PwC global network of firms submitted comments on the IASB's request for information on IFRS for SMEs. The comments provided have been grouped into six broad categories to simplify our response and to avoid repetition. The Firm comments specifically on the scope of the SME standard, convergence with IFRSs, income taxes, options, convergence with the EU directives and the use of additional IASB guidance for SMEs.
International Accounting Standards Board
30 Cannon Street
30 November 2012
Request for information: IFRS for SMEs
We are responding to your invitation to comment on the request for information on IFRS for SMEs (the SME standard) on behalf of PricewaterhouseCoopers.
Following consultation with members of the PricewaterhouseCoopers network of firms, this response summarises the views of the member firms that commented on the request for information. ‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers lnternational Limited, each of which is a separate and independent legal entity.
Many of the questions in the request for information address similar themes. We have therefore grouped our comments into six broad categories to simplify our response and to avoid repetition. We have commented specifically on the scope of the SME standard, convergence with IFRSs, income taxes, options, convergence with the EU directives and the use of additional IASB guidance for SMEs. We have summarised our answers to the detailed questions in the request for information in the appendix to this letter.
Scope (questions 1, 2 and 3)
We continue to believe that the SME standard should not be applied by publicly accountable entities and that the range of other entities permitted to apply the SME standard should be determined by the relevant local regulator. We do not therefore believe that the scope of the SME standard should be extended to cover entities whose debt or equity instruments trade in a public market or financial institutions and other entities that hold assets for a broad group of outsiders. The SME standard should not be revised to address not for profit entities.
The SME standard was developed on the basis that it would not be applied to publicly accountable entities and its principles have not been considered in the context of those entities. Many of the simplifications permitted or required by the SME standard are not appropriate for entities with publicly traded debt or equity securities. For example, there is no requirement to provide information about operating segments or earnings per share. The SME standard also permits a simplified approach to the accounting for and disclosure of financial instruments, which might not be appropriate for financial institutions.
We are concerned that application of the SME standard by publicly accountable entities would reduce the credibility of the financial statements and adversely affect the public standing of IFRSs. The SME standard should be clarified to state that the financial statements of publicly accountable entities or financial institutions that are prepared in accordance with the SME standard do not comply with either IFRSs or IFRS for SMEs.
If, however, the IASB decides to permit entities with traded securities or financial institutions to apply the SME standard, those entities should be required to apply IFRS 9 Financial Instruments or IAS 39 Financial instruments: Recognition and measurement and IAS 32 Financial instruments: Presentation for financial instruments.
Convergence with IFRS (questions 4, 6, 7, 8, 12, 15 and G1)
The Preface to the SME standard should be amended to include a principle that the requirements of new or revised IFRSs should be incorporated into the SME standard unless there is a specific reason not to make the change. The IASB might consider, for example, whether a change to IFRSs would increase complexity in a way that is inconsistent with the objectives of the SME standard. The process of updating the SME standard would be simplified if the IASB considered changes in IFRSs and the implications for the SME standard whenever an IFRS is amended. The SME standard should be revised infrequently in accordance with the IASB’s stated intent, but the IASB should determine the changes that will be made whenever an IFRS is revised.
We agree that the specific guidance in the SME standard should be revised to:
We do not agree that all of the guidance in IFRS 13 Fair value measurement should be incorporated into the SME standard. Much of the guidance in IFRS 13 is not relevant to simpler and less complex organisations. The detailed fair value guidance would also significantly increase the volume of guidance in the SME standard and the complexity of its principles.
We suggest that the definition of fair value in the SME standard be amended to be consistent with the definition in IFRS 13. Entities that apply the SME standard would then be able to use the guidance in IFRS 13 by referring to that standard in areas in which the SME standard does not provide specific guidance, in accordance with the general principles of the SME standard. It is therefore not necessary to include IFRS 13 in its entirety in the SME standard.
We suggest that entities that choose to adopt IAS 32 and IAS 39 or IFRS 9 as permitted by the SME standard should also be required to apply IFRS 13, which provides appropriate guidance for more complex financial instruments.
Income taxes (questions 16, 17 and 18)
Accounting for deferred taxes is often complex and not well understood by users or preparers of financial statements. We believe it is possible to provide useful information about an entity’s income taxes to the users of SME financial statements without applying the model that is now in the SME standard.
The model currently required by the SME standard reflects the proposals to amend IAS 12 Income taxes, which were exposed for comment by the IASB in 2009. These proposals were not incorporated into IAS 12 and the income taxes project is not on the board’s active agenda. Accounting for income taxes in the SME standard is therefore much more complex than and inconsistent with IAS 12. We believe these principles should be amended.
We suggest that SMEs should recognise income tax assets and liabilities on the basis of the amounts due to or from the tax authorities in respect of periods that have ended on or prior to the balance sheet date. Temporary differences will affect the amount paid to or recovered from the tax authorities and if our suggestion is adopted, it will be important that the implications of such temporary differences be explained in the financial statements.
If the board decides not to adopt this approach, the SME standard should be amended to be consistent with IAS 12, including the recent change to include an exemption for investment property measured at fair value.
