1. IFRS for SMEs Institute of Chartered Accountants of the Caribbean, St. Kitts, June 30, 2007 Russell Guthrie Director, Quality Assurance and Member Body Relations

2. Content 1.IFRS for SMEs 2.SMP/SME Issues – covered in papers 3.Strategy – covered in papers 4.Input to Standard Setting – covered in papers 5.Practical Support – covered in papers 6.IFAC Member Body Compliance Program

3. 1 IFRS for SMEs Exposure Draft On February 15, 2007 IASB issued an Exposure Draft (ED) of proposed International Financial Reporting Standard for Small and Medium-sized Entities (I FRS for SMEs)On February 15, 2007 IASB issued an Exposure Draft (ED) of proposed International Financial Reporting Standard for Small and Medium-sized Entities (I FRS for SMEs) Deadline for comments is October 1, 2007Deadline for comments is October 1, 2007

4. 1 IFRS for SMEs Scope SMEs are defined as entities that:SMEs are defined as entities that: do not have public accountability; butdo not have public accountability; but publish general purpose financial statements (GPFS) for external userspublish general purpose financial statements (GPFS) for external users IFRS for SMEs is appropriate for an entity with no public accountability:IFRS for SMEs is appropriate for an entity with no public accountability: not publicly traded; ornot publicly traded; or not a financial institutionnot a financial institution No quantified size testNo quantified size test

5. 1 IFRS for SMEs Reasons Self-contained set of principles for SMEs:Self-contained set of principles for SMEs: –based on full IFRSs –modifications based on user needs and cost-benefit Reduction in volume vs. full IFRSsReduction in volume vs. full IFRSs Enables users to compare SMEs’ financial performance, financial condition and cash flowsEnables users to compare SMEs’ financial performance, financial condition and cash flows

6. 1 IFRS for SMEs Reasons Provide emerging economies with internationally recognized benchmarkProvide emerging economies with internationally recognized benchmark Results in GPFS on which auditor can express an opinionResults in GPFS on which auditor can express an opinion Simplified plain English to help preparersSimplified plain English to help preparers Develop a standard suitable for smallest of SMEsDevelop a standard suitable for smallest of SMEs

7. 1 IFRS for SMEs Due Process World Accounting Standard Setters (Sept. 2003)World Accounting Standard Setters (Sept. 2003) Discussion paper (June 2004)Discussion paper (June 2004) Recognition and measurement (R&M) questionnaire (April 2005)Recognition and measurement (R&M) questionnaire (April 2005) Public roundtables on R&M (Oct. 2005)Public roundtables on R&M (Oct. 2005) Deliberations at 30 Board and 6 SAC meetingsDeliberations at 30 Board and 6 SAC meetings 3 meetings of SME Working Group3 meetings of SME Working Group

8. 1 IFRS for SMEs Drafting Developed by extracting fundamental concepts from IASB Framework for the Preparation and Presentation of Financial StatementsDeveloped by extracting fundamental concepts from IASB Framework for the Preparation and Presentation of Financial Statements Modifications in the light of user needs and cost- benefit considerations.Modifications in the light of user needs and cost- benefit considerations. While drafting staff had in mind a typical SME with about 50 employeesWhile drafting staff had in mind a typical SME with about 50 employees No mandatory fallback to full IFRSsNo mandatory fallback to full IFRSs

9. 1 IFRS for SMEs Modifications Material not relevant to typical SME omitted, with cross-references to full IFRSs if needed:Material not relevant to typical SME omitted, with cross-references to full IFRSs if needed: HyperinflationHyperinflation Equity-settled share-based paymentEquity-settled share-based payment Determining FV of agricultural assetsDetermining FV of agricultural assets Extractive industriesExtractive industries Interim reportingInterim reporting Lessor finance leasesLessor finance leases Recoverable amount of goodwillRecoverable amount of goodwill EPS and segment reportingEPS and segment reporting

10. 1 IFRS for SMEs Modifications Only simpler of options in full IFRS are included while other (s) cross-referenced:Only simpler of options in full IFRS are included while other (s) cross-referenced: –Cost for investment property –Cost for PP&E and intangibles –Expense all borrowing costs –Indirect operating cash flows –One method for all grants

11. 1 IFRS for SMEs Modifications Recognition and measurement simplifications:Recognition and measurement simplifications: Financial instruments:Financial instruments: –Two classifications, not four –Drop “continuing involvement approach” for de- recognition –Much simplified hedge accounting Goodwill impairment – indicator approachGoodwill impairment – indicator approach Expense all R&DExpense all R&D Cost method for associates and JVsCost method for associates and JVs

12. 1 IFRS for SMEs Modifications Recognition and measurement simplifications:Recognition and measurement simplifications: Less fair value for agriculture – only if “readily determinable without undue cost or effort”Less fair value for agriculture – only if “readily determinable without undue cost or effort” Defined benefit plans – principle approach, no corridor testsDefined benefit plans – principle approach, no corridor tests Share-based payment – intrinsic valueShare-based payment – intrinsic value First-time adoption – less prior dataFirst-time adoption – less prior data Leases – simplified calculationsLeases – simplified calculations

