The IASB Project on Accounting Standards for SMEs

1. The IASB Project on Accounting Standards for SMEs Paul Pacter IASB Director of Standards for Small and Medium-sized Entities Council of Securities Regulators of the Americas SME Forum Miami, 16 May 2006

2. COSRA SME Report (p.6) • Slow growth of capital markets in Latin America and Caribbean due to the “absence of key ingredients that make equity investments attractive to private investors and pension funds”: • Information disclosure • Transparency • Good accounting and auditing • Good corporate governance • Investor protection • 1, 2, 3 are issues of direct concern to accounting standard-setters.

3. COSRA SME Report • Two edged-sword for SMEs: • Good accounting and more disclosure add to SME burdens, rather than reduce them. • Also, SMEs are often concerned about the competitive harmfulness of greater transparency. • At the same time, good accounting and disclosure give investors confidence to provide capital. • Solution: Tailor requirements for SMEs. This is what the IASB SME project is all about.

4. COSRA SME Report (p. 25) • Options for addressing SME disclosure challenges: • Tiered disclosure. • Understandable format for disclosure. • Investor education. • IASB is dealing with 1 and 2 in its SME project.

5. International Financial Reporting Standards (IFRSs) • Developed by IASB since 1973. • Widely used in both developed and developing countries for reporting in public capital markets. • Many regard IFRSs as burdensome for non-publicly accountable entities: • Sometimes not cost-beneficial. • Sometimes resulting information is not useful to users of SME financial statements.

6. What About Small Listed Companies? • IASB tentative view: • An entity whose securities are publicly traded has public accountability. • Investor protection. • Outside non-manager investors lack the clout to demand the information they need. • They get the “General Purpose Financial Statements” published by the entity. • Full IFRSs, not IFRS for SMEs. • But do not despair... More about this in a few minutes.

7. IASB’s Preliminary Views • IASB deliberated SME project during second half of 2003 and early 2004: • Reached some preliminary views on the approach. • Discussion Paper June 2004. • 120 responses.

8. January 2005 Decisions • Board discussed responses in late 2004. In Jan. 2005 made tentative decisions: • Clear demand for IASB SME standards. • Focus on non-publicly accountable entities ―unlisted, not banks etc. ―that publish general purpose financial statements for external users. No quantified “size test”.

9. January 2005 Decisions • Each jurisdiction should develop detailed guidelines on which entities are eligible to use. • Board will consider recognition and measurement simplifications – based on user needs and cost/benefit.

10. January 2005 Decisions • “Mandatory fallback” to full IFRS if the SME standard does not address an issue – Yes. • All options in IFRSs also available to SMEs. • Clear disclosure that SME standards are being followed, rather than full IFRSs – Yes.

11. January 2005 Decisions • Organise SME standards by topic, with cross-references to the numbered IASs/IFRSs. • Add preparers and users to Working Group. [Done] • Conduct round tables with preparers and users. [held on 13-14 October 2005]

12. Recognition and Measurement Questionnaire • 1 April 2005: • Brief recognition and measurement questionnaire • 101 responses received. • 28 June 2005: • Discussed responses with IASB’s Advisory Council. • 29-30 June 2005: • IASB SME Working Group met. • Discussed responses. • Many recommendations to Board.

13. Recognition and Measurement Questionnaire • 26 September 2005: • Discussion with World Standard Setters from over 40 countries. • 13-14 October 2005: • Round-table discussions of possible recognition and measurement simplifications. • 43 groups participated.

14. Draft Exposure Draft • January 2006: • IASB staff presented a draft ED to the Board. Preliminary discussion. • January 2006: • Working Group discussed draft ED two days. 84 recommendations to Board. • February and March 2006: • ED discussed by Board in detail.

15. Draft Exposure Draft • Comments about the draft ED: • Organised by topic. • 40 sections. • Most “black letter” paragraphs from IFRSs are included. • Except where there is cross reference back to an IFRS.

