CORPORATE REPORTING PROPOSALS
3.6 The IASB's differential reporting project
During 2003, after the questionnaires upon which this study is based were received back from the respondents, the IASB began developing accounting standards appropriate for small and
medium-sized entities (IASB SME Standards) (IASB,2003). In June 2004, the IASB issued DP SME which invited public comment on the preliminary views of the IASB regarding the development of IASB SME Standards (IASCF,2004). The issues identified by the IASB and the IASB's preliminary views on those issues are summarised in table 3-1.
Table 3-1 Issues and preliminary views of the IASB Issue
Should the IASB develop financial reporting standards for SMEs?
Objectives of IASB SME Standards
Threshold for applying IASB SME Standards
Resolution of issues not addressed in IASB SME Standards
Where an IASB SME Standard is more restrictive than IFRS
Approach to the development of IASB SME Standards
Basis of modification of IFRS in developing IASB SME Standards
Form of IASB SME Standards
Preliminary view
IFRS are suitable to all entities
The IASB will develop IASB SME Standards Entities that follow IASB SME shall disclose that fact
Provide high quality, understandable and enforceable accounting standards suitable for SMEs globally
Focus on meeting the needs of users of SME financial statements
Be built on the same conceptual framework as IFRS
Reduce the financial reporting burden on SMEs that want to use global standards
Allow easy transition to IFRS for those SMEs that become publicly accountable or choose to switch to IFRS
No size test
IFRS apply to an entity that has public accountability or that has prepared financial information in accordance with IFRS Mandatory fallback to IFRS
Optional reversion to an IFRS on a standard-by-standard basis
Developed from IFRS, including the framework, standards and interpretations
Modifications can only be justified on the basis of:
• identified needs of users, or
• cost-benefit analysis
Likely that presentation and disclosure modifications will be justified
Rebuttable presumption that no recognition and measurement modifications will be made
A separate volume organised by IFRS numbers
3.6.1 Desirability
The International Accounting Standards Committee (IASC) the predecessor to the IASB, recognised that a demand exists for a special version of IFRS for small enterprises (IASCF,2004:paraIN5). The Trustees of the IASC Foundation, the body that governs the IASB, also support efforts by the IASB to examine issues particular to emerging economies and to small and medium-sized entities. The IASB is of the preliminary view that IFRS are suitable for all entities (para4). However, it will develop IASB SME Standards. This preliminary view is grounded in the perception that the information needs of the users of financial statements of entities that have public accountability are different to those that do not have public accountability and the application of the cost-benefit considerations (para7).
3.6.2 Form
It is the preliminary view of the IASB that IASB SME Standards should take the form of a separate volume derived from the existing IFRS (para88). This is consistent with the following other preliminary views of the IASB:
• IFRS are the starting point for the development of IASB SME Standards (para62);
• There should be a mandatory fallback to IFRS where IASB SME Standards do not address a particular recognition or measurement issue (para46); and
• IASB SME Standards should be based on the same conceptual framework as IFRS (para 16(c)).
3.6.3 Threshold
The IASB's preliminary view regarding the threshold for the use of IASB SME Standards is that national jurisdictions should determine which, if any, entities should be permitted to follow IASB SME Standards. However, in describing the characteristics of SME's for which the IASB intends the IASB SME Standards to apply, the IASB expressly excludes quantitative, that is, size tests (para26) and instead applies the principle of no public accountability as the overriding characteristic for the application of IASB SME Standards (para35). In accordance with paragraph 28:
[a]n entity has public accountability if:
(a) there is a high degree of outside interest in the entity from non-management investors or other stakeholders, and those stakeholders depend primarily on external financial reporting as their means of obtaining financial information about the entity; or
(b) the entity has an essential public service responsibility because of the nature of its operations."
Presumptive indicators that an entity has public accountability include:
• The filing of its financial statements with a regulatory authority for the purposes of issuing any class of instruments in a public market (para31). However, an entity does not become publicly accountable simply because it is required to submit its financial statements to a central registry maintained by a government agency as a result of which it is open to public inspection (para30).
• It holds assets in a fiduciary capacity for a broad group of outsiders (para31).
• It provides an essential public service.
• It is economically significant in its home country. Arguably, this is a quantitative criterion.
Further, an entity that otherwise would be regarded as having no public accountability, would be regarded as having public accountability if, after informing all of its owners that it intends to prepare IASB SME Standards compliant financial statements, any owner objected thereto (para33).
Finally, it is the lASBs' preliminary view that IASB SME Standards are not intended as a means of avoiding the reporting of information that has already been produced for other purposes (para39). Consequently, where an entity prepares financial information in accordance with IFRS to meet the requirements of one or more of its publicly accountable investors, then it should prepare its financial statements in accordance with IFRS (para38).
3.6.4 Content
In designing IASB SME Standards, the IASB envisages deviations from IFRS based only on user needs and cost/benefit analysis (para66). The lASB's preliminary view is that IASB SME Standards will only contain a relatively limited number of modifications to IFRS (para76).
While presentation and disclosure modifications are expected (para67), there is a rebuttable presumption that no modifications are to be made to the recognition and measurement principles in IFRS (para68). The rebuttable presumption may more easily be overcome for measurement principles than for recognition principles (para82).
Where IASB SME Standards do not address a particular issue, it would be mandatory to address that issue in accordance with IFRS (para46).
Where an entity prepares its financial statements in accordance with IASB SME Standards, it shall make disclosure of that fact in the basis of presentation note. The auditor's report shall also clearly state the basis upon which the audited financial statements were prepared, that is, in accordance with IASB SME Standards (para4).