1. A Global IFRS for SMEs Will Improve Access to Capital
Paul Pacter
IASB Director of Standards for Small and Medium-sized Entities
IOSCO STP on Transition to IFRS: Challenges for Supervisors
Madrid
18 October 2007

2. Why SME Standards Are Needed
IAS voluntary adoptions by some listed companies, few unlisted.
Since 2001:
IFRSs’ growing complexity.
Many national adoptions of IFRSs.
Even for unlisted (permit or require).
National GAAPs converging to IFRSs.
SMEs in small and developing countries need access to capital.
Full IFRSs and SMEs: User needs? Burden?

3. Why SME Standards Are Needed
Benefits of global accounting standards for listed companies:
Investors invest globally.
Companies seek capital globally.
Analysts follow industries globally.
Cross-border mergers.
Accounting differences reduce understandability and obscure comparisons.

4. Why SME Standards Are Needed
Global standards are also needed for unlisted SMEs:
Bank lending decisions.
Banks monitor credit risks after loan is made.
Vendors evaluate finances of buyers.
Credit rating agencies and banks that provide rating services.
Overseas customers.
Foreign venture capital
Non-management investors.
Development institutions.

5. Why SME Standards Are Needed
Benefits of global SME standards go beyond comparability:
Improved quality of reporting as compared to existing GAAP.
Ease burden on SMEs where full IFRSs or full national GAAP are now required for SMEs.
Education and training.
Auditing efficiencies.

6. IASB Exposure Draft
IASB proposed IFRS for SMEs:
Simplified principles tailored for SMEs.
Self-contained (nearly).
Based on full IFRSs, which are developed for public capital markets.
Modifications based on:
User needs and
Cost-benefit.

7. IASB Exposure Draft
SME user needs:
Focus more on short-term cash flows, liquidity, and solvency.
Less interest in long-term earnings forecasts.

8. Exposure Draft – IFRS for SMEs
Organised by topic.
ED 254 pages.
Plus illustrative financial statements, disclosure checklist, basis for conclusions.
Board vote: 13 to 1.
Published:
15 February 2007.
Comment deadline now:
30 November 2007.

9. IASB Definition of SME
IASB view:
IFRS for SMEs is appropriate for an entity with no public accountability:
not publicly traded; and
not a financial institution.
No quantified size test.
Terminology:
Perhaps IASB should use “non-publicly accountable entity (NPAE)” rather than SME.

10. IASB Approach
General purpose financial statements for external users, including:
Non-manager owners.
Existing and potential lenders, vendors, creditors, customers.
Credit rating agencies.
Auditor could give opinion on fair presentation (true/fair view) of financial position, results, cash flows.

11. Finding an Answer Stand-alone document:
SME must try to find answers in the IFRS for SMEs:
by analogy, and
by using pervasive principles in first section of IFRS for SMEs.
May look to full IFRSs if answer cannot be found in IFRS for SMEs.
But, not required to use full IFRSs.

12. Simplifications
Five kinds of simplifications based on user needs and cost-benefit:
Some topics in IFRSs omitted if irrelevant to SME.
Where IFRS has options, include only simpler option.
Recognition and measurement simplifications.
Reduced disclosures.
Simplified drafting.

13. Topics in Full IFRSs Omitted
Material not relevant to typical SME omitted, with cross-references to full IFRSs if needed:
Hyperinflation.
Equity-settled share-based payment.
Determining FV of agricultural assets.
Extractive industries.
Interim reporting.
Lessor finance leases.
Segment reporting.
Earnings per share.

14. Accounting Policy Options
Only simpler of options in full IFRS are included. Others cross-referenced. So, only:
Cost for investment property.
Cost for PP&E and intangibles.
Expense all borrowing costs.
Indirect operating cash flows.
One method for all grants.
Jurisdictions could eliminate options.

15. Recognition and Measurement
Simplifications, page 1 of 2:
Financial instruments:
Two classifications, not four.
Drop “continuing involvement approach” for derecognition.
Much simplified hedge accounting.
Goodwill impairment – indicator approach.
Expense all R&D.
Cost method for associates and JVs.
Income taxes – exceptions eliminated, simplified explanations.

16. Recognition and Measurement
Simplifications, page 2 of 2
Less fair value for agriculture – only if “readily determinable without undue cost or effort”.
Defined benefit plans – principle approach, no corridor tests.
Share-based payment – intrinsic value.
First-time adoption – less prior data.
Leases – simplified calculations.

