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The International Accounting Standards Board (IASB) has released an exposure draft on its proposals for an ‘IFRS for SMEs’ that would be applied by eligible ‘small and medium sized entities’ in lieu of the full suite of IFRS Standards on issue.
The aim of the proposed standard is to provide a simplified, self-contained set of accounting principles that are appropriate for smaller, non-listed companies and are based on full International Financial Reporting Standards (IFRSs), developed primarily for listed companies. The IASB has noted that by removing choices for accounting treatment, eliminating topics that are not generally relevant to SMEs and simplifying methods for recognition and measurement, the resulting draft standard reduces the volume of accounting guidance applicable to SMEs by more than 85 per cent when compared with the full set of IFRSs.
The Australian Accounting Standards Board (AASB) is currently considering how the ‘IFRS for SMEs’ standard should be implemented in the Australian context. The AASB is considering a paper on this topic at its meeting being held this week, which proposes a ‘three tiered’ structure (more details of the proposed structure can be found below). The outcomes of the AASB meeting can be found in Accounting alert 2007/04.
Set out below are a series of questions and answers, providing an overview of the proposals in the exposure draft, as follows:
Our initial view of the proposals We believe that there is an urgent need for the AASB to address the framework for accounting setting in the Australian context, particularly for smaller entities, wholly-owned subsidiaries and the not-for-profit sector. There is an emerging view that using IFRS Standards as a basis for accounting for these entities is becoming more difficult to support and is placing undue hardship on affected entitles. ‘Full’ IFRS is designed for use by large corporates listed on the major stock exchanges of the world and translating these requirements to other sectors has proven to be difficult. Whether the ‘IFRS for SMEs’ is seen as an appropriate solution for such entities remains to be seen. However, it is a positive step that offers some hope of relief. The final determination of the efficacy of Australia adopting the ‘IFRS for SMEs’ will depend on the extent of relief from ‘full’ IFRS offered in the final standard and the amount of modification that the AASB decides is necessary to make the standard suitable for the Australian economy. We hope that the changes made by the AASB are minimal, so that Australian SMEs can take full advantage of the proposals. |
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How is an 'SME' defined?
The ‘IFRS for SMEs’ is intended for an entity with no public accountability. An entity has public accountability (and therefore should use ‘full’ IFRS) if:
- it has issued debt or equity securities in a public market such as the ASX, or
- it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, superannuation fund, mutual fund, or investment bank.
In short, entities without public accountability (SMEs) are unquoted companies that are not financial institutions.
Although the IASB includes superannuation funds in the proposed definition of entities that have public accountability (and so should apply ‘full’ IFRS), the AASB has not yet required superannuation funds to fully comply with IFRS, pending a review of AAS 25. Refer to Accounting Alert 2006/12 for more information on this topic.
A paper being considered by the AASB at this week’s meeting proposes the possibility of a ‘three tiered’ structure for the preparation of financial reports. It is currently proposed that: - ‘publicly accountable entities’ would apply ‘full’ A-IFRS
- non-publicly accountable entities that are of small and medium size (SMEs) would apply the SMEs standard
- entities that by virtue of their economic significance, would be required to prepare financial statements using all the recognition and measurement requirements of A-IFRS, but would have reduced disclosure requirements.
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Will the ‘IFRS for SMEs’ apply to small listed companies?
Small listed companies 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 clout to demand information that they might want. ‘Full’ IFRSs have been designed to serve public capital markets.
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How were the proposals in the SME ED determined?
The draft ‘IFRS for SMEs’ was developed by extracting the fundamental concepts from the IASB Framework and the principles and related mandatory guidance from IFRSs. However, modifications to these were proposed in circumstances where it was considered appropriate in light of user needs and cost-benefit considerations.
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What are some of the key modifications from IFRS?
There are three broad types of modifications based on needs of users of SMEs’ financial statements and cost-benefit considerations; topics omitted, inclusion of only the simpler option, and recognition and measurement implications. These modifications are discussed in detail below.
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 (look to IAS 29 Financial Reporting in Hyperinflationary Economies)
- 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; however, the Board also proposes to reduce the use of fair value through profit and 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 for finance leases (look to IAS 17 Leases. Finance lessors are likely to be financial institutions who would be ineligible to use the ‘IFRS for SMEs’ anyway)
- earnings per share and segment reporting, which are not required for SMEs
- insurance contracts (insurers would not be eligible to use the ‘IFRS for SMEs’).
Only the simpler option included
Where ‘full’ IFRSs provide an accounting policy choice, only the simpler option is included in the ‘IFRS for SMEs’. An SME would be permitted to use other options 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 Intangible Assets)
- expense borrowing costs (capitalisation is allowed by reference to IAS 23 Borrowing Costs)
- the indirect method for reporting operating cash flows (the direct method is allowed by reference to IAS 7 Cash Flow Statements)
- one method for all grants (or an SME may use any of 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.
| Whilst the AASB has not determined its final approach in relation to the options available, it would appear unlikely that the full suite of options would not be available given the AASB’s move towards ‘full’ convergence with IFRS proposed in ED 151 Australian Additions to, and Deletions from, IFRSs. |
Recognition and measurement simplifications
There are a number of recognition and measurement simplifications proposed in the ED. The ‘IFRS for SMEs’ provides an accounting policy choice as to whether these simplifications are applied, or whether the requirements of ‘full’ IFRS are applied.
Following are some examples:
- financial instruments:
- two categories of financial assets rather than four. This means there is no need to deal with all of the “intent-driven” held to maturity rules or related “tainting”. There is also no need for an available for sale option. There are also 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 are avoided.
- much simplified hedge accounting
- goodwill impairment – an indicator approach rather than mandatory annual impairment calculations
- expense all research and development costs (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. The complex ‘corridor approach’ is proposed to be 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 need to be restated than under IFRS 1 First-time Adoption of International Financial Reporting Standards.
| The IASB had originally tentatively agreed to adopt a ‘timing difference’ rather than ‘temporary difference’ approach to the recognition and measurement of income taxes under the ‘IFRS for SMEs’. However, the final exposure draft proposes a ‘temporary difference’ approach, following the same approach as IAS 12 Income Taxes. Many SMEs in the Australian context may be disappointed that this complex area is not also proposed to be simplified. |
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How will amendments be made to the ‘IFRS for SMEs’?
The IASB proposes that updates to the ‘IFRS for SMEs’ would only occur approximately once every two years. Changes would be proposed via an ‘omnibus’ exposure draft.
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What is the process from here?
The comment deadline on the IASB Exposure Draft is 1 October 2007, with the AASB yet to finalise the deadline for any equivalent Australian ED. During the exposure period, the IASB will conduct round-table meetings with SMEs and small firms of auditors to discuss the proposals. The Board will also conduct field tests and/or visits of the proposals in the ED. A final Standard is expected in mid-2008.
Links
IASB press release: “IASB publishes draft IFRS for SMEs”
IAS Plus SME Project Page – provides a full history of the IASB’s SME project
IASB SME Project Page – note that the exposure draft will only be freely available from Monday 26 February 2007.
