Accounting alert 2009/06 - May AASB meeting
SME or not SME?
Issued 25 May 2009
Differential reporting came to the fore in the May AASB meeting as the AASB debated whether or not to implement the 'IFRS for SMEs' in Australia. A number of new pronouncements were also approved.
In this Accounting alert, we focus on:
The IASB's 'IFRS for Small and Medium-sized Entities' is nearing finalisation and is expected to be issued in the coming weeks or months. The AASB has begun a fundamental rethink about its proposals around whether, and if so how, the revised reporting regime should be implemented in the Australian context.
The 'IFRS for SMEs' is a 'slimmed down' version of 'full IFRS' that is designed to fulfil the reporting obligations of non-publicly accountable entities - basically, under the IASB's definition, all entities other than those raising funds (capital or debt) in public markets or those with a fiduciary responsibility (banks, insurance companies, etc).
Since the IASB decided to take this project on its agenda, the AASB has grappled with the impacts it may have on Australian financial reporting, currently based on the 'reporting entity' concept to differentiate between the various reporting obligations.
The AASB issued Invitation to Comment ITC 12 A Proposed Revised Differential Reporting Regime for Australia and the IASB Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities in May 2007, seeking comment on a proposed new differential reporting process based around the removal of the 'reporting entity' concept and the IFRS for SMEs.
What does IFRS for SMEs offer?
The promise of an IFRS for SMEs was a simplified accounting framework for smaller entities that removed some of the complexity of IFRS proper, reduced disclosure and responded to the needs of entities that do not have public accountability. In general, these entities have different stakeholders from the large companies that are listed on the world major stock exchanges - which is the primary focus of IFRS.
In many countries, including much of Europe, IFRS is only required for the consolidated financial statements of listed companies. Individual company reporting and reporting for unlisted entities is generally conducted in accordance with local GAAP or tax requirements. The promise of the IFRS for SME is to harmonise accounting and reporting by this vast and diverse group of entities across the globe - a noble, if difficult, objective.
The IASB's approach in developing the IFRS for SMEs was to start with IFRS and then decide which of its requirements would be suitable for non-publicly accountable entities. Many IFRS requirements have been 'rolled over' into the IFRS for SMEs, often with little simplification. Other requirements have been simplified, but perhaps not in ways that many would expect. Disclosures have been reduced, but still represent a substantially higher volume than a non-reporting entity would currently disclose under Australian standards.
There has been much criticism of the IASB's approach of starting with IFRS rather than a 'clean slate', and many believe that the bar has been set too high for many entities as the final IFRS for SMEs takes form.
Does Australia need an SME standard?
The 'reporting entity' concept is not one that is adopted outside of Australia - in fact, the IASB's definition of a reporting entity is loosely referring to a 'consolidated group' more than a separate concept.
Australia's transition to IFRS in 2005 retained the reporting entity concept and created a two-tier system that permitted much of the 'status quo' to be retained, albeit with major new challenges like financial instrument accounting. However, it is difficult to reconcile the reporting entity approach with the concept of 'general purpose financial statements' as defined by the IASB - which generally doesn't differentiate reporting requirements, but applies a 'one size fits all' approach (segment reporting and earnings per share being logical exceptions).
ITC 12 saw the AASB put Australia on notice that the days of 'the reporting entity concept' were numbered. The AASB's view at that time was that IFRS for SMEs might be the solution for the existing non-reporting entities, although this was only tentatively agreed pending the final form of the IFRS for SMEs.
With the IFRS for SMEs likely to set a high bar in recognition, measurement and disclosure, the AASB finds itself between a rock and hard place. The fundamental question is whether Australia actually needs an SME standard.
Australia took a principled stand to the adoption of IFRS, and basically required all entities to adopt IFRS within the context of the reporting entity concept. Because of the views of the Australian Securities and Investments Commission (ASIC), even non-reporting entities generally follow the recognition and measurement requirements of all standards, even if the disclosures provided are much reduced.
Would the transition to an IFRS for SMEs offer any additional relief? Perhaps some recognition and measurement simplified, but whether this is worth the pain of substantially more disclosure for non-reporting entities is the critical question. Of course, reporting entities that are considered 'non publicly accountable' would benefit of reductions in recognition, measurement and disclosure - depending on where the AASB draws the line between IFRS and IFRS for SME in Australia.
