CGA-Canada shares its views on
IFRS for SMEs
Presentation to
Accounting Standards Oversight Council (AcSOC)
Park Hyatt Toronto, Toronto
February 1, 2007
Check against delivery
www.cga-online.org/canada
The IASB SME Project
Presentation to AcSOC
February 1, 2007
The IASB SME project
Support the stand-alone approach:
ƒ Having an integrated, holistic set of IFRS
for SMEs is preferable to the “exceptions”
perspective of Handbook section 1300.
ƒ Top-down approach is preferable as it is
more tightly integrated with the full set of
IFRSs.
The rapid internationalization of capital markets over the past thirty years and the concomitant integration of
those markets have changed the manner in which business entities exist. As the financial markets have grown
more complex, so have the nature of the economic activities undertaken by these enterprises, with a
corresponding increase in the complexity of the way in which financial statements reflect the effects of those
transactions.
Likewise, the growth of the — for want of a better term — merchant class in many developing nations has
necessitated a set of accounting standards that reflect the needs of those business enterprises. Often, they
have used the same GAAP as that followed by large, multi-national organizations. But the increasing chasm
between these two types of entities, and the increasing resistance associated with what smaller enterprises
call standards overload has led to the demand for a set of standards relevant and applicable to such
organizations.
The IASB IFRS for SME project acknowledges these issues. And rather than re-invent the wheel, the IASB
is to be commended for starting with a well-developed set of reporting requirements based upon a wellestablished conceptual framework. The result has been an integrated, holistic set of International Financial
Reporting Standards for SMEs, which is preferable to the “exceptions” perspective embodied by, for
example, Handbook Section 1300. Moreover, the top-down approach the standard represents is preferable to
a bottom-up approach as it is more tightly integrated with the full set of IFRSs.
Given the globalization of the marketplace, the top-down approach of the IFRS for SMEs would help in
decision making related to consistency and comparability of reporting in general; in mergers and acquisitions
activities within a jurisdiction and in the international arena; lowering of cost of capital; depending upon
future changes to the business model of an entity, it would facilitate moving down from full IFRS to IFRS
for SMEs or moving up from IFRS for SMEs to full IFRS.
Before I go on, I should acknowledge that many small businesses would argue that they do not need
International Financial Reporting Standards. They would suggest that their dealing will only and always be
with other domestic enterprises … but that is today ... who knows about tomorrow … companies grow and
what seemed unnecessary today may be necessary tomorrow. For example, a small domestic firm may grow
and eventually become part of a supply chain that uses IFRS (domestically or in other jurisdictions) or
interacts with purchasers or suppliers who use IFRS.
Furthermore, even though an SME may be a non-publicly accountable enterprise, it often will interact with
enterprises which are publicly accountable— for example, financial institutions which are publicly
accountable, so by reflection, SMEs need to be accountable, or at least, use a financial reporting system that
is common to both publicly and non-publicly accountable enterprises.
The IASB SME project
SME draft is user-friendly:
ƒ Draft is well-organized, well-indexed and
accessible to potential users.
ƒ Most terms are well defined and overall, the
IFRS for SME standard is less complicated
than the full set of IFRS — a necessary
condition if it is to be embraced by SMEs.
After numerous internal drafts and extensive public consultation, it is fair to say
that the proposed text of the exposure draft is “user friendly.” Data made
available to me by CGA-Canada indicates that users and preparers surveyed
concluded that the IFRS for SME standard is well-organized, well-indexed and
accessible to potential users. Most terms are well defined and overall, the IFRS
for SME standard is less complicated than the full set of IFRS — a necessary
condition if it is to be embraced by SMEs. However, that is not to say that it
cannot be improved. In particular, the notion of micro enterprises needs to be
clarified. Furthermore, there are some sections that need to be reviewed. For
example, Section 20, Leases, seems to be confusing. Some respondents to CGACanada’s review felt that the guidance on capitalization was insufficient; others
felt it was appropriate.
The IASB SME project
SME draft is user-friendly:
ƒ Furthermore, the explanatory guidance
included in the various sections is sufficient
and provides enough direction to ensure that
those users unfamiliar with IFRS reporting
will not face an unrealistic burden.
If the IFRS for SME is to gain a positive reception, it must be accessible and it
must not be seen to add to what many SMEs consider standards overload. Based
on data available from CGA-Canada, it is safe to say that the reception should be
positive. The consensus of participants in CGA-Canada’s reviews believe that the
explanatory guidance included in the various sections is sufficient and provides
enough direction to ensure that those users unfamiliar with IFRS reporting will
not face an unrealistic burden.
