not be concerned about comparability. The Chairman pointed out that they could consider an option according to which it would be up to the jurisdiction to decide whether or not to give the option. He said that the option could be in the standard but only be adopted on a jurisdiction basis. One Board member said that in that case additional disclosures would be necessary to explain the situation. Another Board member pointed out that the Board would need to decide whether it was more important to have the IFRS for SMEs ‘as published by the IASB’ or whether they would be comfortable in accepting an IFRS for SMEs ‘as adopted by jurisdictions’. The Chairman then said that they still could include the option, and it would then by for the jurisdictions to decide whether or not to pass on the option to entities in their jurisdiction. He believed that such an approach would help reducing the barrier for adoption, particularly in countries with inflationary economies, which were the ones that used the standard because and for which historical cost would become meaningless very quickly.
Several Board members agreed with the staff recommendation. One Board member said that they needed to discuss comparability from three points of view: (i) comparability within the IFRS for SMEs; (ii) comparability within jurisdictions, and (iii) comparability with full IFRSs (although the latter one was not critical). He was concerned that by adding options, comparability would be reduced. Another Board member said that there were no valid arguments for adding the option; users were not asking for that. Furthermore, the option would add complexity. Another Board member pointed out that adding those options would be a significant break with the purpose of IFRS for SMEs, if there was a particular issue then jurisdictions were allowed to make changes.
On the other hand, another Board said that the purpose of the IFRS for SMEs was to allow future adoption of full IFRSs and spread the IFRS literature. He would support the option, particularly in his jurisdiction that had a history of inflation, and would base his support on concerns raised by constituents that not having the option was a barrier for IFRS for SMEs adoption. He said that comparability would not be an issue in those jurisdictions. He said that in some jurisdictions revaluations were even required by law.
Some members suggested voting on those topics separately, as they were showing some support for the revaluation option but not for the remaining options. One Board member said that in most cases the most significant difference between book value and economic value in an entity was derived from PPE; accordingly, the debt equity ratio of SMEs was distorted. However, he said that the revaluation option should not be mandatory due to complexity issues and also because full IFRSs did not mandate revaluation of PPE. He would also prefer that jurisdictions would be given the final say of not adopting the option.
The Chairman called a vote on allowing the option for revaluation of PPE, and eight out of the thirteen members present agreed with the option. They also concluded that there was no need for re-exposure. Further, the Board approved the staff recommendation for not allowing the option for capitalisation of development or borrowing costs.
The Senior Technical Manager then introduced the final topic which was alignment with full IFRSs. She said that the IASB had decided that each new and revised IFRS, including annual improvements, should be considered individually on a case-by-case basis. She said that respondents had indicated that IAS 19 should be considered, because most of the changes would simplify the requirements of the IFRS for SMEs, while very few had commented on the IASB’s decision not to incorporate IFRS 3(2008), IFRS 10, IFRS 11 and IFRS 13. The staff concluded that IAS 19 should not be considered in that review and that each new IFRS or amendment should be considered once they were issued. The staff had only considered some minor changes for SMEs, such as the definition of a related party and the amendment for the equity method in separate financial statements.
One Board member disagreed with the staff proposal, because he believed that the IFRS for SMEs should be aligned with full IFRSs and that the analysis should be made on a timely basis considering the needs of SMEs. Furthermore, he asked the staff why IAS 19 was not being considered; he was concerned that under this path, the IFRS for SMEs would take a different direction. The Senior Technical Manager said that the objective was to provide stability during the period of the initial comprehensive review. However, the approach would not mean that IAS 19 would never be considered.
Another Board member expressed concern about the timing for the next review; he said that seven years was a long period. The Senior Technical Manager responded that they had requested comments on that particular issue in the ED, which would be discussed at a future meeting. The Board member said that in his view, the review period should be no longer than four or five years. Another Board member pointed out that they had decided to limit the decisions on the ED as much as possible; he also said that many countries were still adopting IFRSs, and he said that the communication would be important. He also said that he would not support more changes as this would be contradictory to what had been exposed in the ED and because the Board had not analysed the potential implications. Finally, he said that the amendment on the equity method for separate financial statements would be easier to implement, and for that reason that change should be made, as had been suggested by the staff.
One Board member raised another concern, which was that not allowing full alignment could be another barrier for adoption of the IFRS for SMEs. He said that in a future meeting they would need to consider this implication. He suggested that whenever the Board would develop a new standard, they should consider the implications for SMEs and even consider simplified versions.
Another Board member said that in his view, the IFRS for SMEs should not be fully aligned with full IFRSs, because the IFRS for SMEs had a different purpose and needed to be stable. He also pointed out that SMEs were short of resources and that it might be difficult for them to follow all changes.
The Chairman called a vote, and twelve of the thirteen Board members present approved the staff recommendation.
