IFRS for Small and Medium-sized Entities
Comments from ACCA
28 November 2007
ACCA is pleased to have this opportunity to comment on the Exposure Draft (ED) of a standard for small and medium-sized entities (SMEs) which was considered by ACCA's Financial Reporting Committee.
ACCA considers this to be the most important project upon which IASB are currently engaged, given the huge number of entities to which this proposed standard might apply and their economic significance. Our response has therefore been developed with the benefit of extensive consultation with our worldwide membership and other stakeholders via our website and through a number of roundtable seminars in a range of countries including Bahrain , Barbados , Kuwait , Pakistan , Poland , Romania , Trinidad, UAE and Zambia . We are also organising some field-testing of the draft standard in the UK and we will be sending you the results of this and any further information from our ongoing consultations in the coming weeks.
Overall comments
We very much support the development of this standard as a contribution to the globalisation of financial reporting standards. We believe that it will be particularly useful in a number of countries where the process of setting or overhauling local standards is in train.
The level of that take up, however, would be increased if further simplifications can be made to the final standard. In some countries the ED is viewed as too complex and therefore only likely to be suitable for a relatively narrow band of larger non-publicly accountable entities and not to genuinely small and medium-sized entities. In such countries there is a risk that the proposed standard may not be allowed at all and existing national systems preferred. Elsewhere, particularly countries which currently rely on IFRS as the basis of reporting by all companies of whatever size, we expect that local jurisdictions are likely to make use of the standard. However, the ED would represent a lost opportunity to reduce the burdens of reporting for the bulk of SMEs unless it is further simplified. In its existing form there may be a movement to develop or retain other forms of reporting, so-called third level approaches which would be undesirable set against the generally acknowledged benefits of global standards. ACCA would certainly prefer that IFRS based accounting be developed as universally as possible.
Given its intended application widely among SMEs, including those in developing countries, IASB should make the text of the standard freely available for download from its website.
The ED is likely to be used in many countries as the blue-print for national standards and not applied directly. Adaptation may take the form of eliminating certain of the options existing in the ED or by removing certain requirements. For example, in some European countries the law imposes no obligation to prepare consolidated accounts where a company may have subsidiaries and the group falls below the threshold for a small company. It seems unlikely that a requirement for consolidation will be re-imposed via an accounting standard. IASB should try to present the text in a way that makes this type of adaptation as straightforward as possible.
The current document is inconsistent as regards its title (IFRS for SMEs) and the entities that the IASB had in mind in its drafting, an enterprise with 50 employees. Many people would not regard the average SME as being as large as that and the title has raised expectations that the needs of an average SME were going to be addressed. This has led to widespread disenchantment with the ED and we suggest the name is changed to refer to entities without public interest or privately held entities.
ACCA responses to specific questions raised by IASB
Q1. Stand alone document
We are content with the way in which the ED deals with rarely occurring matters and options that are less likely to be taken up, that is by cross-reference to the particular standard from full IFRS. This is a more satisfactory way to incorporate such matters in the SME standard than by providing guidance for rarely occurring items. A number of jurisdictions are likely to eliminate some of the more complex options and this will be more easily done with a single cross reference paragraph. Inevitably preparers using the standard will, in case of difficulty, consult the full IFRS. So to some extent they will already be using both books and thus to have to consult the ‘big book' in these instances of difficulty will not pose a significant problem.
The cross-references do pose certain problems that need to be addressed, however. Firstly, as full IFRS are replaced or amended, the specific paragraph references might not remain correct. Secondly, the cross references must be specific. For example, the reference in Paragraph 24.5 to “relevant disclosures required by IAS23” is not adequate. Thirdly, when applying a treatment from another IAS or IFRS, this should not necessarily imply that all of the disclosure requirements of that IAS/IFRS need be followed as well – the SME standard should make clear which ones need to be complied with.
We observe that the level of cross-reference to full IFRS in the ED is not minimal as suggested in the question. Under Q6. we have noted some items which we believe need not be addressed in the proposed standard or can be treated differently.
Q2.Recognition and measurement differences that the Board adopted
The redrafting of the requirements for financial instruments (Section 11) generally seems helpful. Cash flow and fair value hedge accounting, for instance, is presented in a way that might be more accessible by referring to the sort of exposure being hedged.
We support the option to follow IAS39 instead.
The general measurement position is less helpful with the accounting model for financial instruments using fair value (FV) as the default category (even though trade receivables, payables and loans could be at amortised cost). This certainly allows a much wider FV value option than in full IFRS, including a free choice for financial liabilities. The general position in our view should be reversed. Amortised historical cost should be the general measurement basis with a requirement for derivatives and listed investments to be at FV. Without this change on liabilities the standard will incompatible with the EU's accounting directives and so might not be able to be used within Europe at all.
We agree with the approach to goodwill impairment which is a helpful reduction in the burden.
Allowing an extra option to expense development costs is reasonable and we would expect that this treatment will be taken up in the majority of cases.
We would not agree with the option for the cost method for associates and joint ventures when it comes to the consolidated accounts, though in the holding company's separate financial statements this would continue to be acceptable.