The IASB SME project
Length and content are appropriate:
ƒ Overall, the draft content and depth of
coverage is appropriate for most SME users.
ƒ Notwithstanding, if it is to be readily
endorsed by micro enterprises, then a
summary beyond the explanatory guidance
may prove a useful addition to each section.
On balance, there seems to be agreement that the IFRS for SME draft content and
depth of coverage is appropriate for most SME users. However, the notion of
micro enterprises — entities with less than 10 employees, or income of less than
$2.5 million or assets of less than $2.5 million — keeps coming back … so
clearly there is one key issue that needs to be addressed. To be fair, the problem
may be one of trading a known approach for an uncertain set of standards. Until
the IFRS for SME are in place, it is unclear just how pervasive and significant the
impact would be on such entities.
The IASB SME project
Length and content are appropriate:
ƒ Topical coverage more than meets the 80:20
rule — it would be impossible to satisfy all
users’ needs.
ƒ The choice of “simpler” options from among
alternatives in a full IFRS (when there are
alternatives), is “right” if the IFRS for SME
draft is to avoid the issue of “standards
overload”.
As noted, data made available by CGA-Canada suggests that the IFRS for SME
draft content and depth of coverage is appropriate for most SME users. One could
argue that he proverbial 80:20 rule — here 80% of the key issues can be found in
20% of the total volume of standards — applies. Furthermore, the decision to use
“simpler” options from among alternatives in a full IFRS (when there are
alternatives), is “right” if the IFRS for SME draft is to avoid standards overload.
Nothing would limit its effectiveness more than if it were seen as more complex
than the regime it was replacing.
The IASB SME project
Length and content are appropriate:
ƒ Notwithstanding, optional fallback to full
IFRS provides direction when topics are not
addressed by the IFRS for SME standard.
ƒ However, rather than requiring SME users
to reference the full IFRS (for a particular
topic), consideration might be given to
including the “missing” options as an
appendix.
Notwithstanding, it is essential that users are aware of why an option was (or
wasn’t) included as part of the IFRS for SME. Likewise, users need to know that
they always have the option of using full IFRS for a particular topic. That is,
fallback to full IFRS is not an all or nothing choice.
One point that could be considered, especially given the increasing technological
alternatives available, is for an electronic version of the IFRS for SME to include
as an appendix any options excluded from the main text. This would facilitate
users’ ability to explore options or even just to determine whether their particular
circumstances would be better served by an option not normally part of the IFRS
for SME. Ultimately, the goal of financial reporting is to provide information that
is useful for decision-making purposes, irrespective of the size of the enterprise.
One approach that might be worth pursuing is to expand the glossary to include
terms and concepts not part of IFRS for SME. Also include cross-references for
transactions not normally encountered by SMEs, so that if an SME engages in a
transaction that is not usually considered SME-oriented, it will be able to better
account for that set of circumstances.
The IASB SME project
Issues for further consideration:
ƒ First-time adoption strategy could be
clearer.
ƒ Hedging terminology is confusing to nonaccountants.
ƒ The extensive coverage of post-employment
benefits is more than what will be needed by
most Canadian SMEs.
Despite a high level of overall support for the IFRS for SME standard, there
remain a number of issues that need attention. Not all are critical, but they
represent feedback received from focus group members asked to comment on the
proposed draft:
First-time adoption strategy could be clearer. That is, more specific guidance may
assist in the transition from Canadian GAAP to IFRS for SME.
Hedging terminology is confusing to non-accountants. Mind you, it is sometimes
confusing for accountants as well. In fact, all material related to financial
instruments should be carefully reviewed to ensure that only the most essential
aspects carry forward from IAS 32, IAS 39 and IFRS 7.
The extensive coverage of post-employment benefits is more than what will be
needed by most Canadian SMEs. Given that more and more new plans are
defined contribution plans, perhaps consideration should be given to limiting
SME coverage to those plans, referring defined benefit plans back to the full
IFRS.
The IASB SME project
Issues for further consideration:
ƒ Resources should be devoted to the preparation
of the “GAAP Hierarchy” — especially as
fallback to full IFRS is not mandatory.
ƒ Notwithstanding, the “safety net” aspect of full
IFRS should be highlighted.
ƒ Until a stable platform is completed, updates
should be annual rather than biennial.
