The Board resumed its redeliberation of the proposals in the exposure draft (ED) of a proposed IFRS for SMEs (the IFRS will be titled IFRS for Private Entities). At this meeting the Board discussed issues relating to Sections 4-12 of the ED. The outcome of those discussions is summarised below.
Presentation of financial statements. At its meeting in May the Board decided that the IFRS for Private Entities should incorporate the requirements of IAS 1 Presentation of Financial Statements (as revised in 2007). At this meeting the Board made the following tentative decisions:
- Private entities should present their statement of financial position based on liquidity if this provides information that is reliable and more relevant than a current/non-current presentation. The criteria proposed in the ED for classifying assets and liabilities as current would be retained.
- The required analysis of expenses may be presented either by nature or function of expense. The additional disclosures proposed in paragraph 5.10 (when an entity chooses to classify expenses by function) are redundant and should be deleted.
- A private entity would be permitted to present a combined statement of comprehensive income and retained earnings in place of the statement of comprehensive income and the statement of changes in equity if the only changes to its equity during the period arise from profit or loss, payment of dividends, corrections of prior period errors, and changes in accounting policy. If an entity has other equity transactions with owners, a statement of changes in equity would be required.
- All private entities must present a statement of cash flows, and they could choose either the direct or indirect method for reporting operating cash flows.
Consolidated financial statements. These should be required for all private entities that are parent entities. For now, a temporary control exemption should not be added, but the Board may need to revisit this decision for consistency when it discusses discontinued operations.
Combined financial statements. The description of combined financial statements should be retained in the IFRS for Private Entities, with some additional guidance added.
Separate financial statements. Separate company financial statements should not be required. When an investor prepares separate statements, it should choose between cost or fair value through profit or loss for each different category of investment (eg different policies could be adopted for associates and for subsidiaries).
Accounting policy hierarchy. The accounting policy hierarchy in Section 10 is appropriate in principle. However, paragraph 10.4 should be modified to clarify that management may, but is not required to, consider the requirements and guidance in full IFRSs. The hierarchy should not include reference to recent pronouncements of other standard-setting bodies, other accounting literature or accepted industry practice.
Financial instruments. Regarding Section 11 Financial Assets and Financial Liabilities, the Board decided:
- to reorganise Section 11 to make it easier both to identify which instruments are within the scope and to apply the section if a private entity has only very simple financial instruments.
- to clarify by the use of examples that the cost model will be appropriate for the significant majority of financial instruments held by private entities. The examples should reflect the types of financial instruments that a private entity is likely to have, with clear guidance for the accounting required both at acquisition or when issued and subsequently. A private entity that has no other financial instruments would then not need to consider the remainder of Section 11 dealing with more complex financial instruments transactions.
- not to rewrite Section 11 so that cost or amortised cost is the default. Rewriting Section 11 in that way would have required the Board to include definitions and other explicit requirements for derivatives and embedded derivatives to ensure they are measured at their fair value. This would have added significant complexity.
- to combine the guidance on fair value proposed in Appendix B with the fair value measurement principles in paragraphs 11.14─11.16 and simplify it for a private entity context.
- not to add an �available for sale� category for financial assets.
- not to allow straight-line amortisation of premiums and discounts as an elective accounting policy alternative to the effective interest rate (EIR) method. However, an example or examples illustrating EIR should be added as guidance.
- not to permit a �shortcut method� for hedge accounting.
- to include guidance on measuring hedge effectiveness in the training materials being developed by the IASC Foundation education team.. The requirements in the IFRS should be kept short and general.
- to retain the requirements for hedging documentation proposed in the ED.
- not to allow debt instruments to be hedging instruments. The Board asked the staff to recommend at a future meeting whether to permit purchased options as hedging instruments. The recommendation should consider the extent of use of such instruments for hedging purposes by private entities and any desire to use hedge accounting for such instruments.
- to add guidance to clarify which types of risks are eligible for hedge accounting under Section 11.
- to add guidance on accounting for factoring transactions.
- to remove from Section 11 the option to follow IAS 32, IAS 39, and IFRS 7 in their entirely, in lieu of Section 11. However, the Board will revisit this tentative decision at a future meeting after Section 11 has been revised.
- to amend paragraph 11.22(b) to state that an impairment loss for an equity instrument carried at cost (because its fair value cannot be measured reliably) should be the difference between the asset�s carrying amount and the best estimate (which will necessarily be an approximation) of the amount (which might be zero) that the entity would receive for the asset if it were to be sold.
- to rewrite paragraph 11.9(b) to clarify that interest rate swaps must be measured at fair value through profit or loss.
The Board asked the staff to present a rewritten draft of Section 11 for consideration at a future Board meeting.
Inventories. The Board did not support simplifying any of the principles proposed in the ED for accounting for inventories. The Board rejected LIFO as an inventory costing method.