Second Comprehensive Review of the IFRS for SMEs Standard

Date recorded:

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 Accounting Standard using the alignment approach.

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

At this meeting, the IASB deliberated:

  • Feedback on the scope (including the definition of public accountability) and name of the IFRS for SMEs Accounting Standard
  • Topics identified when developing the ED after considering the tentative decisions made by the IASB in deliberating this comprehensive review that are:
    • Potential inconsistencies between the revised Section 2 Concepts and Pervasive Principles of the IFRS for SMEs Accounting Standard and other sections of the standard
    • Sweep issues—consequential to amendments to the IFRS for SMEs Accounting Standard that the IASB has tentatively decided to propose
    • Other sweep issues identified by the staff
  • Transition requirements for an entity applying the amendments to the IFRS for SMEs Accounting Standard for the first time
  • The effective date of the amendments to be proposed

Towards an Exposure Draft—Scope and name of the IFRS for SMEs Accounting Standard (Agenda Paper 30A)

This paper discussed whether to propose amendments to the scope and name of the IFRS for SMEs Accounting Standard.

Scope

At the start of this second comprehensive review, the IASB conducted outreach with its consultative groups and national standard-setters on whether to amend the scope of the IFRS for SMEs Accounting Standard to allow some publicly accountable entities to apply the Standard by permitting exceptions to the definition of public accountability. Responses to outreach supported the IASB’s view that changes to the scope of the IFRS for SMEs Accounting Standard might require other changes that would increase the complexity of the Standard. Furthermore, concerns were raised about the difficulty in clearly defining the group of entities with public accountability that would be permitted to apply the IFRS for SMEs Accounting Standard. At the March 2019 International Forum of Accounting Standard Setters (IFASS) meeting, IFASS members did not support suggestions to provide exceptions to the definition of public accountability and expressed concerns about the difficulty of drafting such exceptions.

Name

The IASB discussed the name of the Standard ‘IFRS for SMEs’ and the use of the term ‘small and medium-sized entities’ (SMEs) on several occasions during development of the Standard. After soliciting views in the 2004 Discussion Paper Preliminary Views on Accounting Standards for Small and Medium-sized Entities, the IASB chose the term ‘small and medium-sized entities (SMEs)’ to describe the entities eligible to apply the standard, primarily because SME is recognised globally. However, many respondents said that ‘SME’ is not appropriate because ‘small’ and ‘medium’ imply a size test and the term SME already has precise, and differing, quantified definitions in many jurisdictions and two definitions for the same term would lead to confusion.

The IASB decided that the best alternative for the name of the Standard was ‘IFRS for SMEs’ after several rounds of discussions, which included considering all of the alternatives suggested by respondents to the RFI. The name ‘IFRS for SMEs’ is now well established as a recognised brand and changes to the name risk weakening this brand. The standard is commonly recognised and adopted by jurisdictions as the alternative to local GAAP for the middle tier of entities, i.e. those entities that do not have public accountability and are not covered by a local standard for micro-sized entities. Furthermore, changing the name might cause problems for local laws or regulations.

Staff recommendation

The staff recommended the IASB does not amend the scope and the name of the IFRS for SMEs Accounting Standard.

IASB discussion

Scope

IASB members noted no new information has been received from the RFI to require the scope to be changed and a very small number of stakeholders would like to widen the scope of the IFRS for SMEs Accounting Standard to include some publicly accountable entities. However, to bring those entities (e.g. smaller financial institutions) into the scope will affect the work already done for the Second Comprehensive Review and will also increase the complexity of the IFRS for SMEs Accounting Standard. In addition, different jurisdictions may have different definitions of a smaller financial institution, which makes it difficult to decide which entities could take the exception to apply the IFRS for SMEs Accounting Standard.

Some IASB members acknowledged that there is a gap to address in the accounting of smaller entities with public accountability. However, IASB members noted it is not the right time to change the scope at this stage and it is difficult to decide which entities could take the exception to apply the IFRS for SMEs Accounting Standard. It is something to consider in the future.

All IASB members voted in favour of the staff’s recommendation not to amend the scope of the IFRS for SMEs Accounting Standard.

Name

IASB members noted that there is no new information to support the name change and it is not cost free to change the name even though the name does not match the scope.

All IASB members voted in favour of the staff’s recommendation not to amend the name of the IFRS for SMEs Accounting Standard.

Towards an Exposure Draft—Definition of public accountability (Agenda Paper 30B)

This paper discussed whether the definition of public accountability in the IFRS for SMEs Accounting Standard (and the draft Standard Subsidiaries without Public Accountability: Disclosures) is still fit for purpose or needs further clarification.