We agree with the formulation of Paragraph 35.1(a) that SMEs only to have to use FV for biological assets when readily determinable market values are to hand.
On defined benefit pension plans we do not agree with the ED's proposals. There should be an option for SMEs to follow IAS19 as well as the proposed method in the ED.
Strangely, in the Basis for Conclusions, the simplification on impairment which would eliminate value in use as a possible measure is not listed. Any impaired assets could therefore only be measured at fair value less costs to sell. This may not be a helpful simplification and closes an option in IFRS. Accounting should be able to reflect the economic reality that, even where a business might be under-performing, it still may be worth more to the current owners to hold on to it than they would realise by selling it to a third party. The same sort of consideration applies to motor cars when just purchased, for instance.
Q3. Recognition and measurement simplifications that the Board considered but did not adopt
We agree with the decisions of the Board on these matters, with the exception of deferred tax. The information in this case is unlikely to be very useful or understandable for the users of SME accounts. Deferred tax might be helpful in the prediction of future cash flows by the users of listed company accounts. The users of unlisted companies' accounts are likely to be more interested in the historical accountability aspect than the prediction of future cash flows.
Q4. Whether all accounting policy options in full IFRS should be available to SMEs
We agree with the principle that all accounting policy options available in full IFRS should also be available to SMEs, with the more complex options dealt with by cross reference. With our proposal on pension cost accounting in Q2 above we would realise this principle more completely than the ED does.
We agree that the ED has recognised the more complex option in the appropriate cases.
Q5. Borrowing costs
SMEs should be given the option of not having to capitalise any borrowing costs even though that option has now been withdrawn for full IFRS, and that capitalisation should be dealt with by cross reference.
Q6. Topics not addressed in the proposed IFRS for SMEs
Our answer to Q1 above set out our general support for the treatment of rarely occurring matters by way of cross reference. In terms of the particular application we note that the main subjects “eliminated” as rarely occurring are
- Agriculture
- Finance lease accounting by lessors
- Hyperinflationary economies
- Equity-settled share based payments
- Segment reporting
- Earnings per share
- Insurance
- Interim financial reporting
In our view the last four of these should be excluded entirely as not required for unlisted entities in full IFRS, anyway, or in the case of insurance not applicable given the definition of SMEs.
Q7. General referral to full IFRSs
We agree with the requirements in 10.2 to 10.4 to include an optional fall back to IFRS, and not a mandatory one.
Q8. Adequacy of guidance
The example financial statements look to be helpful.
The text has been shortened by eliminating much of the explanatory text and guidance that goes with the standards in the full IFRS. The examples are rightly included for provisions in IAS37 and some of the revenue recognition examples from IAS18.
This approach (a minimum of accompanying material) has seemed to work in the UK with the Financial Reporting Standard for Smaller Entities (FRSSE). The full IFRS remain as a possible fall back source of guidance.
Q9. Adequacy of disclosures
The disclosure checklist is included as part of the implementation guidance. There are a number of ways that this could be shortened and simplified, reducing the burden on SMEs while still giving users the information they need. We set out below a number of disclosures that should be eliminated and our main reasons.
The requirements are repetitious, in part because they derive from a series of separate standards. For instance, there should be a general requirement to disclose all material accounting policies and thereby avoid the need for this to be included in each chapter. There are several instances where the disclosure of useful lives and depreciation of assets are required which could again be covered by an overall requirement.
There are disclosures designed to identify unusual items in the income statement that might affect sustainable earnings which are probably less important for users of SME accounts. These might be better dealt with by a general requirement expanding on 5.5 to show material items relevant to understanding performance on the face of the income statement or in the notes –– allowing the elimination of the following specific requirements
- 5.3(e) discontinuing activities
- 5.7 a rather specific list
- 5.10 depreciation etc.
- 10.16-17 changes in estimates
- 17.32(d) intangibles amortisation
- 20.14(a) to (c) provisions movements
- 36.2-4 discontinued operations
A number of disclosures remain concerning assumptions, subjectivity and the effect of alternative treatments and for much the same reason are of less relevance to users of SME financial statements and could therefore be removed
- 8.6 judgements
- 8.7 estimation uncertainty
- 11.49-51 effect of hedge accounting
The following also seem to provide users with non essential information
- 11.44 assets not derecognised
- 13.7(c) details of underlying accounts of associates
- 17.33(c) intangible assets and government grants
- 28.29(b) and (c) tax reconciliation
- 30.29 convenience translations
- 33.6 analysis of management compensation
Q10. Transition arrangements
We agree with these proposals. The arrangements are very similar to IFRS1 in terms of those matters that cannot be adjusted for and those that may be dealt with on a voluntary basis. SMEs are granted an extra concession concerning deferred tax assets and liabilities that are difficult to determine – 38.8(f).
Q11. Maintenance of the standard
The proposal not to update the standard more frequently than once every two years seems reasonable and is roughly in line with the approach in the UK to the FRSSE which seems to have worked. We have noted above concerns over maintaining the specific paragraph cross references if the SME standard falls behind the full version.