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SME Standard review and update

Date recorded:

Cover Paper (Agenda Paper 30)

The Board is undertaking its 2019 Comprehensive Review of the IFRS for SMEs Standard. At this meeting the Board will be asked to decide whether the Request for Information (RFI), which will be issued as part of the 2019 Review, should seek views on whether and how the requirements of the IFRS for SMEs Standard should be aligned with Standards that have been issued since the IFRS for SMEs Standard was issued.

The discussions focused on IFRS 3, IFRS 10, IFRS 11, IFRS 15 and IFRIC Interpretations and some of the amendments to IFRS Standards issued after the 2012 Comprehensive Review of the IFRS for SMEs Standard commenced.

New IFRS Standards — IFRS 3 Business Combinations (Agenda Paper 30A)

Staff recommendations

The staff recommends that the RFI on whether and how the IFRS for SMEs Standard could be aligned with IFRS 3 asks:

  • whether there is a need to introduce requirements for step acquisitions—supported (13/14 Board members)
  • whether those requirements should be aligned with IFRS 3—supported (10/14 Board members)
  • whether acquisition-related costs should be recognised as an expense at the time of the acquisition—supported (11/14 Board members)
  • whether contingent consideration should be measured on initial recognition at fair value, and whether the undue cost or effort exemption should be extended to apply to the fair value measurement of the contingent consideration—supported (11/14 Board members)

The staff also recommend that the Board clarifies that it does not intend to amend the IFRS for SMEs Standard to:

  • introduce the option to measure non-controlling interests (NCIs) at fair value
  • remove the reliability of the measurement threshold for recognising intangible assets
  • clarify that an assembled workforce must not be recognised
  • provide additional guidance in relation to reacquired rights

—All supported (14/14 Board members)

Board Discussion

Board members noted the principle is different between IFRS 3 and Section 19 of the IFRS for SMEs Standard. IFRS 3 is fair value-based while the IFRS for SMEs Standard is cost-based. If the alignment is not to switch entirely to fair value, then it is hard to select parts from IFRS 3 to apply. Other Board members mentioned that they could keep the cost-based approach but possibly make an exemption in a few areas.

Some Board members mentioned the amendment could increase complexity for the entity to apply the Standard. Also, it is possible that the recommended alignment would have limited improvement. Board members mentioned that introducing new accounting standards would be a big change. If aligning creates too many changes then that may be too burdensome.

As regards contingent consideration, one Board member argued that they should keep the cost model because of the uncertainty with regard to the performance of the entity. For example, there is uncertainty about the value of the contingent consideration at the time of acquisition. One Board member mentioned that cash flow and liquidity is more important for SMEs than fair value. However, it would be worth getting feedback from stakeholders.

Board members suggested that equity instruments acquired from non-listed companies need more guidance on how to measure a fair value.

The Board also discussed the need to have the same definition of a business (as recently amended in IFRS 3). The Board would need to try and align the definition of a business between IFRS 3 and the IFRS for SMEs Standard. The Board voted on this aspect and supported to include a discussion in the RFI about the alignment of the definition of a business.

New IFRS Standards — IFRS 10 Consolidated Financial Statements (Agenda Paper 30B)

Staff recommendations

The staff recommends that the Board seeks views in the RFI on whether and how the IFRS for SMEs Standard could be aligned with IFRS 10. The Board should ask in the RFI whether it should:

  • align the definition of control—supported (10/14 Board members)
  • introduce a simplification whereby when an entity concludes it has power over an investee directly and solely from the voting rights which allow it to control the relevant activities of the investee, it should be permitted to consolidate the investee without having to assess the remaining elements of the definition—supported (12/14 Board members)
  • address the accounting for investment entities—supported (11/14 Board members) modified to “seeking views in the RFI on not applying the investment entity exception in the IFRS for SMEs Standard”.

Board Discussion

Most Board members agreed that the IFRS for SMEs Standard should be aligned with IFRS 10.  However, the wording in the recommendation is slightly obscure as a result, and people will reject changes if it is communicated to say that it will not affect many people.

As regards the simplification, Board members agreed that it is a good idea and helpful. However, some of the wording in the paragraph is slightly obscure, for example, the entity is ‘permitted’ to consolidate but it actually means if they do have a majority control they ‘will’ consolidate.

As regards investment entities, Board members hold different views on alignment. Some Board members were concerned that if the investment entities exception is not extended to SMEs, this would add complexity to the boundaries and, also, it would create too much complexity in the IFRS for SMEs Standard. As a result, there should be an exception for investment entities. One Board member mentioned that they have to seek information about the possible exemption. They would not suggest any point of alignment and would not suggest any alignment without the result of the RFI.