Staff recommendation

The staff recommended the IASB should:

  • Clarify the definition of public accountability in the IFRS for SMEs Accounting Standard (and also in the Standard Subsidiaries without Public Accountability: Disclosures, if the IASB finalises the draft Standard) to improve understanding
  • Clarify in the Standard Subsidiaries without Public Accountability: Disclosures, if finalised, that an intermediate parent assesses its eligibility to use that standard in its separate financial statements on the basis of its own status without considering whether other group entities have, or the group as a whole has, public accountability, using similar wording to that of paragraph 1.7 of the IFRS for SMEs Accounting Standard
  • Make the guidance on public accountability in Module 1 Small and Medium-sized Entities (the educational material on Section 1 of the IFRS for SMEs Accounting Standard) available on the IFRS Foundation website as guidance on the Standard Subsidiaries without Public Accountability: Disclosures, if finalised

IASB discussion

IASB members agreed with the staff recommendations to clarify the definition of public accountability in the IFRS for SMEs Accounting Standard; however, IASB members asked the staff to explain why the changes are made and indicated that the changes are just a clarification and is not intended to propose changes to the scope.

One IASB member noted that the definition of public accountability is not an issue for the IFRS for SMEs Accounting Standard and the changes proposed by the staff may be open to challenages and create unintended issues. 

In relation to the guidance on public accountabiltiy,  IASB members noted that the message should be clear as to which standard this guidance is for. IASB members acknowledged that the intention is just to make the guidance visible to users of Subsidiaries without Public Accountability: Disclosures with no intention to change the guidance.

9 out of 10 IASB members voted in favour of clarifying the definition of public accountability in the IFRS for SMEs Accounting Standard.

All IASB members voted in favour of the staff’s recommendation to clarify the eligibility assessment in the Standard Subsidiaries without Public Accountability: Disclosures.

No IASB members objected to putting the guidance on the website. IASB members agreed that the staff should make it clear how to practically provide that guidance and bring it back to the IASB.

Towards an Exposure Draft—Review for inconsistencies between revised Section 2 and other Sections of the IFRS for SMEs Accounting Standard (Agenda Paper 30C)

This paper summarised the findings from the review for inconsistencies between:

  • Section 2 Concepts and Pervasive Principles of the IFRS for SMEs Accounting Standard that the IASB tentatively decided to propose to amend to align it with the 2018 Conceptual Framework
  • Other Sections of the IFRS for SMEs Accounting Standard—after considering all of the IASB’s tentative decisions to propose amendments to the IFRS for SMEs Accounting Standard as part of this comprehensive review

IAS 37 includes the 1989 Framework definition of a liability. IAS 38 includes the 1989 Framework definition of an asset. Both standards were not amended following the revision of the definitions in 2018 Conceptual Framework. Equivalent Sections in the IFRS for SMEs Accounting Standard (Section 21 Provisions and Contingencies and Section 18 Intangible Assets other than Goodwill) do not include the definitions of an asset and a liability. In developing the ED, the staff consider including the definitions of an asset and a liability in Section 18 and Section 21.

Staff recommendation

The staff recommended the IASB propose amendments to the standard to:

  • Include the 1989 Framework definitions of an asset and a liability in Section 21 and Section 18
  • Remove the references to the recognition criteria in Section 2 from Section 17 Property, Plant and Equipment and Section 18 Intangible Assets other than Goodwill

IASB discussion

IASB members noted that some wording in the invitation to comment may need to be updated as the focus area should be what information the IASB would like to obtain from the comments rather than just asking whether the changes are ok or not.

One IASB member noted explanations may need to be added in the Basis for Conclusions as to why the IASB removed the references to the recognition criteria in Section 2 from Section 17 and Section 18.

IASB members agreed with the departures as the decision on the amendments has already been made and the invitation for comments should not be overengineered.

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

Towards an Exposure Draft—Sweep issues (Agenda Paper 30D)

This paper discussed sweep issues for the IASB to consider that:

  • Are consequential to amendments to the IFRS for SMEs Accounting Standard that the IASB has tentatively decided to propose
  • Have been identified by the staff in developing the ED

Staff recommendation

The staff made the following recommendations to the IASB:

