Approach to the 2019 comprehensive review of the IFRS for SMEs Standard (Agenda Paper 30A)

Background

This paper contained a summary of the discussions held in February and March 2019 on the 2019 comprehensive review of the IFRS for SMEs Standard.

In those discussions, Board members expressed differing views regarding whether, and how to, incorporate new and amended IFRS Standards into the IFRS for SMEs Standard. The staff have identified two views.

View 1—the IFRS for SMEs Standard should be aligned with new and amended IFRS Standards, in determining alignment the Board should apply the alignment principles

The benefits of using full IFRS Standards as the basis for the IFRS for SMEs Standard would include efficiencies for preparers, auditors, regulators and users of financial statements prepared in accordance with either full IFRS Standards or the IFRS for SMEs Standard and a consistent financial reporting framework which supports efficiency in the education of accountants and users.

When aligning the IFRS for SMEs Standard with full IFRS Standards, the focus is on extracting the fundamental concepts of IFRS Standards and simplifying those concepts. This produces a Standard that is significantly shorter and less complex than full IFRS Standards.

View 2—the IFRS for SMEs Standard should provide a stable platform that is only updated for specific problems brought to the Board’s attention

The benefits of this approach are as follows:

• It maintains a stable platform—it minimises disruption and the cost of a significant update for entities applying the IFRS for SMEs Standard
• It reflects that the Board has not heard significant concerns about the current IFRS for SMEs Standard, and that it appears to generally be working well
• It involves limited re-education of stakeholders
• It minimises costs for jurisdictions who need to translate the Standard and related educational materials
• It reduces the risk of unintended consequences of making significant changes

Staff recommendation

The staff recommended the Board proceed with View 1 as View 2 would be a significant departure from the original intention of the Board when developing the IFRS for SMEs Standard.

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

Background

This paper was for educational purposes only and the Board was not asked to make any decisions at this point. It analyses the three principles (relevance; simplicity; faithful representation) the Board could apply when determining whether and how to align Section 20 Leases with IFRS 16 Leases.

Relevance

SMEs widely use leasing as a source of financing. The staff therefore believe that IFRS 16 is relevant to entities applying the IFRS for SMEs Standard

Simplicity

Requiring a single lessee accounting model could be viewed as a simplification as users of SMEs’ financial statements will no longer have to analyse to separate accounting treatments for operating and financing leases. The simplifications already included in IFRS 16 (e.g. short-term leases, low-value assets, etc.) can be included in the IFRS for SMEs Standard and provide cost reliefs to entities applying the Standard. The staff recommends to incorporate further simplifications to IFRS 16 in the IFRS for SMEs Standard, such as:

• Removing the quantitative threshold for low value assets and introducing a list of examples to assist companies identifying such assets
• Providing additional relief to assist entities with identifying the discount rate to be applied when determining the liability
• Providing additional relief to assist entities with determining and reassessing the lease term
• Simplifying the requirements for subsequent measurement (reassessment) of lease liability
• Retaining the existing finance lease disclosures applying the IFRS for SMEs Standard
• Simplifying the language of the Standard

Faithful representation

The staff believes that the additional simplifications proposed above will not reduce faithful representation.

Way forward and next steps (Agenda Paper 30C)

Background

The way forward will depend mainly on which view the Board will take in Agenda Paper 30A.

Should the Board confirm the staff’s recommendation of View 1 and agree to use the alignment principles of relevance, simplicity and faithful representation, the staff would proceed as planned.

If the Board agrees with View 1, but is concerned that there is insufficient implementation experience available during the 2019 review to decide whether and how to align the IFRS for SMEs Standard with IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16, the staff would propose a modification to the planned approach. The modified approach would consist of two stages. Stage 1 would be a 2019 Request for Information (RFI) that addresses IFRS Standards and amendments with effective dates up to and including 1 January 2016 that are not currently included in the IFRS for SMEs Standard. The second stage would be a 2022 RFI, which would address IFRS Standards and amendments with effective dates up to and including 1 January 2019.