New IFRS Standards — IFRS 11 Joint Arrangements (Agenda Paper 30C)

Staff recommendations

The staff recommends that the RFI the IFRS for SMEs Standard should be aligned with IFRS 11. The Board should ask in the RFI whether it should:

  • align the definitions of IFRS 11 and Section 15
  • retain the accounting policy election in Section 15 (i.e. cost model, equity method or fair value model)
  • introduce requirements on how to account for the acquisition of an interest in a joint operation that constitutes a business

Board Discussion

The Board members noted that the change in definition has brought clarification to IFRS 11 but this change had been difficult in implementation. For example, ‘too interpretative in nature’. It seems it is too early to align with IFRS 10 and it is better to wait.

Board members mentioned that one of the main objectives of IFRS 11 was to eliminate proportionate consolidation and it has been difficult to implement; thus, it would be best to retain proportionate consolidation in the IFRS for SMEs Standard until the post-implementation review of IFRS 11 is finished.

Board members noted that IFRS 11 is a very difficult Standard to apply. If it only picks up the definitions and alignments recommended by the staff, it might not have a big effect. The staff should ask in the RFI as to whether this assumption is correct. This would be to gather information rather than proposing changes.

The Board voted to retain the current requirements in the IFRS for SMEs Standard for this particular topic. This was supported by 8 of the 14 Board members.

New IFRS Standards — IFRS 15 Revenue from Contracts with Customers  (Agenda Paper 30D)

Staff recommendations

  • The staff recommends that the RFI propose that the IFRS for SMEs Standard be aligned with IFRS 15 using one of the following three alternatives:
    • Alternative 1—modifying Section 23 to remove the clear differences in outcomes between Section 23 and IFRS 15 without a wholesale reworking of Section 23;
    • Alternative 2—fully reworking Section 23 to reflect all IFRS 15 principles and language; and
    • Alternative 3—not amending Section 23 as part of the 2019 Review.
    • Alignment was supported (13/14 Board members)
  • The staff prefer Alternative 1—supported (10/14 Board members)
  • The staff also recommends that the Board seek views on whether, if it proceeds to an Exposure Draft using either Alternative 1 or Alternative 2, to provide transition relief by permitting an entity to continue its current revenue accounting treatment for any contracts already in progress at the transition date or scheduled to be completed within a set period of the transition date—supported (10/14 Board members)

Board Discussion

One Board member suggested that the Board may want to consider retaining the current requirements at this stage. According to this Board member, IFRS 15 is lower on the priority list. Recognition and measurement applying IFRS 15 has been concentrated in relatively few SMEs.

Board members noted that Alternative 1 is a simple way of solving the issue as it would not be very invasive. Some jurisdictions have a ‘carve out’ in place for construction contracts which could be a solution for the IFRS for SMEs Standard as well to have some alignment.

Board member said that Alternative 3 is difficult from a change management perspective. In essence, it is saying go part way for some time and then make a change later. These are tentative steps.

Board members suggested that if the Board would prefer retaining the current requirements, it would be worth taking advantage of the RFI to inquire as to whether there have been issues with comparability.

The discussion did not mention Alternative 2. 

Amendments to IFRS Standards and IFRIC Interpretations (Agenda Paper 30E)

Staff recommendations

The staff recommends the Board seek views in the RFI on whether and how the IFRS for SMEs Standard could be aligned with new IFRIC Interpretations and recent amendments to IFRS Standards.

The staff recommend the following alignments:

  • Amend Section 3 for Definition of Material (Amendments to IAS 1 and IAS 8)
  • Amend Section 7 for Disclosure Initiative (Amendments to IAS 7)
  • Amend Section 16 for
    • Annual Improvements to IFRS Standards 2011–2013 Cycle (Amendments to IAS 40)
    • Transfers of Investment Property (Amendments to IAS 40)
  • Amend Section 17 for Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)
  • Amend Section 18 for Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)
  • Amend Section 26 for
    • Annual Improvements to IFRS Standards 2010–2012 Cycle (Amendments to IFRS 2)
    • Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2)
  • Amend Section 29 for
    • IFRIC 23 Uncertainty over Income Tax Treatments
    • Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12)
  • Amend Section 34 for Bearer Plants (Amendments to IAS 16 and IAS 41)

All supported (13/14 Board members).

The staff do not recommend any further alignments to new IFRIC Interpretations or recent amendments—supported (13/14 Board members)

Board Discussion

The Chairman recommended that some of the items under the table in the agenda paper (e.g. IFRIC 21 and 22) could have some clarification questions to be asked that need to be separated from other items listed in the table; some of the items in the table would need to be removed due to them not being applicable to SMEs.

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