2019 Comprehensive Review of the IFRS for SMEs Standard - Agenda Paper 30 – The relationship between the IFRS for SMEs Standard and full IFRS Standards

Background

In February 2019 the Board agreed to undertake a comprehensive review of the IFRS for SMEs Standard (the Standard). The first phase of the review is to develop a Request for Information that will seek views on whether and, if so, how the IFRS for SMEs Standard should be aligned with new and amended IFRS Standards not currently incorporated into the IFRS for SMEs Standard.

Staff analysis

The intention of the Board in developing the Standard was to align it with full IFRS Standards as demonstrated in the Preface and Basis for Conclusions. If the Board still believe that the Standard should be aligned then Section 2 Concepts and Pervasive Principles, which is currently aligned with the 1989 Framework for the Preparation and Presentation of Financial Statements, should be updated to align with the 2018 Conceptual Framework. Other areas of the Standard would also require consequential amendments.

It is noted that the concept of ‘undue cost or effort’ in Section 2 could be retained even though it is not a concept in the 2018 Conceptual Framework.

When determining actions to align the Standard to new IFRS Standards the Board decided in the 2012 Comprehensive Review to make this assessment on a case-by-case basis once new Standards have been issued. The Staff believe this is still appropriate but that the following principles would help with this consideration:

1. Relevance to SMEs – Is there a need to change? This principle would ask what problem the new Standard seeks to address and whether that is relevant to SMEs in order to decide if the SME Standard should be aligned with full IFRS.
2. Simplification – How can the requirements be simplified? Under this principle the Board would assess whether they can simplify the language, recognition and measurement or disclosure requirements of the IFRS Standard.
3. Proportionality – Is the outcome proportional? This principle seeks to ensure that the requirements of the Standard continue to provide information that is useful for economic decision-making.

At the April 2019 meeting the Board will consider the scope of the IFRS for SMEs Standard and how it can be aligned with new and amended IFRS Standards.

Staff recommendations

The staff recommends the following:

• (a) the IFRS for SMEs Standard should continue to be aligned with full IFRS Standards;
• (b) that the Request for Information include a recommendation to align Section 2 of the IFRS for SMEs Standard with the 2018 Conceptual Framework and to make appropriate consequential amendments to other sections of the IFRS for SMEs Standard;
• (c) that the concept of ‘undue cost and effort’ should be retained. It provides an additional mechanism the Board can use to balance the costs and benefits of the requirements of the IFRS for SMEs Standard; and
• (d) that when assessing whether and how to align the IFRS for SMEs Standard with each new and amended IFRS Standard the following principles should be applied:

1. Relevance to SMEs – Is there a need for change?
2. Simplification – How can the requirements be simplified?
3. Proportionality – Is the outcome proportional?

Board discussion

There were mixed views from Board members on the staff recommendations. There was a consensus amongst Board members that the concept of ‘undue cost and effort’ was a critical consideration for IFRS for SMEs.

In relation to whether IFRS for SMEs should be aligned with full IFRS standards there were mixed views on what this would mean in practice. Some Board members thought that the best approach would be to take the amendments that had been made to IFRS and determine their applicability to IFRS for SMEs in line with the proposed approach. Other Board members expressed a preference for only considering amendments to IFRS standards where a problem had been identified with the SME standards already. The staff clarified that using the proposed approach they would look at a change to IFRS, for instance the introduction of a new standard, and work through the applicability of it to the SME standard so that the Board would take a view that could be incorporated in to the request for information. They suggested that they could use IFRS 16 as an example for the Board to consider in future.

Additional views around aligning the Standards were raised by other Board members. The Vice Chair cautioned against creating a presumption that IFRS for SMEs would be changed whenever full IFRS Standards were changed as this could have unintended consequences when considering full IFRS Standards in the future. Another Board member expressed concern that if the Standards were not aligned as far as possible there could be a big educational cost as preparers may only know one or the other.

In terms of aligning section 2 to the Conceptual Framework several Board members expressed the view that the Framework should apply to IFRS as a whole so that it the work to align should be done but a request for information was not required. Several Board members countered this by highlighting that the Conceptual Framework sits outside the full IFRS Standards and so played a different role, and had a different objective, to section 2 which forms an integral part of the SME Standard.

Most Board members agreed with the principles in recommendation (d), however, it was noted by one Board member that proportionality may not be the best way of characterising the third principle and it could be better described as ‘faithful representation’.

Board Decisions

The Board agreed that Staff should bring a paper to a future meeting illustrating the application of the principles outlined to IFRS 16. No separate vote was held on the recommendations in the paper.