Cover paper (Agenda Paper 30)

In January 2020, the IASB published Request for Information (RFI) Comprehensive Review of the IFRS for SMEs Standard. The comment period ended on 27 October 2020.

After reviewing the feedback received on the RFI, the IASB tentatively decided to develop an Exposure Draft (ED) for amendments to the IFRS for SMEs Standard using the alignment approach.

At its May 2021 meeting, the IASB started deliberating specific sections of the IFRS for SMEs Standard that could be aligned with new requirements in IFRS Accounting Standards in the scope of the review.

At this meeting the IASB deliberated the approach to develop proposals to update the disclosure requirements in the IFRS for SMEs Standard to align with IFRS Accounting Standards and the alignment of the IFRS for SMEs Standard with the requirements for financial guarantee contracts in IFRS 9 Financial Instruments.

This paper was not discussed.

Towards an Exposure Draft—Aligning disclosure requirements with IFRS Accounting Standards (Agenda Paper 30A)

This paper discussed whether and, if so, how to propose amendments to the disclosure requirements in the IFRS for SMEs Standard to align with IFRS Accounting Standards.

Staff recommendations

The staff recommended that the IASB apply below approach to develop proposals to update the disclosure requirements in the IFRS for SMEs Standard:

• Retain unchanged the disclosure requirements in the sections of the IFRS for SMEs Standard for which the IASB has tentatively decided not to propose amendments to the recognition and measurement requirements
• Align disclosure requirements with the proposals in the ED Subsidiaries without Public Accountability: Disclosures in the sections of the IFRS for SMEs Standard for which the IASB has tentatively decided to propose alignment of recognition and measurement requirements with IFRS Accounting Standards
• Partially align disclosure requirements with the proposals in the ED in the sections of the IFRS for SMEs Standard for which the IASB has tentatively decided to propose partial alignment of recognition and measurement requirements with IFRS Accounting Standards.

IASB discussion

Some IASB Board members agreed with the staff’s recommendation to use the work that has been done on the ED/2021/7 Subsidiaries without Public Accountability: Disclosures as there is no need to re-do the work to develop new disclosure requirements given their process is the same. They also agreed if the standard resulting from ED/2021/7 will be updated in the future, the disclosure requirements in the IFRS for SMEs may also be updated accordingly.

Some IASB members noted that aligning disclosure requirements with the standard resulting from ED/2021/7 does not mean that the IFRS for SMEs Standard will no longer have its traditional stability (e.g. only updates every 3 or 5 years). If disclosures for Subsidiaries without Public Accountability are updated in the future, it should not automatically assume that all updates will be incorporated into the IFRS for SMEs Standard. There should be a redeliberation process for this given that they are different standards with different scoping.

Some IASB members agreed to use ED/2021/7 as a starting point for the IFRS for SMEs disclosure deliberation; however, they noted that some items may need tweaks in the IFRS for SMEs Standard and staff should be looking for things on exceptions basis.

IASB members noted challenges on project management if the timing of publishing the IFRS for SMEs ED and completion and summarising the feedback from ED/2021/7 coincides. It is unwise to hold back the ED for IFRS for SMEs until the redeliberation of the feedback on ED/2021/7. The staff may need to publish a summary of feedback received from ED/2021/7 during the ED period for the IFRS for SMEs Standard. This is to ensure that stakeholders can consider the comments received on ED/2021/7 and finalise their comments for IFRS for SMEs.

All IASB members voted in favour of the staff’s recommendations.

Towards an Exposure Draft—IFRS 9 Financial Instruments (issued financial guarantee contracts) (Agenda Paper 30B)

This paper continued its discussion from the December 2021 IASB meeting on possible amendments to the requirements for issued financial guarantee contracts in Section 12 of the IFRS for SMEs Standard considerting the feedback on the RFI published in January 2020 and the recommendations of the SME Implementation Group.

Staff recommendations

The staff recommended that the IASB:

• Propose amendments to the IFRS for SMEs Standard to require an SME to initially measure a financial guarantee contract it issued at the premium received (plus the present value of any future premium payments payable), which may be nil, and thereafter at the higher of:
  • The expected credit losses (ECL)
  • The amount initially recognised, if any, amortised on a straight-line basis over the life of the guarantee
• The ECL above would be measured consistently with the IASB’s tentative decision to align the IFRS for SMEs Standard with the ECL model discussed in Agenda Paper 30A of the February 2022 IASB meeting

IASB discussion

Some IASB members agreed with the simplification recommended by staff as from the feedback received from the RFI most of financial guarantee contracts issued by SMEs are related party financial guarantees and that the fair value can be difficult to measure.

One IASB member disagreed with the potential alternatives mentioned in the agenda paper. The alternatives introduce exceptions for accounting intercompany financial guarantee contracts and allow amortisation on a different basis other than straight line, which will add complexity to the standard and do not meet the simplification principle although they are technically correct.

Some IASB members raised concerns that the useful information will be lost as the fair value approach under IFRS 9 provides useful information. If the IASB decides to compromise the fair value requirements under IFRS 9 for financial guarantee contracts, the staff need to ensure that better disclosure requirements are introduced.

Some IASB members would like for staff to clarify whether a day 1 ECL should also be considered when to initially measure a financial guarantee contract under the transaction cost. IASB members recommended that the staff develop an example along with the ED to demonstrate the approach, so stakeholders can understand the proposed simplification and how the approach will be applied.

Some IASB members noted the difficulties for SMEs to apply the ECL calculation to financial guarantee contracts and suggested a simple provision approach should be applied. Other IASB Board members disagreed with the provision approach given financial guarantee contracts are financial instruments and should be measured subsequently under the financial instruments section of the IFRS for SMEs Standard. They noted that no exceptions should be allowed for financial guarantee contracts if the ECL model is approved in the ED.

IASB decision

10 of the 11 IASB members voted in favour of the staff’s recommendations.