13. 1 IFRS for SMEs Maintenance and Organization Organized by topicOrganized by topic Update IFRS for SMEs every 2 yearsUpdate IFRS for SMEs every 2 years Omnibus Exposure DraftOmnibus Exposure Draft

14. 1 IFRS for SMEs Next Steps Exposure period ends October 1, 2007Exposure period ends October 1, 2007 Final Standard – 1H 2008Final Standard – 1H 2008 Continued round-tables with SMEs, SMPs and national standard settersContinued round-tables with SMEs, SMPs and national standard setters Field tests – deadline of October 31, 2007Field tests – deadline of October 31, 2007

15. 1 IFRS for SMEs IFAC’s Role IFAC is highly supportive of projectIFAC is highly supportive of project Responding to EDResponding to ED Helping IASB conduct field testsHelping IASB conduct field tests Encouraging member bodies and regional accountancy organizations to participateEncouraging member bodies and regional accountancy organizations to participate Organizations present should seriously consider participatingOrganizations present should seriously consider participating Challenge is to get SMEs and SMPs engagedChallenge is to get SMEs and SMPs engaged

16. 1 IFRS for SMEs SMP Committee’s Views Followed and input to SME project since 2003Followed and input to SME project since 2003 Globally applicable standard, consistently implementedGlobally applicable standard, consistently implemented Favorable cost-benefit outcomeFavorable cost-benefit outcome Significant milestone for global accountancy professionSignificant milestone for global accountancy profession

17. 1 IFRS for SMEs SMP Committee’s Views ScopeScope Users and user needsUsers and user needs Cost-benefitCost-benefit Micro-entitiesMicro-entities Stand-aloneStand-alone Measurement basisMeasurement basis Recognition and measurements simplificationsRecognition and measurements simplifications

18. 1 IFRS for SMEs SMP Committee’s Views Phase 1 – Information PaperPhase 1 – Information Paper Micro-Entity Financial Reporting: Perspectives of Preparers and Users, December 2006Micro-Entity Financial Reporting: Perspectives of Preparers and Users, December 2006 Inform debate and prompt discussionInform debate and prompt discussion Summary of research evidenceSummary of research evidence Disproportionate regulatory burden on microsDisproportionate regulatory burden on micros Lack of researchLack of research

19. 1 IFRS for SMEs SMP Committee’s Views Phase 2 - focus group interviews of owners, preparers, and financiersPhase 2 - focus group interviews of owners, preparers, and financiers Fieldwork completed in UK, Kenya, Poland and Uruguay; Italy, India and Malaysia to followFieldwork completed in UK, Kenya, Poland and Uruguay; Italy, India and Malaysia to follow Identify any changes to ensure IFRS for SMEs suits micro-entitiesIdentify any changes to ensure IFRS for SMEs suits micro-entities

20. ICAC 25 th Annual Accountants Conference June 30, 2007 IFAC Member Body Compliance Program Russell Guthrie – Director – Quality Assurance and Member Relations

21. Part 2 Update Response status Completed Part 2 responses published 141 Part 2 with members / associates for final review 6 Part 2 completed and under Staff review7 Subtotal Part 2 completed 154 Excused (Iraq) 1 Total Members and Associates 155 IFAC Compliance Program

22. Parts 1 and 2 High level of external interestHigh level of external interest –380,000+ Page views on IFAC website (1-05 to 4-07) –IOSCO –EGAOB – Assessment of Auditor Oversight –WB/RDBs –National regulators (FRC, IRBA) –E-Standards Forum Emphasize to members importance of transparency and updating of informationEmphasize to members importance of transparency and updating of information IFAC Compliance Program

23. Part 3 Development of “Policy Recommendations” by IFAC Staff based on Part 2 responsesDevelopment of “Policy Recommendations” by IFAC Staff based on Part 2 responses Member Bodies develop Action Plans based on the aboveMember Bodies develop Action Plans based on the above Action plans must be:Action plans must be: –Realistic –Specific (time frame and responsibility) –“Owned” by the member body IFAC Compliance Program

24. Part 3 – Key aspects Buy in by member body is essential to successBuy in by member body is essential to success –Board/Council –Technical Committees –Management –Key Volunteers IFAC Compliance Program

25. Part 3 – Key aspects Iterative processIterative process Confirm RecommendationsConfirm Recommendations –3 months Prepare Action PlanPrepare Action Plan –6 months Monitoring Progress and Updating InfoMonitoring Progress and Updating Info –Every 6 months IFAC Compliance Program

26. Why is this important? Increased interest and focus on program by IFAC BoardIncreased interest and focus on program by IFAC Board Increasing level of regulatory body interestIncreasing level of regulatory body interest Increased attention, observation and priority by Public Interest Oversight BoardIncreased attention, observation and priority by Public Interest Oversight Board Support from World Bank and Regional Development BanksSupport from World Bank and Regional Development Banks IFAC Compliance Program

27. Why is this important? Opportunities:Opportunities: –For the profession to demonstrate leadership and pro-activity –To engage country stakeholders who must also assist –To obtain resources to make the necessary changes IFAC Compliance Program

28. www.ifac.org