16. Draft Exposure Draft • Comments about the draft ED: • About 250 pages. • Full IFRSs now 2,400 pages. • ED developed by considering needs of a company with about 50 employees. • Which companies are required or permitted to use is up to each individual jurisdiction.

17. SME Concerns: Tax Reporting and Distributable Income • IFRSs for SMEs – general purpose financial statements (GPFS) for: • Outside investors, banks, vendors, customers, credit rating agencies. • Global standards cannot directly deal with tax reporting or measuring distributable income. • These are based on local law. • Can easily be addressed by reconciliations at national level.

18. SME Concerns: SME Managers as Users of Financial Statements • SMEs say managers are the primary users of their financial statements. • That may be true, but the objective of GPFS is to provide information to outside investors, banks, vendors, customers, credit rating agencies. • Managers can get whatever information they need to run their business. • GPFS may serve managers’ needs as well.

19. SME Concerns: Fair Value • Fair value (FV) for non-financial assets: • Full IFRSs do not require FV for any non-financial assets except agriculture. • FV is only an option for PP&E, intangibles, investment property. • Not allowed for most inventory. • SME agribusiness say they know FV and manage using FV. • Always is a reliability exception. • FV has long been used by SMEs for impairments and write-downs.

20. SME Concerns: Fair Value • Financial assets – IFRS for SMEs: • Two categories of financial assets: (1) Cost and (2) FV through P&L. • FV through P&L only if: • a. Observable market price and either (1) intend to sell or (2) liquid market. • b. Plus all derivatives. • All other financial assets at cost. • If impairment is indicated, must calculate recoverable amount. • Share-based payment: • SME can use intrinsic value.

21. SME Concerns: References to Full IFRSs in the IFRS for SMEs • Cross-references to full IFRSs: • Mandatory fallback: • Big dilemma for IASB. • Pervasive principles added, to minimise need for fallback. • Realistically, IASB cannot say “do whatever you want” if an IFRS addresses the issue.

22. SME Concerns: References to Full IFRSs in the IFRS for SMEs • Cross-references to full IFRSs: • Transactions unusual for SMEs: • Omit from IFRS for SMEs, but refer back to IFRS. • Such as defined benefit pension. • Accounting policy options: • Include simple option in IFRS for SMEs. Allow complex option by referring back to IFRS. Examples: • Fair Value for investment property. • Revaluation of PP&E and intangibles. • Capitalisation of borrowing cost.

23. SME Concerns: Options • Accounting policy options: • Each jurisdiction may choose to eliminate options. • Therefore reval option for PP&E and intangibles can be deleted from national adoption of IFRS for SMEs. • Likewise for FV for investment property. • Likewise equity method and proportionate consolidation. • SME financial statements would still conform to IFRS for SMEs.

24. SME Concerns: “Maintenance” • Worried about frequent updating of IFRS for SMEs: • Board has not yet decided frequency. • We recognise need for stability, and limited resources of SMEs. • Staff proposal is every 2 or 3 years. • Not every new or revised IFRS or Interpretation will trigger a revision of IFRS for SMEs. • Occasionally a new IFRS may require quicker updating.

25. What About Small Listed Companies? • IASB tentative view is that the IFRS for SMEs is not appropriate for any listed companies large or small: • Full IFRSs are designed for public capital markets. • Reporting to non-management investors. • Investor protection. • The solution: NEXT SLIDE...

26. What About Small Listed Companies? • A jurisdiction could adopt the IFRS for SMEs in its entirety as national GAAP for SMEs including small listed companies. • Auditor’s report and basis of presentation note would refer to conformity with “Country X financial reporting standards for SMEs”, not to “IFRS for SMEs”. • The note could even say that “Country X financial reporting standards for SMEs are identical to the IFRS for SMEs developed by the IASB”.

27. Next Steps Please understand that these dates are tentative: • Exposure Draft – by 30 June2006 (maybe later in summer). • Field tests? Visits to SMEs? • Final Standard – by 30 June 2007. • Effective – 2008.

28. Thank you. There will be time for questions and comments after Nelson, Carlos, and Franco make their presentations.