Definition of an SME

The IFRS for SMEs is intended for an entity with no public accountability. An entity has public accountability (and therefore should use full IFRSs) if:

• it has issued debt or equity securities in a public market; or
• it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund, or investment bank.

Stand-alone document

The Board intends the IFRS for SMEs to be a stand-alone document for a typical SME with about 50 employees. The IASB has not specified a quantified size test, though jurisdictions adopting the IFRS for SMEs may add one. There is no mandatory fallback to full IFRSs.

Small listed companies

They are not eligible to use the IFRS for SMEs. Listed companies, large or small, have elected to seek capital from outside investors who are not involved in managing the business and who do not have the power to demand information that they might want. Full IFRSs have been designed to serve public capital markets.

Based on concepts and principles in full IFRSs

The draft IFRS for SMEs was developed by extracting the fundamental concepts from the IASB Framework for the Preparation and Presentation of Financial Statements and the principles and related mandatory guidance from IFRSs with appropriate modifications in the light of users' needs and cost-benefit considerations.

Modifications of IFRSs

The modifications are of three broad types based on needs of users of SMEs' financial statements and cost-benefit considerations:

1. Topics omitted. IFRS topics not relevant to a typical SME are omitted, with cross-references to the IFRS if needed. These are:

• General price-level adjusted reporting in a hyperinflationary environment.
• Equity-settled share-based payment (the computational details are in IFRS 2 Share-based Payment).
• Determining fair value of agricultural assets (look to IAS 41 Agriculture, but the ED also proposes to reduce the use of fair value through profit or loss for agricultural SMEs).
• Extractive industries (look to IFRS 6 Exploration for and Evaluation of Mineral Resources).
• Interim reporting (look to IAS 34 Interim Financial Reporting).
• Lessor accounting finance leases (finance lessors are likely to be financial institutions who would be ineligible to use the IFRS for SMEs anyway).
• Recoverable amount of goodwill (SMEs would test goodwill for impairment much less frequently than under IAS 38 Intangible Assets, but if an SME is required to perform such a test it would look to the calculation guidance in IAS 38).
• Earnings per share and segment reporting, which are not required for SMEs, and Insurance contracts (insurers would not be eligible to use the IFRS for SMEs).

2. Only the simpler option included. Where full IFRSs provide an accounting policy choice, only the simpler option is in the IFRS for SMEs. An SME is permitted to use the other option by cross-reference to the relevant IFRS. These are:

• Cost-depreciation model for investment property (fair value through profit or loss is permitted by reference to IAS 40 Investment Property).
• Cost-amortisation-impairment model for property, plant and equipment and intangibles (the revaluation model is allowed by references to IAS 16 Property, Plant and Equipment and IAS 38).
• Expense borrowing costs (capitalisation allowed by reference to IAS 23 Borrowing Costs).
• Indirect method for reporting operating cash flows (the direct method is allowed by reference to IAS 7 Cash Flow Statement).
• One method for all grants (or an SME can use any of the alternatives in IAS 20 Government Grants and Disclosure of Government Assistance).

In adopting the IFRS for SMEs, an individual jurisdiction could decide not to allow the option that is cross-referenced to the full IFRS.

3. Recognition and measurement simplifications. Here are some examples:

• Financial instruments:
  • Two categories of financial assets rather than four. This means no need to deal with all of the intent-driven held to maturity rules or related 'tainting', no need for an available for sale option, and many other simplifications.
  • A clear and simple principle for derecognition - if the transferor has any significant continuing involvement, do not derecognise. The complex 'pass-through testing' and 'control retention testing' of IAS 39 Financial Instruments: Recognition and Measurement are avoided.
  • Much simplified hedge accounting.
• Goodwill impairment - an indicator approach rather than mandatory annual impairment calculations.
• Expense all research and development cost (IAS 38 would require capitalisation after commercial viability has been assessed).
• The cost method for associates and joint ventures (rather than the equity method or proportionate consolidation).
• Less fair value for agriculture - only if 'readily determinable without undue cost or effort'.
• Defined benefit plans - a principle approach rather than the detailed calculation and deferral rules of IAS 19 Employee Benefits. Complex 'corridor approach' omitted.
• Share-based payment - intrinsic value method.
• Finance leases - simplified measurement of lessee's rights and obligations.
• First-time adoption - less prior period data would have to be restated than under IFRS 1 First-time Adoption of IFRSs.

Frequency of updating the IFRS for SMEs

• Approximately once every two years via an 'omnibus' exposure draft.

Organisation of the ED

The ED is issued in three documents:

• The draft IFRS for SMEs (254 pages),
• Implementation guidance (80 pages, consisting of illustrative financial statements and a disclosure checklist), and
• Basis for conclusions (48 pages).

Next steps

• Comment deadline on the ED is 1 October 2007.
• During the exposure period the Board will conduct round-table meetings with SMEs and small firms of auditors to discuss the proposals. The Board will field test the proposals in the ED.
• Final standard is expected in mid-2008.
• It would be effective according to decisions in each jurisdiction that adopts the IFRS for SMEs.