The Accounting Standards for SmallMedium Entities: the IASB project

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The Accounting Standards for Small-Medium
Entities the IASB project

• Matteo Pozzoli
• Budapest, 14th October

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Do we need them?
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Background

• IASC Approve SMEs project April 1998
• First public discussion July 2001
• First IASB meeting including SME Standards in
  agenda July 2003
• Discussion Paper Preliminary Views on Accounting
  Standards for Small and Medium-sized Entities
  June 2004
• Staff Questionnaire April 2005

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References

• European Accounting Directives
• UKs Financial Reporting Standards for Small
  Entities (FRSSE) issued by the UK Accounting
  Standards Board
• Report by the ad hoc Consultative Group of
  Experts on Accounting by Small and Medium-Sized
  Enterprises of the United Nations Conference on
  Trade and Development (UNCTAD)
• Accounting literature

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European framework

• IVth European Directive and UK Accounting
  Standards Board adopt a size approach
• IVth Directive states that The Member States
  may permit companies which on their balance sheet
  dates do not exceed the limits of two of the
  three following criteria
• balance sheet total EUR 3 650 000
• net turnover EUR 7 300 000
• average number of employees during the financial
  year 50
• to draw up abridged balance sheets showing only
  those items preceded by letters and roman
  numerals in Articles 9 and 10, disclosing
  separately the information required in brackets
  in D (II) under Assets and C under
  Liabilities in Article 9 and in D (II) in
  Article 10, but intotal for each. (IVth
  Directive, art. 11)

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Technical approaches

• IASB SME Standards should be applied under a
  characteristics approach by Non Public
  Accountable Entities (NPAE)
• Connection original IFRSs IASB SMEs Standards
• Framework
• Potential technical differences
• Disclosures
• Editorial matters

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Public accountabilitydefinition

• An entity is public accountable if
• (a) there is an high degree of external interests
  (investors, lenders, stakeholders) and (b) the
  nature of the operations implies a social
  responsability or
• the most of stakeholders rely on financial
  reporting to base their economic decision

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Public accountabilityPresumptive indicators of
public accountability

• it has filed, or it is in the process of filing,
  its financial statements with a securities
  commission or other regulatory organisation for
  the purpose of issuing any class of instruments
  in a public market
• it holds assets in a fiduciary capacity for a
  broad group of outsiders, such as a bank,
  insurance company, securities broker/dealer,
  pension fund, mutual fund or investment banking
  entity
• it is a public utility or similar entity that
  provides an essential public service or
• it is economically significant in its home
  country on the basis of criteria such as total
  assets, total income, number of employees, degree
  of market dominance, and nature and extent of
  external borrowings.

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IFRS IASB SME Standards mandatory fallback

• If an entity presents a particular transaction,
  which is not addressed by IASB SME Standards, it
  is required to look to the original IAS/IFRS
• The mandatory fallback works on an issue by
  issue basis
• Eg if a NPAE holds an ambedded derivative and
  this issue is not taken in consideration, it
  should use the relating requirements included in
  IAS 39

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Framework

• Framework is the accounting model milestone on
  which specific requirements are based on
• IASB determined that any entity can use the IASB
  Framework, such as
• Entities applying original IASs/IFRSs
• NPAEs
• Not for profit organizations
• International Public Standards Accounting
  Standards Board states (at the moment) that
  governmental entities shoul use IASB Framework

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Potential technicaldifferences

• IASB Staff enacted a Questionnaire on SME
  Recognition and Measurement
• Question 1 What are the area for possible
  simplification of recognition and measurement
  principles for SMEs?
• Eg deferred income tax accounting (IAS 12)
  measurement of defined benefit pension or other
  post-employment benefit liabilities (IAS 19) use
  of the effective interest method and fair value
  measurements under (IAS 39)

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Potential technicaldifferences (follow)

• Question 2 From your experience, please indicate
  which topics addressed in IFRSs might be omitted
  from SME standards because they are unlikely to
  occur in an SME context. If they occur, the
  standards would require the SME to determine its
  appropriate accounting policy by looking to the
  applicable IFRSs
• Eg share-based payment transactions (IFRS 2)
  insurance contracts (IFRS 4) retirement benefit
  plans (IAS 26) split accounting for compound
  financial instruments (IAS 32) hedge accounting
  (IAS 39)

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Disclosures

• IASs/IFRSs present often a very complex set of
  disclosures requirements
• This decision is due to a fair illustration of
  discretional values provided to meet market needs
• A deep analysis of users needs and a trade-off
  between benefits-costs should determine when and
  what a NPAE has to illustrate in the financial
  statements

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Editorial matters

• Separate volume
• Follow the IAS/IFRS numbering system (SME-IFRS 1,
  SME-IFRS 2, et cetera)
• Not be organized by topic

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Future foreseeableevolutions

• Financial Accounting Standards Board created the
  Small Business Advisory Committee (2004) and the
  simplification approach
• Some member States have to implement the
  Directive CE 51/2003
• IASB should edit an ED of SME Standards (March
  2006)