New SME Standards 

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New SME Standards

The IASB is set to release an exposure draft on reporting by small and medium entities (SME).

FROM: MAR-APR 2007 ISSUE | BY STEPHEN SPECTOR

Since 2003, the International Accounting Standards Board (IASB) has been working to develop an International Financial Reporting Standard (IFRS) for small and medium entities (SME). The project mirrors the efforts of the Accounting Standards Board in Canada prior to the release of HandbookSection 1300. The IASB standards for SMEs focus on entities that publish general-purpose financial statements for external users such as outside investors, family members, non-manager owners, and existing and potential lenders and creditors. Thus, the definition of an SME is virtually the same as Section 1300’s definition of a non-publicly accountable enterprise. However, the IASB has chosen to highlight what SMEs are not (what follows is subject to change):

An entity has public accountability (and, therefore, should use full IFRS) if it has issued debt or equity securities in a public market, or 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 bank.

The IASB follows the lead of the Accounting Standards Board: publicly accountable enterprises, large or small, are entities which have elected to seek capital from outside investors who are not involved in managing the business and who generally do not have access to information they might want. Full IFRSs apply to such entities in order to serve public capital markets.

Basis for the Standards

Like Section 1300, the IASB did not start from scratch, but rather chose to amend the applicability of certain standards vis-à-vis SMEs. For instance, IFRS topics not relevant to SMEs are, for the most part, omitted, although there remain cross-references to the “full” IFRS on an “if and/or when needed” basis. Likewise, to simplify situations where IFRSs provide accounting policy choices, the least complex option is chosen for use in the IFRS for SMEs. Note that an SME is not proscribed from using the other options of the relevant IFRS – something the more sophisticated and/or larger SMEs may choose to do.

However, unlike Section 1300, the IASB has been very reluctant to make changes to the underlying measurement rules of the IFRS. For example, the differential reporting aspects of Handbook Section 3465 permit a qualifying entity to use the taxes payable approach with respect to accounting for income taxes. Given that, for many small enterprises, the difference between depreciation and Capital Cost Allowance would be the source of future tax assets or liabilities, Canadian GAAP acknowledges that creating these balance sheet items serves little purpose. On the other hand, the IAS 12, Income Taxes, requires that entities recognize future tax assets and liabilities, and that deferrals arising from timing differences be reported on the financial statements.

In other words, there is no change to the underlying measurement model when dealing with income taxes – a significant difference between Canadian and International GAAP.

Limited Measurement Relief

Notwithstanding, the IASB does provide some relief from complex measurement rules. It has simplified the requirements associated with financial instruments. Rather than four categories, only two categories of financial assets will be recognized so there is no need to deal with all of the intent-relatedheld-to-maturity rules, nor for an available-for-sale option.

Also, the rules associated with derecognition have been reduced to a single principle: if the transferor has any significant continuing involvement, the SME cannot derecognize the financial instrument.

Another topic where simplification will be welcomed relates to share-based payments. Currently, neither Handbook Section 3870 nor IFRS 2 provide any alternative for non-public entities. That is, if such entities issue their own shares as payment for goods and services, they are required to apply an option-pricing model to determine the cost of those goods and services.

The IASB SME standard will allow qualifying entities to use the intrinsic method to value share-based payments – an approach that is easier to pursue.

Next Steps

The timetable for implementation remains optimistic: it is expected that the exposure draft will be released by mid-2007 for a six-month comment period. Coincident with its release will be a series of round tables, focus groups, and field tests to validate the approach and conclusions of the IASB. Assuming no significant changes are needed, it is anticipated that the final standards would be released late in 2007 or early in 2008. Uncertain at this point is the effective date: 2008 may be an unrealistic target; 2009 is more likely achievable.

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Stephen Spector, MA, FCGA, is the proprietor of Spector and Associates and teaches Financial and Managerial Accounting at Simon Fraser University. He also serves on CGA-BC's board of governors. E-mail shspector@shaw.ca.