This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

SME Standard review and update

Date recorded:

Review of the IFRS for SMEs Standard (Agenda Paper 30)

The Board is undertaking a comprehensive review of the IFRS for SMEs Standard. It plans to issue a Request for Information (RfI) in the second half of 2019. At this meeting the Board will be asked to decide whether the RfI should seek views on whether and, if so, 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 focus on IFRS 13 Fair Value Measurement, IFRS 9 Financial Instruments, IFRS 14 Regulatory Deferral Accounts and IFRS 16 Leases.

Approach to new and amended IFRS Standards (Agenda Paper 30A)

This paper is for information purposes only and summaries the approach the IASB plans to follow in its comprehensive review of the IFRS for SMEs Standard.

At its May 2019 meeting the Board decided that the IFRS for SMEs Standard should be aligned with new and amended IFRS Standards. In doing so the Board’s intention is to apply an alignment-based approach using three principles—relevance, simplicity and faithful representation. Each new or amended IFRS Standard not yet incorporated into the IFRS for SMEs Standard would be tested against these principles to assess whether changes should be proposed for the next version of the IFRS for SMEs Standard.

The Board will consult on transition arrangements and adjustments that would ease the transition process and minimise time and resource costs for preparers.

New IFRS Standards—IFRS 13 Fair Value Measurement (Agenda Paper 30B)

Staff recommendation and Board decisions

The staff recommended that the RFI seek views on a proposal to:

  • a) align the definition of fair value—supported (13/14 Board members)
  • b) align the guidance on fair value measurement so the fair value hierarchy incorporates the principles of the IFRS 13 fair value hierarchy, and also includes examples that illustrate application of the hierarchy— supported (10/14)
  • c) move the general disclosure requirements to a single location, alongside the guidance for fair value measurement—supported (13/14) with the modification to create Section 2A if the guidance gets too long and detailed for Section 2
  • d) require the level in the hierarchy at which fair value measurements are made to be disclosed—rejected (2/14)
  • e) move the guidance for fair value measurement in the IFRS for SMEs Standard to Section 2 Concepts and Pervasive Principlesnot voted on as already voted on under (c)

Board discussion

Board members acknowledged that there is already guidance on fair value measurement in the IFRS for SMEs Standard with some Board members suggesting it is already sufficiently aligned with full IFRS. Some Board members advocated strongly against changing the SME guidance as the accounting outcome would be the same, but it would incur implementation costs in SMEs. Others saw merit in aligning the guidance more closely. One Board member pointed out that the hierarchy levels are already present in the IFRS for SMEs, just not numbered as in IFRS 13. However, there was no benefit in numbering the levels for SMEs as there were no disclosure requirements associated with different levels and hence, SMEs would not have to determine which level they are in. The staff took the view that aligning the definitions would be important as it would be risky to have two different definitions.

Most Board members agreed, however, that it would be useful to have the guidance in one place, but some Board members thought that Section 2 was not ideal as the guidance is too detailed. One Board member suggested to create a Section 2A for that guidance, rather than putting it at the end of the Standard (i.e. Section 36).

New IFRS Standards—IFRS 9 Financial Instruments (Agenda Paper 30C)

The staff recommend that the RFI propose that the IFRS for SMEs Standard be aligned with IFRS 9, but with some modifications.

The RFI will also seek feedback on whether the IFRS for SMEs Standard should have requirements on hedge accounting and whether the Standard still needs a fall back to IAS 39 or IFRS 9.

Staff recommendation and Board decisions

The staff recommended that the Board:

  • a) introduce principles for the classification and measurement of financial assets based on contractual cash flows—supported (13/14 Board members) with the modification that the staff should put the emphasis on the examples
  • b) align the IFRS for SMEs Standard with IFRS 9 simplified approach for impairment of financial assets—supported (12/14), however without the modifications proposed by staff, only ask in the RFI whether to retain the incurred loss model or to use the simplified ECL approach in IFRS 9
  • c) retain the requirements of the IFRS for SMEs Standard for:
    • i) the initial recognition of financial instruments at the transaction price;
    • ii) financial liabilities and own credit;
    • iii) derecognition principles—all supported (14/14)
  • d) not introduce the fair value through other comprehensive income option for equity instruments—supported (14/14)
  • e) retain the current requirements for hedge accounting in Section 12 (subject to assessing the need for any requirements on hedge accounting)—supported (14/14) with the modification to ask in the RFI if there is a need for hedge accounting requirements or if that could be resolved by the fallback to IFRS 9
  • f) change the fall back to IFRS 9, if the requirements on the IFRS for SMEs Standard are aligned with IFRS 9 (subject to assessing the need for any requirements on hedge accounting)—supported (14/14), irrelevant of whether the IFRS for SMEs will be aligned with IFRS 9 and the modification that the staff should ask in the RFI if the fall back is used by anyone

Board discussion

Most Board members agreed that the IFRS for SMEs Standard should be aligned with IFRS 9. However, a minority favoured retaining the current requirements because IFRS 9 is based on the IFRS for SMEs Standard and the IFRS for SMEs Standard therefore already contains a simplified model of IFRS 9. The Board members agreed that if the Board should decide to align the Standard with IFRS 9, SMEs should not be put through the exercise of having to assess all of their existing instruments for SPPI and instead allow grandfathering.         