  • Recommendation 1: Propose amendments to Section 19 of the IFRS for SMEs Accounting Standard:
    • To align with the requirements set out in paragraph 11 of IFRS 3 Business Combinations (as amended in May 2020)
    • To align with the requirement of IFRS 3 that an acquirer cannot recognise a contingency that is not a liability
  • Recommendation 2: Propose amendments to the IFRS for SMEs Accounting Standard to align with the definition of accounting estimates as set out in IAS 8 as amended in February 2021 and consequently, introduce the application guidance relevant to SMEs as set out in IAS 8
  • Recommendation 3: Propose amendments to paragraph 9 of Section 11 Basic Financial Instruments of the IFRS for SMEs Accounting Standard to reflect the 2017 amendments to IFRS 9 to enable SMEs to measure at amortised cost debt instruments that have prepayment features with negative compensation
  • Recommendation 4: Propose amendments to paragraph 8 of Section 14 Investments in Associates of the IFRS for SMEs Accounting Standard to reflect the 2017 amendments to IAS 28 and to clarify, for SMEs, the treatment of financial instruments that form part of an entity’s net investment in an associate or jointly controlled entity
  • Recommendation 5: Propose amendments to Section 33 Related Party Disclosures of the IFRS for SMEs Accounting Standard to align it with IAS 24, with some proposed simplifications

IASB discussion

Recommendation 1

IASB members agreed with the staff’s proposal but did not think that it is necessary to ask for further views in the invitation to comment.

All IASB members voted in favour of the staff’s proposal but decided not to ask for feedback in the invitation to comment of the ED.

Recommendation 2

The staff clarified that only the text of the definition of accounting estimates will be aligned and not the examples.

All IASB members voted in favour of the recommendation.

Recommendation 3

Some IASB members challenged whether this issue needs to be addressed given the arrangement may be rare for SMEs in particular from the lenders’ perspective.

Some IASB members noted that SMEs may be a lender in the arrangement, and therefore agreed with the staff’s recommendation to make this clarification.

One IASB member suggested to ask the question whether this type of transaction is widely spread and then ask whether should be addressed.

One IASB member suggested the invitation to comment should be structured section by section, not a separate section for the sweep issues.

All IASB members voted in favour of the recommendation.

Recommendation 4

One IASB member suggested that it should be clear when using equity method, whether the proposed amendments are for cost or fair value measurement or whether the amendments are relevant for both.

All IASB members voted in favour of the recommendation.

Recommendation 5

All IASB members voted in favour of the recommendations.

Towards an Exposure Draft–IFRS for SMEs Accounting Standard transition requirements for alignment with new IFRS Accounting Standards (Agenda Paper 30E)

This paper discussed how entities applying the IFRS for SMEs Accounting Standard would initially apply the proposed amendments to align with new IFRS Accounting Standards in the scope of the second comprehensive review.

Staff recommendation

The staff recommended the IASB use the transition requirements and reliefs of the new IFRS Accounting Standards as the starting point and supplement these with reliefs for SMEs, which are set out in detail in the agenda paper on a section-by-section basis.

IASB discussion

One IASB member asked whether overriding cost and benefits should also be considered in addition to the ‘practicable’ criteria. The staff and other IASB members explained the practicable criteria were taken from the existing requirement in the IFRS for SMEs Accounting Standard and noted that complexity would be added to the standard by considering additional overriding costs and benefits on transition. IASB members agreed with the staff’s recommendation to use the transition requirements and reliefs of the new IFRS Accounting Standards as the starting point.

The IASB discussed and voted for the staff’s recommendations on transition reliefs for below specific sections of the IFRS for SMEs Accounting Standard:

Section 11 Basic Financial Instruments

One IASB member queried whether transition should be prospectively rather than retrospectively given many of the changes are unlikely for SMEs but much work may be involved to look into the classification of each contract. Other IASB members noted it would be rare for an SME to hold complex financial instruments and not apply the optional fallback to IAS 39 for recognition and measurement of financial instruments. Therefore, the work involved to apply retrospectively will not be burdensome for SMEs.  

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

Section 9 Consolidated and Separate Financial Statements

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

Section 15 Investments in Joint Ventures

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

Section 19 Business Combinations and Goodwill

One IASB member suggested two clarifications: The first one was whether the beginning of the first annual reporting period is the same as the initial application and suggested the staff to use the consistent terms.  The second one was to clarify the treatment of contingent consideration as the proposal is not to remeasure those balances on transition.

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

Section 23 Revenue

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

New Section Fair Value Measurement:

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

Towards an Exposure Draft—Effective date (Agenda Paper 30F)

The purpose of this paper was to ask the IASB to consider the effective date for the revised IFRS for SMEs Accounting Standard.

Staff recommendation

The staff recommended the IASB propose that the effective date for the revised IFRS for SMEs Accounting Standard be a minimum of two years after the revised version is issued, with early application permitted.

IASB discussion

IASB members noted the staff would add some justifications as to why two years are given before the standard is effective after the revised version is issued.

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

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