Can the reporting entity concept be resurrected?
The AASB's discussion at the May meeting offers an intriguing possibility: the introduction of a 'third tier' of financial reporting, perhaps without the 'second tier' of IFRS for SMEs.
In other words, everyone could follow the recognition and measurement requirements of IFRS, but the disclosures would reduced, perhaps using the disclosure simplification of the IFRS for SME as a guide (as is relevant).
This would effectively be the reporting entity concept by a different name, although probably with more disclosure than currently occurs. Entities following this approach could not claim compliance with IFRS, but this is effectively the case with special purpose financial reports today in any case.
Before the AASB can proceed to this sort of outcome, there are a number of factors that would need to be considered, including:
- How the disclosures required would be determined and indicated - i.e. principle-based or 'line by line'
- Whether an IFRS for SME is required for global non-publicly accountable entities
- Whether the simplification is enough for particular groups of entities, particularly wholly-owned subsidiaries of publicly accountable entities and the smaller non-publicly accountable entities
- The legal framework under which financial reports are prepared in Australia and tensions between the parliament and standard setter
- How simplification can be achieved as IFRS continues to evolve globally as major new requirements begin to be implemented
- Reconciling IFRS with the needs of not-for-profit and public sector entities.
|We expect that the AASB's differential reporting project will generate substantial interest, particularly now that the release of the IFRS for SME is imminent. Entities with strong or particular views should monitor this project closely and make their views known to the AASB.|
A high-level summary of the other matters discussed at the meeting is presented in the table below.
|Topic||Overview||Comments and more information|
|Annual improvements||The AASB made AASB 2009-4 Amendments to Australian Accounting Standards arising from the Annual Improvements Process and AASB 2009-5 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Process||
The amendments in AASB 2009-4 apply to annual reporting periods beginning on or after 1 July 2009. AASB 2009-5 will apply to annual reporting periods beginning on or after 1 January 2010.
Importantly, the additional guidance on distinguishing whether an entity is acting as agent or principle is included as an attachment to AASB 118 Revenue is effectively immediately applicable .
IAS Plus Newsletter (PDF 104kb)
|First-time adoption||The AASB made AASB 1 First-time Adoption of Australian Accounting Standards (May 2009).||
This revised standard is expected to have limited application in the Australian context as most entities have already transitioned to IFRS.
IAS Plus Update Newsletter (PDF 111kb)
|Revenue recognition||The AASB continued to develop its response to the IASB Discussion Paper Preliminary Views on Revenue Recognition in Contracts with Customers, which will now be finalised out of session.||It is understood that the AASB generally supports the IASB's proposals, but has concerns about the outcomes in relation to long-term contracts (perhaps suggesting that the IASB's focus on the control of a product or service is too narrow).|
|IASB insurance project||The Board received an education session on the IASB's insurance project.||Entities interested in this project should refer to our Deloitte monthly insurance accounting newsletter|
|Interpretations||The AASB noted that an Australian constituent has raised an issue with IFRIC dealing with the treatment of stamp duties under IFRS 3/AASB 3 Business Combinations (2008)||
The treatment of stamp duties under the revised business combinations standards has been contentious since the revised standards were made.
|Financial instruments||The AASB is to closely monitor the IASB's fast-tracked project to replace IAS 29 Financial Instruments: Recognition and Measurement||IAS Plus project page|
|Income from non-exchange transactions||The AASB approved ED 180 Income from Non-exchange Transactions (Taxes and Transfers), which will be issued as a joint ED with the New Zealand Financial Reporting Standards Board (FRSB).||The comment period is expected to be five months.|
|ADMINISTRATIVE AND OTHER MATTERS|
|Policies and procedures||The AASB considered a draft Statement of Policies and Procedures regarding the development of Standards and Interpretations.||-|
|Consultative Group||The AASB will met with its Consultative Group on Wednesday 20 May 2009.||-|
More information on the above topics can be obtained from the AASB Action Alert (PDF 49kb) for the meeting.
The next meeting of the AASB is scheduled for 24-25 June 2009 in Melbourne.
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