Require or allow more options (questions 9, 10 and 14)
Accounting policy options increase the complexity of the accounting model and the SME standard would be easier to apply if there were no options. However, we understand that many entities that use the SME standard prefer the flexibility that options provide.
We therefore agree that the SME standard should be amended to permit (but not require):
When these options are applied, the SME standard should require that all of the relevant guidance in IAS 16 Property, plant and equipment, IAS38 Intangible assets and IAS 23 Borrowing costs is also applied. The IASB should therefore consider whether the SME standard should incorporate or refer to the relevant guidance in those standards.
Convergence with EU Directives (questions 11 and 13)
We understand that the adoption of IFRS for SMEs in the European Union is hindered by a limited number of conflicts between the EU Directives and the SME standard. IFRS for SMEs should not generally be amended at the request of certain territories or regions. The IASB should consider amendments on the basis of their technical merit in the context of the objectives of the SME standard.
However, we understand the particular concerns in the EU in connection with two specific issues and therefore we do not object to the SME standard being amended to:
require that, where an entity is unable to estimate the useful life of an intangible asset, the useful life should be presumed to be ten years unless a shorter period can be justified; and
permit an accounting policy option to recognise a share subscription receivable as an asset.
Additional IASB guidance (questions G2, G3 and G4)
We continue to believe that the SMEIG should not address through Q&As issues that might be relevant to full IFRS. The Q&As are not subject to the IASB’s due process and there is a danger that the Q&As, although specific to the SME standard and not mandatory, might be applied in the interpretation of full IFRS. This is not appropriate. The number of Q&As that apply only to the SME standard should be very limited and subject to appropriate due process. The existing Q&As already issued should not be incorporated into the SME standard.
Other issues (questions 5, 19, and G5)
We agree that entities should be permitted to use either the SME standard to account for financial instruments or to apply IAS 39 (or IFRS 9, when that standard becomes effective). This allows more complex entities to apply the relevant provisions of the financial instruments standards to more complex financial instruments.
We do not believe additional topics should be included in the SME standard.
We suggest that the IASB reconsider the title of the SME standard and develop a title that does not use the term ‘IFRS’, which is potentially confusing for users of the financial statements.
If you have any questions in relation to this letter please do not hesitate to contact John Hitchins (Global chief accountant) (020 7804 2497), or Tony de Bell (020 7213 5336).
Summary of our answers to the specific questions raised in the request for information:
Q1: (a) No—do not change the current requirements. Continue to prohibit an entity whose debt or equity instruments trade in a public market from using the IFRS for SMEs.
Q2: (a) No—do not change the current requirements. Continue to prohibit all financial institutions and other entities that hold assets for a broad group of outsiders as one of their primary businesses from using the IFRS for SMEs.
Q3: (c) No—do not revise the IFRS for SMEs for this issue.
Q4: (b) Yes—revise the IFRS for SMEs to reflect the main changes from IFRS 10 outlined above (modified as appropriate for SMEs).
Q5: (b) Allow entities the option of following the recognition and measurement provisions of IFRS 9 (with the disclosure requirements of Sections 11 and 12).
Q6: (c) Other, see attached letter.
Q7: (c) Other, see attached letter.
Q8: (b) Yes—revise the IFRS for SMEs so that arrangements are classified as joint ventures or joint operations on the basis of the parties’ rights and obligations under the arrangement (terminology and classification based on IFRS 11 Joint Arrangements, modified as appropriate for SMEs).
Q9: (b) Yes—revise the IFRS for SMEs to permit an entity to choose, for each major class of PPE, whether to apply the cost-depreciation-impairment model or the revaluation model (the approach in IAS 16).
Q10: (c) Other, see attached letter.
Q11: (b) Yes—modify paragraph 18.20 to establish a presumption of ten years that can be overridden if a shorter period can be justified.
Q12: (b) Yes—revise the IFRS for SMEs to incorporate the main changes introduced by IFRS 3 (2008), as outlined above and modified as appropriate for SMEs.
Q13: (c) Yes—add an additional option to paragraph 22.7(a) to permit the subscription receivable to be presented as an asset, i.e., the entity would have a choice whether to present it as an asset or as an offset to equity.
Q14: (c) Other, see attached letter.
Q15: (b) Yes—revise the IFRS for SMEs so that an entity is required to recognise all actuarial gains and losses in other comprehensive income (i.e., removal of profit or loss option in paragraph 28.24).
Q16: (d) No—SMEs should not recognise deferred income taxes at all (i.e., they should use the taxes payable method), although some related disclosures should be required.
Q17: (c) Other, see attached letter.
Q18: (b) Yes—revise Section 29 to incorporate the exemption for investment property at fair value (the approach in IAS 12), subject to our suggestion in connection with income taxes as a whole
Q19: (a) No.
Q20: (a) No.
G1: (a) Where changes are intended to improve requirements in full IFRSs and there are similar wordings and requirements in the IFRS for SMEs, they should be incorporated in the (three-yearly) omnibus exposure draft of changes to the IFRS for SMEs.
G2: (b) No—the current Q&A programme has served its purpose and should not be continued.
G3: (b) No—the seven final Q&As should be retained as guidance separate from the IFRS for SMEs.
G4: (a) No.
G5: (b) Yes.
G6: Not applicable