If the Board agrees with View 2 in Agenda Paper 30A, the staff recommend the Board not proceed with an RFI at this time, but rather develop a strategy that would allow it to come to a consensus on the purpose and role of the IFRS for SMEs Standard.

Staff recommendation

Consistent with the staff recommendation in Agenda Paper 30A, the staff recommended to proceed with Option 1.

Board discussion

The Board discussed the three papers together. Most Board members struggled with the dichotomy of the views the staff had presented in Agenda Paper 30A, leaning towards View 1. In the Board members’ opinions, the two views are not mutually exclusive and elements of both views could be combined. The Chairman stated that the Board should strive for a strong alignment of the IFRS for SMEs Standard with full IFRS, while keeping the platform simple and stable. Arguments in favour of View 1 included that the Standard is called “IFRS” for SMEs, which suggests that the Standard is somewhat aligned with full IFRS. One Board member said that if the Board were to support View 2, the Standard should be called “Accounting Standard for SMEs, issued by the IASB” to indicate departure from full IFRS.

The Chairman indicated that principles might not be helpful when reviewing the IFRS for SMEs as it is a practical Standard that requires a practical approach. Most Board members agreed with the Chairman, with one Board member saying that the principles would be fulfilled with any new accounting Standard and are therefore unhelpful. Board members stated that in order to determine whether a new accounting Standard should be incorporated in the IFRS for SMEs, the Board should examine the associated benefits for users of financial statements of an SME. Agenda Paper 30B was perceived as helpful in that regard. This benefit should then be compared with the cost (especially for the data gathering) the SME incurs to apply the accounting requirement and the general ability of a typical SME to implement the change. One Board member said that it should be considered that the cost-benefit analysis is different for an SME compared to a public interest entity (PIE), but costs could be reduced by allowing for longer implementation times, which would then, however, delay the whole process of reviewing the IFRS for SMEs Standard.

Some Board members emphasised that the scope of the IFRS for SMEs Standard does not include any size restrictions, as long as an entity is not publicly listed. It could therefore happen that a billion pound company applies the IFRS for SMEs Standard. The relative cost for this entity to apply, for example, the requirements of IFRS 16 could be lower than for a 50-employee entity. A universal cost-benefit analysis might therefore be challenging. This was countered, however, by the Chairman, who stated that as far as the Board knows, the IFRS for SMEs Standard is currently only applied in jurisdictions where its application is only allowed for actual small or medium-sized entities. Some Board members agreed with that statement and warned that a size discussion might make the review much more difficult.

There was some discussion about the “deluge” of new Standards that is anticipated to be incorporated in the IFRS for SMEs if the Board followed View 1 in Agenda Paper 30A. This “deluge” is a result of not changing the IFRS for SMEs for a long time with the purpose of keeping a stable platform. While some Board members suggested not to overwhelm constituents with too many new requirements, others said that the impact could be quite limited. When the IFRS for SMEs Standard was published at first, the Board already presumed some of the upcoming changes in full IFRS and the Standard could therefore be more aligned than currently perceived. For example, the ‘solely payments of principal and interest’ (SPPI) test in IFRS 9 was based on the IFRS for SMEs Standard.

As regards what should be asked in the RFI, Board members were split between a high-level questionnaire (asking which approach should be selected for the review of the Standard) and a reasonably specific questionnaire (asking more detailed questions as to how the new Standards should be incorporated). In any case, Board members suggested not to be presumptive in the RFI as to which Standards to incorporate. The RFI should be open and explaining all costs and benefits, without making a judgement. Some Board members suggested to provide alternative “subsets” of new accounting Standards in the RFI that could be incorporated with the remaining Standards to follow at a later review.

The staff summarised that based on Board member comments, they would work under the assumption of only one RFI that included the points discussed in this session. They acknowledged that Board members were leaning towards View 1, but constituents should not be overwhelmed with having to implement too many new requirements. The RFI should be strategic and comprehensive, but relatively specific and provide several alternatives without being presumptive.

12 of the 14 Board members supported this approach.