Introduction
In January 2020, the International Accounting Standards Board (IASB) published a request for information as part of the second comprehensive review of the IFRS for SMEs Accounting Standard (Standard). The request for information set out the IASB’s proposed approach to aligning the Standard with new and amended IFRS Accounting Standards.
After publishing the request for information, the IASB talked to SMEs’ investors, lenders and creditors. These discussions, together with the comment letters responding to the request for information, helped the IASB develop its proposals in the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard.
This article describes the proposals in the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard and their expected benefits to users of SMEs’ financial statements. The Exposure Draft is open for comment until 7 March 2023.
How to Update the Standard
In the request for information, the IASB asked for views on whether the Standard should continue to be based on full IFRS Accounting Standards with modifications to reflect the needs of users of SMEs’ financial statements—that is, whether to amend the Standard to align it with new and amended IFRS Accounting Standards.
Respondents generally agreed with:
- continuing to align the Standard with full IFRS Accounting Standards; and
- the IASB’s plan to apply three alignment principles when considering potential amendments.
The IASB applies these three alignment principles to potential amendments in the following order:
- Relevance to SMEs: would the change make a difference to users’ decisions?
- Simplicity: could appropriate simplifications be made?
- Faithful representation: would the outcome faithfully represent the substance of economic phenomena?
Although respondents agreed with the alignment principles, some were concerned that the cost of changing accounting policies could be prohibitive for SMEs and might not be justified by the benefits to users. Some respondents also questioned whether the cost–benefit balance might vary in the many jurisdictions in which the Standard is applied.
The IASB has evaluated new and amended IFRS Accounting Standards using the alignment principles and considered the costs and benefits of the consequences. Based on this evaluation the IASB is proposing amendments to the Standard. The IASB is proposing to allow an undue cost or effort exemption in some circumstances, to better balance the costs and benefits.
Scope of the Second Comprehensive Review
The IASB considered and is proposing amendments to the IFRS for SMEs Accounting Standard for:
- The Conceptual Framework for Financial Reporting;
- IFRS 3 Business Combinations;
- IFRS 9 Financial Instruments;
- IFRS 10 Consolidated Financial Statements;
- IFRS 11 Joint Arrangements;
- IFRS 13 Fair Value Measurement; and
- IFRS 15 Revenue from Contracts with Customers.
The IASB considered and is not proposing amendments to the IFRS for SMEs Accounting Standard for:
- IFRS 14 Regulatory Deferral Accounts; and
- IFRS 16 Leases.
The IASB is also proposing amendments to the IFRS for SMEs Accounting Standard for minor amendments to other IFRS Accounting Standards and IFRIC Interpretations.
Overview of the Second Comprehensive Review
The sections below discuss the proposals in the Exposure Draft and their benefits to users, and also the reasons why some topics did not result in proposed amendments.
Revenue
Section 23 of the Standard sets out the requirements for the recognition of revenue. In the request for information, the IASB sought views on aligning the Standard with IFRS 15 Revenue from Contracts with Customers, issued in 2015. IFRS 15 established principles that an entity applies when reporting information about the nature, amount, timing and uncertainty of revenue and cash flows from a contract with a customer.
Many respondents agreed with aligning the Standard with some aspects of IFRS 15. Respondents asked for the IFRS 15 five-step model to be included because, in their view, it provides a helpful framework for preparers.
The IASB is proposing to align Section 23 with IFRS 15 by rewriting Section 23 to reflect the principles and language used in IFRS 15, using the five-step model from IFRS 15. The IASB is proposing to simplify the requirements in IFRS 15.
Benefits to Users
Improved consistency in revenue reported for economically similar transactions.
Improved ability to compare SMEs’ information.
Improved disclosures to help understand the amount, timing and uncertainty of revenue and cash flows from an SME’s contracts with customers.
Consolidated Financial Statements
Section 9 of the Standard sets out when and how an SME prepares consolidated financial statements. IFRS 10 Consolidated Financial Statements introduced a control model as the single basis for consolidation.
Respondents to the request for information generally agreed with aligning Section 9 with the IFRS 10 definition of control. The IASB agreed and is proposing to align the definition of ‘control’ in Section 9 with that in IFRS 10.
The IASB also agreed with many respondents’ views on retaining the rebuttable presumption in paragraph 9.5 of the Standard and updating that paragraph to refer to the new definition of control. The rebuttable presumption is a simplification of the control model.
Respondents generally agreed the IASB should not amend the Standard to require investment entities to measure investments in subsidiaries at fair value through profit or loss. Based on this feedback, the IASB is not proposing requirements for investment entities in the Exposure Draft.
Benefits to users
The proposed single basis for consolidation will increase comparability, usefulness and consistency for users of SMEs’ financial statements.
Joint Arrangements
Section 15 of the Standard applies to the accounting for joint arrangements. IFRS 11 Joint Arrangements introduced a new definition of ‘joint control’ and changed the way an entity classifies joint arrangements.
Respondents to the request for information generally agreed the IASB should align the definition of joint control in the Standard with IFRS 11. They also agreed that the IASB should not amend the classification requirements in the Standard. The IASB is proposing to align the definition of joint control and to retain the classification requirements for joint arrangements in the Standard. The requirements for classification of joint arrangements will, therefore, diverge from IFRS Accounting Standards.
