IASB April 2008

The discussion of the SME project was educational, and no decisions were made. The objective was to present the findings of the field testing carried out on the exposure draft (ED) of a proposed IFRS for SMEs. At the meeting the staff gave an overview of the demographics of the field testing sample and some of the main problems encountered by the field testers. At a future meeting, staff will make recommendations to the Board for changes based on comments received on the ED and field test results.

Background to field testing

Field test entities were asked:

• to provide background information about their business and reporting requirements;

• to submit their most recent annual financial statements under their existing accounting framework;

• to restate those financial statements in accordance with the ED (without prior year information); and

• to respond to questions designed to identify specific problems encountered in applying the ED.

Demographics of field testing sample

In total, 116 entities from 20 countries participated. The sample contained a large number of very small entities:

• About 35 per cent had 10 or fewer full time employees.

• A further 35 per cent had between 11 and 50 full-time employees.

Over half of the entities had bank loans or significant overdrafts. A third had foreign operations.

The staff noted that in general there was not a strong link between the type of problems an entity encountered and its size or industry. The main factor influencing the problems identified by field testers was the nature and extent of differences between the proposed IFRS for SMEs and an entity’s existing accounting framework.

Overall impression

About half of the field test entities identified no, or only one or two, issues or problems. The staff noted that some entities did not comply with all the requirements of the ED in restating their financial statements, for example the requirement to present a statement of changes in equity or to prepare consolidated financial statements.

The staff did not believe that this invalidated those responses because useful information about problems in applying the ED was received nevertheless.

Some issues discussed

The Board reviewed some of the main issues identified by field testers including the following:

Annual remeasurements. Many field testers highlighted as problematic the need to perform annual remeasurements of fair values for financial assets and liabilities and residual values for property, plant and equipment because market prices or active markets often were not available.

The Board noted that fair value measurement is generally required only for the more complex financial instruments and, therefore, many field test entities would not need to apply such measurements. The staff pointed out that the problems with fair value seemed to stem from a misunderstanding by entities of the approach in Section 11 of the ED, which classifies financial instruments according to their cash flow characteristics rather than into the four categories in IAS 39. Entities appeared to believe that more instruments needed to be measured at fair value than was intended by the ED.

Disclosures. Some field test entities noted problems attributable to the nature, volume and complexity of disclosures. They felt that some of the disclosures required them to provide sensitive information, for example key management personnel remuneration when there were only one or two key management personnel.

Reference to full IFRSs. Around 20 per cent of the field testers chose to refer back to full IFRSs to apply an option available by cross-reference. Most of those entities already follow full IFRSs or a national GAAP similar to full IFRSs. A few field testers said that they would have wanted to use one of the options but did not do so because of the need to refer back to full IFRSs. Only a few entities noted that they needed to refer back to full IFRSs to understand or clarify requirements in the ED.