the iasb project on accounting standards for smes

1© 2006 IASC Foundation, all rights reserved.© 2006 IASC Foundation, all rights reserved.

The IASB Project on The IASB Project on Accounting Standards Accounting Standards for SMEsfor SMEsPaul PacterPaul Pacter

IASB Director of Standards for IASB Director of Standards for Small and Medium-sized Small and Medium-sized EntitiesEntitiesCouncil of Securities Council of Securities Regulators of the Americas Regulators of the Americas SME ForumSME Forum

Miami, 16 May 2006Miami, 16 May 2006


COSRA SME Report (p.6)COSRA SME Report (p.6) Slow growth of capital markets in Latin Slow growth of capital markets in Latin

America and Caribbean due to the America and Caribbean due to the ““absence of key ingredientsabsence of key ingredients that make that make equity investments attractive to equity investments attractive to private investors and pension funds”:private investors and pension funds”:1.1. Information disclosureInformation disclosure2.2. TransparencyTransparency3.3. Good accounting and auditingGood accounting and auditing4.4. Good corporate governanceGood corporate governance5.5. Investor protectionInvestor protection

1, 2, 3 are issues of direct concern to 1, 2, 3 are issues of direct concern to accounting standard-setters.accounting standard-setters.


COSRA SME ReportCOSRA SME Report Two edged-sword for SMEs:Two edged-sword for SMEs:

Good accounting and more Good accounting and more disclosure disclosure addadd to SME burdens, to SME burdens, rather than reduce them.rather than reduce them.

Also, SMEs are often concerned Also, SMEs are often concerned about the competitive harmfulness about the competitive harmfulness of greater transparency.of greater transparency.

At the same time, good accounting At the same time, good accounting and disclosure give investors and disclosure give investors confidence to provide capital.confidence to provide capital.

Solution: Tailor requirements for Solution: Tailor requirements for SMEs. This is what the IASB SME SMEs. This is what the IASB SME project is all about.project is all about.


COSRA SME Report (p. 25)COSRA SME Report (p. 25)

Options for addressing SME Options for addressing SME disclosure challenges:disclosure challenges:1.1. Tiered disclosure.Tiered disclosure.

2.2. Understandable format for Understandable format for disclosure.disclosure.

3.3. Investor education.Investor education. IASB is dealing with 1 and 2 in its IASB is dealing with 1 and 2 in its

SME project.SME project.


International Financial International Financial Reporting Standards (IFRSs)Reporting Standards (IFRSs)

Developed by IASB since 1973.Developed by IASB since 1973. Widely used in both developed and Widely used in both developed and

developing countries for reporting in developing countries for reporting in public capital markets.public capital markets.

Many regard IFRSs as burdensome Many regard IFRSs as burdensome for non-publicly accountable entities:for non-publicly accountable entities: Sometimes not cost-beneficial.Sometimes not cost-beneficial. Sometimes resulting information is Sometimes resulting information is

not useful to users of SME financial not useful to users of SME financial statements.statements.


What About Small Listed Companies?What About Small Listed Companies? IASB tentative view: IASB tentative view:

An entity whose securities are publicly An entity whose securities are publicly traded has traded has public accountabilitypublic accountability..

Investor protection.Investor protection. Outside non-manager investors lack Outside non-manager investors lack

the clout to demand the information the clout to demand the information they need.they need.

They get the “General Purpose They get the “General Purpose Financial Statements” published by Financial Statements” published by the entity.the entity.

Full IFRSs, not IFRS for SMEs.Full IFRSs, not IFRS for SMEs. But do not despairBut do not despair... More about ... More about

this in a few minutes.this in a few minutes.


IASB’s Preliminary ViewsIASB’s Preliminary Views

IASB deliberated SME IASB deliberated SME project during second project during second half of 2003 and early half of 2003 and early 2004:2004: Reached some Reached some

preliminary views preliminary views on the approach.on the approach.

Discussion Paper Discussion Paper June 2004.June 2004.

120 responses.120 responses.


January 2005 DecisionsJanuary 2005 Decisions Board discussed responses in Board discussed responses in

late 2004. In Jan. 2005 made late 2004. In Jan. 2005 made tentative decisions:tentative decisions:1.1. Clear demand for IASB SME Clear demand for IASB SME

standards.standards.

2.2. Focus on non-publicly Focus on non-publicly accountable entities ―accountable entities ― unlisted, unlisted, not banks etc. ―not banks etc. ― that publish that publish general purpose financial general purpose financial statements for external users. statements for external users. No quantified “size test”.No quantified “size test”.


January 2005 DecisionsJanuary 2005 Decisions

3.3. Each jurisdiction should Each jurisdiction should develop detailed guidelines on develop detailed guidelines on which entities are eligible to which entities are eligible to use.use.

4.4. Board will consider recognition Board will consider recognition and measurement and measurement simplifications – based on user simplifications – based on user needs and cost/benefit.needs and cost/benefit.



5.5. ““Mandatory fallback” to full Mandatory fallback” to full IFRS if the SME standard does IFRS if the SME standard does not address an issue – Yes.not address an issue – Yes.

