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Subsidiaries that are SMEs

Date recorded:

Research results—can we do it (Agenda Paper 31)

In the previous Board meeting, the staff reported the results of the research on whether a standard, if developed, would be adopted by jurisdictions and applied by subsidiaries that are SMEs. In this session, the staff report the results of their analysis on whether they can utilise the disclosure requirements of the IFRS for SMEs Standard with minimal tailoring.

In the paper, the staff have taken two alternative approaches to tailoring the disclosure requirements of the IFRS for SMEs Standard and analyse the difference in outcomes from the two approaches.

Approach 1:

  • (a) If there is no recognition and measurement difference and the disclosure requirement was in the IFRS Standard when the IFRS for SMEs Standard was developed—no change
  • (b) If there is no recognition and measurement difference but the disclosure requirement was added to the IFRS Standard since the IFRS for SMEs Standard was developed—consider BC157 of the IFRS for SMEs Standard (which sets out the principles that guided the Board when it determined which disclosures to include in the IFRS for SMEs Standard on the basis of users’ needs) and adapt the disclosures if supported by one of the principles
  • (c) If there is a recognition and measurement difference—consider the principles in BC157 of the IFRS for SMEs Standard and adapt the disclosures if supported by one of the principles

Approach 2:

  • (a) If there is no recognition and measurement difference—no change
  • (b) If there is a recognition and measurement difference—consider the principles in BC157 of the IFRS for SMEs Standard and adapt the disclosures if supported by one of the principles

The staff observed that there is only a difference in outcome between the two approaches when there has been a change to the disclosure requirements, but not to the recognition and measurement requirements in an IFRS Standard since the IFRS for SMEs Standard was developed/revised. In the five Standards used to test the approaches, the only difference in outcome relates to IFRS 16.

The staff believes that, regardless of whether they take Approach 1 or Approach 2, they can utilise the disclosure requirements of the IFRS for SMEs Standard with only minimal tailoring to develop disclosure requirements for subsidiaries that are SMEs.

In this session, the staff asked the Board members whether they prefer Approach 1 or Approach 2 for tailoring the disclosure requirements of the IFRS for SMEs Standard for subsidiaries that are SMEs.

Board discussion

Board members were split between Approaches 1 and 2.

Those preferring Approach 1 said it was more appropriate as it would give the Board the opportunity for changing disclosure requirements as and when they are updated in full IFRS. It was highlighted that applying Approach 1 there is no requirement to change the SME subsidiary disclosures for every update of full IFRS. Instead, whenever the Board amended a full IFRS Standard for disclosure requirements, it would be considered whether the SME subsidiaries disclosures should be updated as well. BC157 of the IFRS for SMEs Standard would ensure that the update is only made when it is in line with the objective of the IFRS for SMEs Standard. One Board member said that updates to disclosure requirements were relatively rare and it therefore follows that not much more resource would be required to update on a continuous basis.

Those preferring Approach 2 argued that, different to Approach 1, this approach would not lead to a separate level of disclosure requirements that is located between the IFRS for SMEs Standard and full IFRS. This approach would also bring more discipline into the process as it would only be updated when the IFRS for SMEs Standard is updated. As a positive side effect, the burden for the IASB staff would be reduced and preparers would only be confronted with changes every 5-7 years.

One Board member expressed a general concern as in his view the Board’s intention with this project was to explore whether SME subsidiaries can apply the IFRS for SMEs disclosures without adaptations. If the work on the project showed that this is the case, the project would go ahead, and if not, the project would be stopped. His concern was that the Board is now instead looking to adapt disclosures, rather than just lifting them from the IFRS for SMEs Standard. The staff confirmed that initially the Board member’s understanding was the intended approach to the project, however, it has become clear in the meanwhile that the IFRS for SMEs disclosures could not just be used unadapted.

When asked, the staff confirmed that the SME subsidiaries disclosures would be a Standard within full IFRS, rather than a section of the IFRS for SMEs.

Board decision

The Board voted with 8:6 votes in favour of Approach 2.

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