As regards classification and measurement, the discussion was around whether the SPPI test should be supplemented by a business model test, and whether the existing examples in the IFRS for SMEs Standard should be the basis for classification.

As regards the impairment model, Board members struggled with the concept of ‘most likely outcome’ with some preferring to retain the incurred loss model and others favouring a move to the simplified expected credit loss model in IFRS 9 (i.e. lifetime expected losses for all instruments), however without the modifications that that staff proposed. One Board member suggested to retain the incurred loss model, but to reorder the impairment indicators in the IFRS for SMEs Standard, to give more priority to forward-looking information.

As regards hedge accounting, the Board found that the model in the IFRS for SMEs is not broken, however, that does not necessarily mean that it should be retained. The Board would like to have more information on how widely hedge accounting is used by SMEs. One option could be to remove the hedge accounting requirements completely from the IFRS for SMEs and, if an SME wants to apply hedge accounting, they should fall back on full IFRS (be it IAS 39 or IFRS 9).

As regards the fall back to full IFRS, most Board members preferred to make the fall back to IFRS 9 instead of IAS 39. This would even be the case if the IFRS for SMEs Standard would not be aligned with IFRS 9. The Board members would, however, like to find out through the RFI whether the fall back is actually used by any of the SME preparers.

New IFRS Standards—IFRS 14 Regulatory Deferral Accounts (Agenda Paper 30D)

The staff are recommending that the IFRS for SMEs Standard not be amended to align it with IFRS 14. IFRS 14 was issued as a temporary Standard. It applies only to entities applying full IFRS Standards for the first time and permits deferred regulatory balances to be carried forward but does prescribe accounting requirements. The Board is planning to publish an Exposure Draft early in 2020 of a proposed replacement of IFRS 14.

Staff recommendation and Board decisions

The staff recommend that the RFI seek views on a proposal to not align the IFRS for SMEs Standard with IFRS 14. The Board supported this recommendation with 13 votes (1 absent). There was no discussion on that agenda paper.

New IFRS Standards—IFRS 16 Leases (Agenda Paper 30E)

The staff are recommending that IFRS 16 be incorporated into the IFRS for SMEs Standard. However, the staff are proposing that some simplifications be made to the requirements and terminology, to simplify the requirements.

Staff recommendation and Board decisions

The staff recommended that the RFI propose that the IFRS for SMEs Standard be aligned with IFRS 16, with:

  • a) recognition exemptions for leases of 12 months or less (short-term leases) and leases of low-value assets—supported (13/14), with the modification to use the same threshold as in IFRS 16
  • b) an exemption from the requirement to separate lease component from any associated non-lease components—supported (13/14)
  • c) simplified measurement requirements for some variable lease payments, and for optional payments, such as those relating to extension options—supported (13/14)
  • d) additional simplifications:
    • i) replacing the quantitative threshold for low-value assets with a list of examples to assist companies identifying such assets—rejected (see (a))
    • ii) providing additional relief to assist entities with identifying the discount rate to be applied when determining the liability by allowing the use of the rate of return of a high quality corporate bond if the rate implicit in the lease or the entity’s incremental borrowing rate are not readily determinable—supported (11/14)
    • iii) simplifying the definition of the lease term to “the non-cancellable period for which an entity is required to comply with the lease” and providing additional relief to assist entities with determining and reassessing the lease term—supported (13/14), with the modification to include any expected exercise of renewal
    • iv) simplifying the requirements for subsequent measurement (reassessment) of lease liability— supported (12/14)
    • v) retaining the existing finance lease disclosures applying the IFRS for SMEs Standard—supported (13/14)

Board discussion

The Board was generally supportive of aligning the IFRS for SMEs Standard with IFRS 16 and agreed with the one lease model. However, Board members struggled with some of the simplifications. The removal of the quantitative threshold was not supported by Board members as it would require too much judgement. One Board member suggested to use a number, but not as high as full IFRS (i.e. lower than US$5,000), as it is a high number for SMEs. Others supported to carry over the $5,000 threshold accepting that SMEs then might have many small-ticket items. This would be part of the simplification.

The Board was also sceptical with regard to the allowing the use of the rate of return of a high quality corporate bond as many jurisdictions do not have an active market for those and turning to a different jurisdiction might not reflect the economic reality of the SME.

As regards the definition of the lease term, the Vice-Chair said it would be risky not to include any renewal options as an extreme example would be a one-month lease with 360 renewal options.

 

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.