When the IASB first proposed a standard for SMEs, the intention was that in the
absence of SME coverage, fallback would be to the full IFRS pertinent to the
transaction. As the standards developed, that perspective was modified to view
full IFRS as a sort of “safety net.” One reason for this change was articulated at
the December 2006 IASB Board meeting. The Board was concerned that a
mandatory fallback to full IFRS could create a potential conflict between auditors
— who normally would be familiar with the provisions of full IFRSs — and SME
managers who likely would only be familiar with the IFRS for SMEs.
Therefore, the IASB concluded that the IFRS for SME standard should contain a
GAAP hierarchy analogous to Section 1300 of the Handbook (not that the IASB
specifically referred to that document). This hierarchy would refer to the
requirements and guidance in the IFRS for SME dealing with issue at hand and
secondly, the definitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses and the pervasive principles in Section 2
of the IFRS for SME. If an issue was still unresolved, then management could
consider the requirements and guidance in full IFRSs and Interpretations of full
IFRSs dealing with the issue.
Accordingly, resources should be provided to ensure that the hierarchy is
completed and made part of the IFRS for SME before its release.
One other point worth considering: the goal is to issue updates every other year.
While such a system makes sense once a stable platform is established, it may be
beneficial to issue updates on annual basis until stability is established.
The IASB SME project
A number of issues remain:
ƒ Given that there are no significant IFRS/
Canadian GAAP differences for publicly
accountable enterprises, is it reasonable
to assume that the same circumstances
apply to non-publicly accountable
enterprises?
When the Canadian Accounting Standards Board released its Strategic Plan in
January 2006, it indicated that it intended to pursue separate strategies for each of
the major categories of reporting entities — publicly accountable enterprises,
non-publicly accountable enterprises and not-for-profit organizations.
Since the announcement, the AcSB has conducted a number of round table
discussions, as well as engaged in research which, when taken together, has led to
a not-entirely unexpected conclusion: there are no significant difference between
GAAP as currently resident in the CICA Handbook and GAAP as represented by
International Financial Reporting Standards. While it is true that there are
differences related to tax-specific accounting rules, that is true of all jurisdictions
— so it is not an impediment to the AcSB’s goal of moving reporting by publicly
accountable enterprises to IFRS. Also, there are differences at the margins, but
these are being addressed; the key point is that there are no significant differences
(and any that might exist now will be gone by 2010). In other words, there does
not appear to be any need for unique, made-in-Canada standards.
However, this outcome raises an interesting challenge with respect to non
publicly accountable enterprises — if the underlying economic principles that
govern their existence is the same as that of publicly accountable enterprises,
does that mean that there are likewise no significant differences between GAAP
as currently resident in the CICA Handbook and GAAP that will be represented
by IFRS for SMEs? If so, adoption of IFRS for SMEs by SMEs should be
welcomed.
The IASB SME project
A number of issues remain:
ƒ Given that current Canadian GAAP
provides differential reporting provisions
that will not be carried over to the IFRS
for SME standard, should non-publicly
accountable enterprises in Canada be
able to continue to apply these options?
Given that there does not appear to be any reason not to adopt IFRS for SME in
Canada, one issue needs to be resolved. Currently, Section 1300 permits nonpublicly accountable enterprises to adopt differential reporting requirements.
Under IFRS for SME, a number of these options will not be carried forward. For
example, under Section 1300, operating/holding company pairings need not
comply with the consolidation requirements normally expected of
parent/subsidiary relationships. Instead, such arrangements can be accounted for
using the cost method rather than the equity method, and no consolidated
reporting is required.
However, this option is not available under IFRS for SME. For example, Section
10 provides only a single exemption for subsidiaries and parents that are
themselves subsidiaries of another enterprise — and that latter enterprise does
prepare consolidated financial statements. On the other hand, Section 10 does not
specify how the accounting is to be handled — it focuses on the reporting.
Accordingly, the question of what is to happen to differential reporting provisions
that will not be carried over to the IFRS for SME standard needs to be answered.
For what it’s worth, it is my opinion that these options should not be continued.
This statement is supported by data from CGA-Canada’s respondents to survey of
IFRS for SME draft. Almost all respondents criticized the current Canadian
model, complaining that sometimes the disclosure requirements (e.g., when using
the tax payable method rather than providing for future tax assets and/or
liabilities) was more complex than following Section 3465 in its entirety. The
consensus was that the Canadian implementation of differential reporting was not
doing what it was intended to do.
The IASB SME project
A number of issues remain:
ƒ Given that the AcSB intends to assess
the impact of IFRS-based reporting by
publicly accountable enterprises, has
consideration been given to performing a
similar assessment for those nonpublicly accountable enterprises using
IFRS for SME?
