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The IFRS for SMEs Accounting Standard Update is a staff summary of news, events and other information about the IFRS for SMEs® Accounting Standard and related SME activities. The staff summary has not been reviewed by the International Accounting Standards Board (IASB).

This edition of the IFRS for SMEs Accounting Standard Update includes:

Frequently asked questions on the proposals in the Exposure Draft

The IASB is carrying out a second comprehensive review of the IFRS for SMEs Accounting Standard, which the IASB issued in 2009 and amended in 2015.

On 8 September 2022, the IASB published the Exposure Draft Third edition of the IFRS for SMEs Accounting Standard as part of this second comprehensive review.

During the IASB’s stakeholder engagement activities, some of the frequently asked questions about the proposals in the Exposure Draft, include:

Is the IASB widening the definition of public accountability so that fewer entities will fall within the scope of the IFRS for SMEs Accounting Standard?

The IASB is proposing to add guidance that clarifies why the types of entities listed in paragraph 1.3(b) of the Exposure Draft would often be considered to have public accountability. The IASB does not intend for this guidance to widen the definition of public accountability.

Is the IASB introducing the expected credit loss model in IFRS 9 Financial Instruments for SMEs?

The IASB is proposing to introduce a simplified expected credit loss model for SMEs. The model proposed in the Exposure Draft is based on the model in IFRS 9 Financial Instruments but simplified in two ways:

  • an SME measures expected credit losses for a financial asset using an approach aligned with the simplified approach in IFRS 9 (lifetime expected credit losses). The IASB is not proposing the general approach in IFRS 9 in the Exposure Draft.
  • an SME only applies the simplified expected credit loss model if the SME has financial assets other than trade receivables or contract assets. The incurred loss model is retained for impairment of trade receivables and contract assets.

Furthermore, the IASB designed the simplified expected credit loss model to be proportionate for SMEs. The model’s focus is on reasonable and supportable information that is available without undue cost or effort.

Some respondents to the Request for Information suggested that SMEs should apply the simplified requirements in Section 21 Provisions and Contingencies when accounting for issued financial guarantee contracts. Why did the IASB not consider this alternative in the Exposure Draft?

The IFRS for SMEs Accounting Standard defines a financial instrument as ‘a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity' (paragraph 11.3). A financial guarantee contract issued by an SME to a bank is a contractual right of the bank to receive cash from the SME and a contractual obligation of the SME to pay cash to the bank if the debtor defaults (the debtor might, for example, be a subsidiary of the SME). Therefore, the contract is a financial asset of the bank and a financial liability of the SME.

The IASB did not consider including issued financial guarantee contracts within the scope of Section 21 because:

  • an issued financial guarantee contract meets the definition of a financial liability and so the IASB has no logical basis for excluding this type of contract from the financial instrument section (Section 11).
  • such an alternative treatment would be inconsistent with the alignment approach the IASB used during this comprehensive review. Under this approach, the IASB considers aligning the IFRS for SMEs Accounting Standard with the IFRS 9 accounting treatment for financial instrument transactions meeting the relevance principle for SMEs, with simplifications if needed. (Relevance to SMEs is determined by assessing whether the problem addressed by IFRS 9 would make a difference in the decisions of users of SME’s financial statements.)

Why is the IASB asking for views on whether to introduce an accounting policy option for development costs?

The IFRS for SMEs Accounting Standard requires all development costs to be recognised as expenses, whereas IAS 38 Intangible Assets requires the recognition of intangible assets arising from development costs that meet specified criteria.

This simplification in the IFRS for SMEs Accounting Standard was made for cost–benefit reasons. In particular, when the IASB developed the Standard, feedback suggested that:

  • SMEs do not have the resources to assess whether a project is commercially viable on an ongoing basis; and
  • lenders disregard information about development costs recognised as assets in making lending decisions about SMEs.

During the first comprehensive review of the Standard, the IASB similarly considered the balance of costs and benefits and decided not to amend the recognition and measurement requirements for development costs.

Nevertheless, during this second comprehensive review, feedback suggested that holding intangible assets is becoming more common among entities, including SMEs. Stakeholders also informed the IASB that some SMEs—especially those engaged in research and development activities as their primary business—have IT processes to assess whether a project is commercially viable on an ongoing basis.

The IASB’s view continues to be that most SMEs should recognise development costs as expenses for cost–benefit reasons and so should not be required to recognise development costs as an asset. Therefore, the IASB is asking for feedback about the costs and benefits—including the effect on users of financial statements—of introducing an accounting policy option permitting an SME to recognise intangible assets arising from development costs meeting the criteria in paragraph 57(a)–(f) of IAS 38.

Supporting materials

In recent months, the IASB has issued materials to support the publication of the Exposure Draft, including:

  • a webcast that summarises the IASB’s proposals in the Exposure Draft;
  • Section 19 Business Combinations and Goodwill without mark-up, which sets out the proposed Section 19 in the Exposure Draft without marked-up amendments to improve readability; and
  • a newsletter that explains how the IASB has responded to feedback from users of SMEs’ financial statements and describes the proposals the IASB published in the Exposure Draft.

The IASB has also previously released materials including:

  • a Snapshot—an overview of the IASB’s proposals in the Exposure Draft;
  • a short video—an introduction to the proposals in the Exposure Draft by IASB Member Bruce Mackenzie; and
  • a Questions and Answer—frequently asked questions about the second comprehensive review and the IASB’s approach to developing the Exposure Draft.

Get involved in the consultation

In the Exposure Draft, the IASB invites comments on the proposed amendments to the IFRS for SMEs Accounting Standard. Respondents can share their comments with the IASB by comment letter or a comment letter drafted using the optional response document submitted electronically:

The Exposure Draft is open for comment until 7 March 2023.

During this phase of the review, the IASB is seeking feedback on the proposed amendments to the IFRS for SMEs Accounting Standard. The IASB will consider feedback on the Exposure Draft when finalising the third edition of the IFRS for SMEs Accounting Standard.

Please visit the project page for other updates and more information about the project.