6.6. All options in IFRSs also All options in IFRSs also available to SMEs. available to SMEs.

7.7. Clear disclosure that SME Clear disclosure that SME standards are being followed, standards are being followed, rather than full IFRSs – Yes.rather than full IFRSs – Yes.



8.8. Organise SME standards by Organise SME standards by topic, with cross-references to topic, with cross-references to the numbered IASs/IFRSs.the numbered IASs/IFRSs.

9.9. Add preparers and users to Add preparers and users to Working Group. Working Group. [Done][Done]

10.10. Conduct round tables with Conduct round tables with preparers and users. preparers and users. [held on [held on 13-14 October 2005]13-14 October 2005]


Recognition and Measurement Recognition and Measurement QuestionnaireQuestionnaire

1 April 2005:1 April 2005: Brief recognition and measurement Brief recognition and measurement

questionnairequestionnaire 101 responses received.101 responses received.

28 June 2005:28 June 2005: Discussed responses with IASB’s Discussed responses with IASB’s

Advisory Council.Advisory Council. 29-30 June 2005:29-30 June 2005:

IASB SME Working Group met.IASB SME Working Group met. Discussed responses.Discussed responses. Many recommendations to Board.Many recommendations to Board.


Recognition and Measurement Recognition and Measurement QuestionnaireQuestionnaire

26 September 2005:26 September 2005: Discussion with World Discussion with World

Standard Setters from over 40 Standard Setters from over 40 countries.countries.

13-14 October 2005:13-14 October 2005: Round-table discussions of Round-table discussions of

possible recognition and possible recognition and measurement simplifications.measurement simplifications.

43 groups participated.43 groups participated.


Draft Exposure DraftDraft Exposure Draft January 2006:January 2006:

IASB staff presented a draft ED to IASB staff presented a draft ED to the Board. Preliminary discussion. the Board. Preliminary discussion.

January 2006:January 2006: Working Group discussed draft ED Working Group discussed draft ED

two days. 84 recommendations to two days. 84 recommendations to Board.Board.

February and March 2006:February and March 2006: ED discussed by Board in ED discussed by Board in

detail.detail.


Draft Exposure DraftDraft Exposure Draft

Comments about the draft ED:Comments about the draft ED: Organised by topic.Organised by topic. 40 sections.40 sections. Most “black letter” Most “black letter”

paragraphs from IFRSs are paragraphs from IFRSs are included.included. Except where there is cross Except where there is cross reference back to an IFRS.reference back to an IFRS.


Draft Exposure DraftDraft Exposure Draft Comments about the draft ED:Comments about the draft ED:

About 250 pages.About 250 pages. Full IFRSs now 2,400 pages. Full IFRSs now 2,400 pages.

ED developed by considering ED developed by considering needs of a company with needs of a company with about 50 employees.about 50 employees.

Which companies are required Which companies are required or permitted to use is up to or permitted to use is up to each individual jurisdiction.each individual jurisdiction.


SME Concerns: Tax Reporting SME Concerns: Tax Reporting and Distributable Incomeand Distributable Income

IFRSs for SMEs – general purpose IFRSs for SMEs – general purpose financial statements (GPFS) for:financial statements (GPFS) for: Outside investors, banks, vendors, Outside investors, banks, vendors,

customers, credit rating agencies. customers, credit rating agencies. Global standards cannot directly Global standards cannot directly deal with tax reporting or deal with tax reporting or measuring distributable income.measuring distributable income. These are based on local law.These are based on local law.

Can easily be addressed by Can easily be addressed by reconciliations at national level.reconciliations at national level.


SME Concerns: SME Managers as SME Concerns: SME Managers as Users of Financial StatementsUsers of Financial Statements

SMEs say managers are the SMEs say managers are the primary users of their financial primary users of their financial statements.statements. That may be true, but the objective That may be true, but the objective

of GPFS is to provide information to of GPFS is to provide information to outside investors, banks, vendors, outside investors, banks, vendors, customers, credit rating agencies. customers, credit rating agencies.

Managers can get whatever Managers can get whatever information they need to run their information they need to run their business. business.

GPFS may serve managers’ needs as GPFS may serve managers’ needs as well.well.


SME Concerns: Fair ValueSME Concerns: Fair Value Fair value (FV) for non-financial Fair value (FV) for non-financial

assets:assets: Full IFRSs do not Full IFRSs do not requirerequire FV for any FV for any

non-financial assets except non-financial assets except agriculture.agriculture. FV is only an option for PP&E, FV is only an option for PP&E,

intangibles, investment property.intangibles, investment property. Not allowed for most inventory.Not allowed for most inventory. SME agribusiness say they know SME agribusiness say they know

FV and manage using FV.FV and manage using FV. Always is a reliability exception.Always is a reliability exception. FV has long been used by SMEs for FV has long been used by SMEs for

impairments and write-downs. impairments and write-downs.


SME Concerns: Fair ValueSME Concerns: Fair Value Financial assets – IFRS for SMEs:Financial assets – IFRS for SMEs:

Two categories of financial assets: Two categories of financial assets: (1) Cost and (2) FV through P&L.(1) Cost and (2) FV through P&L.