17. Disclosure Simplifications
Reduced disclosures:
Full IFRSs – more than 3,000 items in disclosure checklist.
IFRS for SMEs – fewer than 400.
Simplifications based on users’ needs and cost-benefit:
Kept: short-term cash flow, liquidity, solvency, measurement uncertainties, accounting policy choices.
Dropped: disaggregations, public capital market disclosures.

18. Micro-sized SMEs (tiny)
Is the IFRS for SMEs suitable?
Yes.
The issue is whether micro prepares general purpose financial statements that present fairly position, operating results, and cash flows.
As noted earlier, full IFRSs are already used by unlisted companies in 70 jurisdictions.

19. Other Issues
Suitability for tax returns, dividend distribution, other legal requirements? For managing the business?
Not specific objectives of the IASB.
With a simple reconciliation, IFRS for SMEs can serve tax or legal reporting.
We believe the information will likely be useful for managing. But our goal is external financial reporting.
Small listed companies?

20. Simplifications Considered but Not Adopted
Drop the cash flow statement.
All leases operating.
All pension plans defined contribution.
Completed contract only.
Fewer provisions.
Non-recognition of share-based payment.
Non-recognition of deferred taxes.
Cost model for all agriculture.
No consolidation.
Derivatives at cost.

21. The Effort: Due Process
Comprehensive due process, including:
Discussion paper (June 2004).
Recognition and measurement (R&M) questionnaire (April 2005).
Public roundtables on R&M (Oct. 2005).
Working Group (35 members).
Deliberations at over 30 Board meetings.
Roundtables on ED (ongoing).

22. Maintenance
Maintaining the IFRS for SMEs:
Update the IFRS for SMEs every 2 years — if needed.
One single Exposure Draft.

23. Since ED Was Issued ED published in 5 languages.
Extraordinary outreach effort:
Presentations at 84 conferences and roundtables in 36 countries.
Including 62 since ED was issued.
Plus 7 published articles.
Compliance checklist.
Field tests under way (next slide).
Roughly 60 comment letters so far:
Two months to go in comment period.

24. Field Tests Field Test Questionnaire:
English, Spanish, French.
Plus compliance checklist.
Real SMEs try to prepare financial statements, tell us problems:
Understandability of the ED?
Problems in applying the ED?
Lack of available data?
Need to look to full IFRSs?
Around 100 SMEs participating.
Request by 30 November 2007.

25. Issues in Early Letters and Roundtables
Eliminate all cross references to full IFRSs.
Simplify income taxes.
Eliminate or restrict consolidation.
Amortise goodwill & other intangibles.
Restrict use of FV to:
quoted market price or
readily determinable without undue cost or effort (plus all derivatives).
Don’t require component depreciation.

26. Issues in Early Letters and Roundtables
Clarify use of IFRS for SMEs by subsidiary of a full IFRS entity.
Simplify defined benefit pension plans
Simplify share-based payment.
Leases – do not require:
Straight-line for operating.
Finance lease measured only at FV.
Impairment: Allow value in use.
Further disclosure simplifications.

27. Early Adoptions South Africa: Australia: Denmark: UK:
Word for word for all unlisted companies that do not use full IFRSs.
Australia:
Proposed for largest 25,000 unlisted.
Denmark:
Planning legislation to permit.
UK:
Likely to permit.

28. Interest in the United States!
Could private companies in the US use the IFRS for SMEs?
Does not appear to be a reason why not:
No statutory audit requirement in US.
Basis of presentation note would refer to conformity with IFRS for SMEs.
If audited, auditor would report on conformity with IFRS for SMEs.
Strong support from FEI.

29. Board redeliberations: Final Standard: End of 2008. Effective:
Next Steps
Staff analyses of comments and field tests, recommendations for changes to the ED:
To the Board 1Q 2008.
Board redeliberations:
2Q-4Q 2008.
Final Standard: End of 2008.
Effective:
Whenever adopted locally.

30. More information on www.iasb.org Thank you. Questions? Comments?
EXPRESSIONS OF INDIVIDUAL VIEWS BY MEMBERS OF THE IASB AND ITS STAFF ARE ENCOURAGED. THE VIEWS EXPRESSED IN THIS PRESENTATION ARE THOSE OF DR. PACTER. OFFICIAL POSITIONS OF THE IASB ON ACCOUNTING MATTERS ARE DETERMINED ONLY AFTER EXTENSIVE DUE PROCESS AND DELIBERATION.