Business Combinations
Section 19 of the Standard applies to the accounting for business combinations and is based on the Accounting Standard that preceded IFRS 3 Business Combinations (2008). IFRS 3 (2008) was issued to respond to known deficiencies in IFRS 3.
The IASB’s proposals include:
- updating the definition of a ‘business’ in the Standard, including application guidance and illustrative examples; and
- requiring the acquisition method of accounting that includes introducing requirements for step-acquisitions and requiring contingent consideration to be measured at fair value.
Benefits to users
Improved consistency in what is treated as a business combination.
Reduced diversity in how SMEs account for step-acquisitions.
Enhanced information for assessing the initial investment and performance of business combinations.
Financial Instruments
Sections 11 and 12 of the Standard set out requirements for financial instruments. As part of this review, the IASB considered whether to align the Standard with IFRS 9 Financial Instruments. The IASB is proposing to align the Standard with only some aspects of IFRS 9.
The IASB is proposing to remove the option for an SME to apply the Accounting Standard that preceded IFRS 9, IAS 39 Financial Instruments: Recognition and Measurement.
Classification
The Standard provides examples of how to classify financial instruments. In the request for information the IASB asked for views on whether it should supplement the examples with a principle for classification. Respondents generally favoured introducing a principle for classification of financial instruments.
Expected credit losses
The Standard sets out an incurred loss model for an SME to use to recognise impairment losses on financial assets. IFRS 9 introduced an expected credit loss model and a simplified expected credit loss model. In the request for information, the IASB asked about introducing the simplified expected credit loss model. Respondents were less supportive on this aspect of alignment than they were about other proposals and expressed concerns about complexity and the costs of application.
The IASB is proposing to align the Standard with the simplified expected credit loss model for financial assets other than trade receivables and contract assets related to revenue.
Issued financial guarantee contracts
To respond to concerns about the measurement of issued financial guarantee contracts, the IASB is proposing to include in the Standard the IFRS 9 definition of a ‘financial guarantee contract’ and to require measurement based on IFRS 9 with appropriate simplifications.
Benefits to users
Enhanced comparability of SMEs’ information by removing the option of applying IAS 39.
Better information from earlier recognition of impairment losses for some financial assets measured at amortised cost.
Conceptual Framework
Section 2 of the Standard sets out the concepts and basic principles underlying an SMEs’ financial statements. It is based on the 1989 Framework for the Preparation and Presentation of Financial Statements.
Most respondents to the request for information agreed that Section 2 of the Standard should be aligned with the 2018 Conceptual Framework for Financial Reporting. Therefore, the IASB is proposing to revise Section 2 of the Standard to reflect the structure, definitions and principles of the 2018 Conceptual Framework, with appropriate simplifications for SMEs.
Benefits to users
Aligning Section 2 with the 2018 Conceptual Framework should assist users’ understanding and enhance the quality of information communicated in SMEs’ financial statements.
Fair Value Measurement
The Standard already includes the use of fair value measurement. The request for information asked for views on aligning the fair value measurement guidance with IFRS 13 Fair Value Measurement and locating the guidance in one section of the Standard. Stakeholders agreed the IASB should align the Standard with IFRS 13 and locate the guidance in one place.
Leases
Section 20 of the Standard includes requirements for accounting for leases and is based on the Accounting Standard that preceded IFRS 16 Leases, which introduced a single lessee accounting model. IFRS 16 requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.
Respondents had mixed views on whether the Standard should be aligned with IFRS 16. Some respondents expressed concerns about whether there was sufficient implementation experience of IFRS 16. Some respondents also questioned the relative costs and benefits for SMEs. However, others agreed the IASB should align the Standard with IFRS 16.
Some users who responded to the user questionnaire said that the recognition of leases is important when the item being leased is significant to the SME—that is, where it is a major item of property, plant or equipment. However, some users said that the recognition of lease liabilities for SMEs does not affect credit assessments because leased assets cannot be collateralised. Other users said that it is important to be able to understand future cash outflows from lease arrangements.
The IASB considered the costs and benefits of aligning Section 20 with IFRS 16 and decided:
- to propose no amendments to Section 20; and
- to consider amending the Standard to align it with IFRS 16 during a future review of the Standard.
Other topics
Cryptocurrency
A few stakeholders agreed with including guidance on cryptocurrencies in the Standard. However, the IASB agreed with the views of other stakeholders and the SME Implementation Group’s advice that the Standard should not diverge from full IFRS Accounting Standards by covering this topic. Therefore, the IASB decided against developing requirements for holdings of cryptocurrency or for issuing cryptoassets.
Development costs
Unlike IAS 38 Intangible Assets, the Standard requires all development costs to be recognised as expenses, and the IASB received feedback questioning whether this requirement is a helpful simplification. The IASB is asking for views on introducing an accounting policy option that:
- permits an SME applying the Standard to recognise intangible assets arising from development costs that meet the criteria in IAS 38; but
- allows the SME to continue recognising such costs as expenses.
Minor amendments to IFRS Accounting Standards and IFRIC Interpretations
In the request for information, the IASB also asked for views on aligning the Standard with minor amendments and IFRIC Interpretations with which the Standard is not currently aligned. Based on feedback on the request for information, the IASB is proposing a number of minor amendments to the Standard.