FV through P&L only if:FV through P&L only if: a. Observable market price and a. Observable market price and

either (1) intend to sell or (2) either (1) intend to sell or (2) liquid market.liquid market.

b. Plus all derivatives.b. Plus all derivatives. All other financial assets at cost.All other financial assets at cost.

If impairment is indicated, must If impairment is indicated, must calculate recoverable amount.calculate recoverable amount.

Share-based payment:Share-based payment: SME can use intrinsic value.SME can use intrinsic value.


SME Concerns: References to SME Concerns: References to Full IFRSs in the IFRS for SMEsFull IFRSs in the IFRS for SMEs

Cross-references to full IFRSs:Cross-references to full IFRSs: Mandatory fallback:Mandatory fallback:

Big dilemma for IASB. Big dilemma for IASB. Pervasive principles added, Pervasive principles added, to minimise need for fallback.to minimise need for fallback.

Realistically, IASB cannot say Realistically, IASB cannot say “do whatever you want” if an “do whatever you want” if an IFRS addresses the issue.IFRS addresses the issue.


SME Concerns: References to SME Concerns: References to Full IFRSs in the IFRS for SMEsFull IFRSs in the IFRS for SMEs

Cross-references to full IFRSs:Cross-references to full IFRSs: Transactions unusual for SMEs:Transactions unusual for SMEs:

Omit from IFRS for SMEs, but refer Omit from IFRS for SMEs, but refer back to IFRS.back to IFRS.

Such as defined benefit pension.Such as defined benefit pension. Accounting policy options:Accounting policy options:

Include simple option in IFRS for Include simple option in IFRS for SMEs. Allow complex option by SMEs. Allow complex option by referring back to IFRS. Examples:referring back to IFRS. Examples:– Fair Value for investment property.– Revaluation of PP&E and intangibles.– Capitalisation of borrowing cost.


SME Concerns: OptionsSME Concerns: Options Accounting policy options:Accounting policy options:

Each jurisdiction may choose to Each jurisdiction may choose to eliminate options.eliminate options. Therefore reval option for PP&E Therefore reval option for PP&E

and intangibles can be deleted and intangibles can be deleted from national adoption of IFRS for from national adoption of IFRS for SMEs.SMEs.

Likewise for FV for investment Likewise for FV for investment property.property.

Likewise equity method and Likewise equity method and proportionate consolidation.proportionate consolidation.

SME financial statements would SME financial statements would still conform to IFRS for SMEs.still conform to IFRS for SMEs.


SME Concerns: “Maintenance”SME Concerns: “Maintenance” Worried about frequent updating Worried about frequent updating

of IFRS for SMEs:of IFRS for SMEs: Board has not yet decided Board has not yet decided

frequency.frequency. We recognise need for stability, We recognise need for stability,

and limited resources of SMEs.and limited resources of SMEs. Staff proposal is every 2 or 3 years.Staff proposal is every 2 or 3 years.

Not every new or revised IFRS or Not every new or revised IFRS or Interpretation will trigger a Interpretation will trigger a revision of IFRS for SMEs.revision of IFRS for SMEs.

Occasionally a new IFRS may Occasionally a new IFRS may require quicker updating.require quicker updating.


What About Small Listed Companies?What About Small Listed Companies?

IASB tentative view is that the IASB tentative view is that the IFRS for SMEs is not appropriate IFRS for SMEs is not appropriate for any listed companies large or for any listed companies large or small:small: Full IFRSs are designed for Full IFRSs are designed for

public capital markets.public capital markets. Reporting to non-management Reporting to non-management

investors.investors. Investor protection.Investor protection.

The solution: The solution: NEXT SLIDE...NEXT SLIDE...


What About Small Listed Companies?What About Small Listed Companies? A jurisdiction could adopt the IFRS for A jurisdiction could adopt the IFRS for

SMEs in its entirety as national GAAP SMEs in its entirety as national GAAP for SMEs including small listed for SMEs including small listed companies.companies.

Auditor’s report and basis of Auditor’s report and basis of presentation note would refer to presentation note would refer to conformity with “Country X financial conformity with “Country X financial reporting standards for SMEs”, not to reporting standards for SMEs”, not to “IFRS for SMEs”. “IFRS for SMEs”.

The note could even say that The note could even say that “Country X financial reporting “Country X financial reporting standards for SMEs are identical to standards for SMEs are identical to the IFRS for SMEs developed by the the IFRS for SMEs developed by the IASB”.IASB”.


Next StepsNext StepsPlease understand that Please understand that these dates are tentative:these dates are tentative:

Exposure Draft – by 30 JuneExposure Draft – by 30 June

2006 (maybe later in 2006 (maybe later in summer).summer).

Field tests? Visits to SMEs?Field tests? Visits to SMEs? Final Standard – by 30 June Final Standard – by 30 June

2007.2007. Effective – 2008.Effective – 2008.


Thank you.Thank you.

There will be time There will be time for questions and for questions and comments after comments after Nelson, Carlos, and Nelson, Carlos, and Franco make their Franco make their presentations.presentations.

the iasb project on accounting standards for smes

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