1 © 2006 IASC Foundation, all rights reserved. The IASB Project on Accounting Standards for SMEs Paul Pacter IASB Director of Standards for Small and Medium-sized Entities World Advanced Program in Accounting and Auditing Regulation 28 March 2006

2 © 2006 IASC Foundation, all rights reserved. Why SME Standards Are Needed  IASB has never said its standards (IFRSs) are aimed only at large listed companies.  But, as a practical matter: Main adopters have been listed companies.  Few countries have pushed full IFRSs down to SMEs.

3 © 2006 IASC Foundation, all rights reserved. Why SME Standards Are Needed  Why global GAAP for listed companies?  The accounting confusion that results from dozens of national GAAPs in a global financial market is a disservice to investors, creditors, and others who use corporate financial statements.  Benefits to capital markets.  Benefits to companies.

4 © 2006 IASC Foundation, all rights reserved. Why SME Standards Are Needed  Even for unlisted SMEs, financial statements that are understandable across borders are needed:  Banks make loans across national boundaries and operate multi-nationally.  Vendors from other countries.  Credit rating agencies.  Overseas customers.

5 © 2006 IASC Foundation, all rights reserved. IASB’s Preliminary Views  IASB deliberated SME standards during second half of 2003 and early 2004:  Reached some preliminary views on the approach.  Discussion Paper June  120 responses.

6 © 2006 IASC Foundation, all rights reserved. January 2005 Decisions  Board discussed responses in late In Jan made tentative decisions: 1.Clear demand for IASB SME standards. 2.Focus on non-publicly accountable entities that publish general purpose financial statements for external users. No quantified “size test”.

7 © 2006 IASC Foundation, all rights reserved. January 2005 Decisions 3.Each jurisdiction should develop detailed guidelines on which entities are eligible to use. 4.Board will consider recognition and measurement simplifications – based on user needs and cost/benefit.

8 © 2006 IASC Foundation, all rights reserved. January 2005 Decisions 5.“Mandatory fallback” to full IFRS if the SME standard does not address an issue – Yes. 6.“Optional fallback” to full IFRS if SME standard is different from full IFRS – No. 7.Clear disclosure that SME standards are being followed, rather than full IFRSs – Yes.

9 © 2006 IASC Foundation, all rights reserved. January 2005 Decisions 8.Organise SME standards by topic, with cross-references to the numbered IASs/IFRSs. 9.Add preparers and users to Working Group. [Done] 10. Conduct round tables with preparers and users. [held on October 2005]

10 © 2006 IASC Foundation, all rights reserved. IASB Definition of SME  Small and medium-sized entity:  Does not have public accountability:  Not publicly traded.  Not financial institution.  Not essential public service.  Not economically significant in its home country.  Publishes general purpose financial statements for external users.

11 © 2006 IASC Foundation, all rights reserved. Recognition and Measurement Questionnaire  1 April 2005:  Brief questionnaire was sent to all DP respondents, SAC, Working Group, and posted for public response.  To identify recognition and measurement issues for discussion at round tables.  101 responses received.

12 © 2006 IASC Foundation, all rights reserved. Recognition and Measurement Questionnaire  Recognition and measurement means:  Some items recognised as assets and liabilities under full IFRSs might not be recognised by SMEs.  Example: Deferred taxes.  Some assets, liabilities, income, and expenses might be measured differently by SMEs than under full IFRSs.  Example: Premium or discount amortised straight-line rather than effective interest method.

13 © 2006 IASC Foundation, all rights reserved. Recognition and Measurement Questionnaire  28 June 2005:  Discussed responses with IASB’s Advisory Council and received views.  June 2005:  IASB SME Working Group met.  Discussed responses.  Recommendations to the Board.

14 © 2006 IASC Foundation, all rights reserved. Recognition and Measurement Questionnaire  26 September  Discussion with World Standard Setters from over 40 countries.  October 2005:  Round-table discussions of possible recognition and measurement simplifications.  43 groups participated.

15 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  January 2006  IASB staff presented a draft ED to the Board. Preliminary discussion.  Working Group – 2 days discussion of draft ED. Views sent to Board.  February and March 2006  ED discussed by Board in detail.

16 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  Comments about the draft ED:  Organised by topic.  40 sections.  Each paragraph cross- referenced back to full IFRS.  Nearly all “black letter” paragraphs from IFRSs are included.  Except where there is cross reference back to an IFRS.

17 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  Comments about the draft ED:  Pervasive principles up front – look to in absence of specific standard.  No “black-letter/grey letter” distinction.  Model financial statements.  233 pages, but sections on financial instruments, taxes, several others to be added.  Full IFRSs now 2,400 pages.

18 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  Comments about the draft ED:  ED developed by considering needs of company with 50 employees and annual revenue of approximately €10 million.  Which companies are required or permitted to use is up to each individual jurisdiction.

19 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  Comments about the draft ED:  Goals of:  High quality standards.  Meet SME user needs.  Reduce preparer burden.  Broadly consistent with full IFRSs.  Global applicability.

20 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  Sections of draft ED: IN Introduction 1Concepts and Pervasive Principles 2Financial Report of an SME 3Balance Sheet 4Income Statement 5Statement of Changes in Equity 6Cash Flow Statement 7Notes to the Financial Statements Model Financial Statements 8 Consolidated Financial Statements

21 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  Sections of draft ED: 9Accounting Policies, Estimates, and Errors 10 Financial Assets and Financial Liabilities 11 Inventories 12 Investments in Associates 13 Investments in Joint Ventures 14 Investment Property 15 Property, Plant and Equipment 16 Intangible Assets Other Than Goodwill

22 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  Sections of draft ED: 17 Business Combinations and Goodwill 18 Rights and Obligations under Leases 19 Assets Held for Sale 20 Provisions and Contingencies 21 Equity 22 Revenue 23 Construction Contracts 24 Government Grants 25 Borrowing Costs

23 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  Sections of draft ED: 26 Share-Based Payment 27 Impairment of Assets 28 Employee Benefits 29 Income Taxes 30 Financial Instruments – Additional Issues 31 Financial Reporting in Hyperinflationary Economies 32 Foreign Currency Translation 33 Segment Reporting

24 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  Sections of draft ED: 34 Events After the Balance Sheet Date 35 Related Party Disclosures 36 Earnings Per Share 37 Specialised Industries 38 Discontinued Operations 39 Interim Financial Reporting 40 First-Time Adoption of IFRSs for SMEs

25 © 2006 IASC Foundation, all rights reserved. Next Steps Please understand that these dates are tentative:  Exposure Draft – by 30 June  Field tests?  Final Standard – by 30 June  Effective – 2008.

26 © 2006 IASC Foundation, all rights reserved. Thank you. Questions?Comments?