One of the key issues relating to the move to IFRS for publicly accountable
enterprises is the notion that the entire process will be monitored and evaluated
after a period of time. The AcSB has acknowledged the learning curve that will
be required during the transition to IFRSs and further recognizes the need to
avoid standards overload.
As mentioned earlier, the AcSB has held a number of round table discussions
regarding the move to IFRS. One suggestion that appears to have support is the
idea that a sort of post-implementation audit will take place to ensure that the
move to IFRS has not negatively impacted Canadian companies’ ability to
remain competitive, nor has it increased compliance costs.
The question then that comes to mind is reasonable — are there plans to perform
a similar exercise with respect to the accounting and reporting requirements that
will be mandated for non-publicly accountable enterprises once IFRS for SME is
adopted?
The IASB SME project
A number of issues remain:
ƒ Given that the majority of Canadian nonpublicly accountable enterprises would
be considered micro enterprises, has a
cost/benefit assessment been performed
in order to determine whether there
should be a bottom threshold?
Perhaps the most critical issue yet to be resolved relates to the nature of Canadian
SME organizations. It is particularly critical given that the majority of Canadian
non-publicly accountable enterprises would be considered micro enterprises.
A December 2006 study published by the International Federation of
Accountants Small and Medium Practices Committee concluded that very little
research had been conducted looking specifically at micro-entities as these
tended to be subsumed in the term SME. Furthermore much of the published
literature was restricted to studies conducted in developed countries and did not
reflect the very different environment in which micro-entities operate in
developing, emerging or transitional economies.
The study goes on to question whether IFRS for SMEs is likely to meet the needs
of users of financial reports of micro-entities. In its development of the IFRS for
SME, it is unrealistic to assume the IASB has been unaware of this question;
however, there is no data available to address the point — will IFRS for SMEs
meet the needs of users of financial reports of micro-entities? Perhaps a
cost/benefit assessment should be performed in order to determine whether there
should be a bottom threshold?
Such action would recognize that like publicly accountable enterprises, nonpublicly accountable enterprises are not monolithic and in fact there is
considerable heterogeneity. Moreover, as noted in the IFAC study, very few
countries base definitions of different types of entities only on the criterion of
public accountability.
The IASB SME project
A number of issues remain:
ƒ Alternatively, has consideration been
given to the New Zealand Financial
Reporting Act of 1993 whereby
enterprises that meet very specific
criteria are effectively exempted from
compliance with GAAP?
Alternatively, has consideration been given to following the approach of
Australia and New Zealand (especially the latter) where companies are tiered,
with different expectations depending on which tier one falls into? For instance,
New Zealand exempts enterprises that meet very specific criteria from
compliance with GAAP. Given that the prime users of these enterprises’ financial
statements are tax authorities and a very limited ownership group, it can be
suggested that the cost of compliance exceeds the benefits of meeting GAAP.
Similarly, Australia has two sets of requirements. The Corporations Act defines
small companies in terms of size criteria; small companies need not prepare
financial statements unless a foreign company controls them; at least 5% of
shareholders require the statements, or the statements are required by the
Australian Securities and Exchange Commission.
Australian accounting standards then differentiate between reporting and nonreporting entities. Three criteria are used to determine the existence of dependent
users. If no dependent users exist, then the entity must either follow ASIC
reporting requirements or, if not relevant, it need not follow GAAP.
Inasmuch as the size and economies of Canada and Australia are similar, has any
consideration been given, or rather, should consideration be given, to such a
regime in Canada, especially as the majority of SMEs that would apply the IFRS
for SME would be deemed micro enterprises? Focusing on dependency would
avoid the insoluble issue of a size test.
The IASB SME project
To summarize:
ƒ Overall support for the IFRS for SME
standard is high.
ƒ With one exception, the remaining issues
relate to transition and education — both
of users and preparers.
ƒ The question of whether IFRS for SME
standards are appropriate for micro
enterprises requires further study.
Overall support for the IFRS for SME standard is high.
With one exception, the remaining issues relate to transition and education —
both of users and preparers.
The question of whether IFRS for SME standards are appropriate for micro
enterprises requires further study.
Thank you for your time and attention.
Acknowledgements
The preceding presentation reflects collective views of the participants of four meetings
(one meeting each conducted by CGA-Alberta, CGA-Ontario, CGA-B.C., and
AcSB/CICA), and views of Mr. Dany Girard (Past-Chair, CGA-Canada), Mr. Stephen
Spector (Spector Research Ltd.), Mr. Rock Lefebvre (Vice-President, Research and
Standards, CGA-Canada) and Mr. Amar Goomar (Senior Research and Standards
Analyst, CGA-Canada).