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 Council of Securities Regulators of the Americas SME Forum Miami, 16 May 2006

2 © 2006 IASC Foundation, all rights reserved. COSRA SME Report (p.6)  Slow growth of capital markets in Latin America and Caribbean due to the “absence of key ingredients that make equity investments attractive to private investors and pension funds”: 1.Information disclosure 2.Transparency 3.Good accounting and auditing 4.Good corporate governance 5.Investor protection  1, 2, 3 are issues of direct concern to accounting standard-setters.

3 © 2006 IASC Foundation, all rights reserved. COSRA SME Report  Two edged-sword for SMEs:  Good accounting and more disclosure add to SME burdens, rather than reduce them.  Also, SMEs are often concerned about the competitive harmfulness of greater transparency.  At the same time, good accounting and disclosure give investors confidence to provide capital.  Solution: Tailor requirements for SMEs. This is what the IASB SME project is all about.

4 © 2006 IASC Foundation, all rights reserved. COSRA SME Report (p. 25)  Options for addressing SME disclosure challenges: 1.Tiered disclosure. 2.Understandable format for disclosure. 3.Investor education.  IASB is dealing with 1 and 2 in its SME project.

5 © 2006 IASC Foundation, all rights reserved. International Financial Reporting Standards (IFRSs)  Developed by IASB since  Widely used in both developed and developing countries for reporting in public capital markets.  Many regard IFRSs as burdensome for non-publicly accountable entities:  Sometimes not cost-beneficial.  Sometimes resulting information is not useful to users of SME financial statements.

6 © 2006 IASC Foundation, all rights reserved. What About Small Listed Companies?  IASB tentative view:  An entity whose securities are publicly traded has public accountability.  Investor protection.  Outside non-manager investors lack the clout to demand the information they need.  They get the “General Purpose Financial Statements” published by the entity.  Full IFRSs, not IFRS for SMEs.  But do not despair... More about this in a few minutes.

7 © 2006 IASC Foundation, all rights reserved. IASB’s Preliminary Views  IASB deliberated SME project during second half of 2003 and early 2004:  Reached some preliminary views on the approach.  Discussion Paper June  120 responses.

8 © 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 ― unlisted, not banks etc. ― that publish general purpose financial statements for external users. No quantified “size test”.

9 © 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.

10 © 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.All options in IFRSs also available to SMEs. 7.Clear disclosure that SME standards are being followed, rather than full IFRSs – Yes.

11 © 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]

12 © 2006 IASC Foundation, all rights reserved. Recognition and Measurement Questionnaire  1 April 2005:  Brief recognition and measurement questionnaire  101 responses received.  28 June 2005:  Discussed responses with IASB’s Advisory Council.  June 2005:  IASB SME Working Group met.  Discussed responses.  Many recommendations to Board.

13 © 2006 IASC Foundation, all rights reserved. Recognition and Measurement Questionnaire  26 September 2005:  Discussion with World Standard Setters from over 40 countries.  October 2005:  Round-table discussions of possible recognition and measurement simplifications.  43 groups participated.

14 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  January 2006:  IASB staff presented a draft ED to the Board. Preliminary discussion.  January 2006:  Working Group discussed draft ED two days. 84 recommendations to Board.  February and March 2006:  ED discussed by Board in detail.

15 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  Comments about the draft ED:  Organised by topic.  40 sections.  Most “black letter” paragraphs from IFRSs are included.  Except where there is cross reference back to an IFRS.

16 © 2006 IASC Foundation, all rights reserved. Draft Exposure Draft  Comments about the draft ED:  About 250 pages.  Full IFRSs now 2,400 pages.  ED developed by considering needs of a company with about 50 employees.  Which companies are required or permitted to use is up to each individual jurisdiction.

17 © 2006 IASC Foundation, all rights reserved. SME Concerns: Tax Reporting and Distributable Income  IFRSs for SMEs – general purpose financial statements (GPFS) for:  Outside investors, banks, vendors, customers, credit rating agencies.  Global standards cannot directly deal with tax reporting or measuring distributable income.  These are based on local law.  Can easily be addressed by reconciliations at national level.

18 © 2006 IASC Foundation, all rights reserved. SME Concerns: SME Managers as Users of Financial Statements  SMEs say managers are the primary users of their financial statements.  That may be true, but the objective of GPFS is to provide information to outside investors, banks, vendors, customers, credit rating agencies.  Managers can get whatever information they need to run their business.  GPFS may serve managers’ needs as well.

19 © 2006 IASC Foundation, all rights reserved. SME Concerns: Fair Value  Fair value (FV) for non-financial assets:  Full IFRSs do not require FV for any non-financial assets except agriculture.  FV is only an option for PP&E, intangibles, investment property.  Not allowed for most inventory.  SME agribusiness say they know FV and manage using FV.  Always is a reliability exception.  FV has long been used by SMEs for impairments and write-downs.

20 © 2006 IASC Foundation, all rights reserved. SME Concerns: Fair Value  Financial assets – IFRS for SMEs:  Two categories of financial assets: (1) Cost and (2) FV through P&L.  FV through P&L only if:  a. Observable market price and either (1) intend to sell or (2) liquid market.  b. Plus all derivatives.  All other financial assets at cost.  If impairment is indicated, must calculate recoverable amount.  Share-based payment:  SME can use intrinsic value.

21 © 2006 IASC Foundation, all rights reserved. SME Concerns: References to Full IFRSs in the IFRS for SMEs  Cross-references to full IFRSs:  Mandatory fallback:  Big dilemma for IASB.  Pervasive principles added, to minimise need for fallback.  Realistically, IASB cannot say “do whatever you want” if an IFRS addresses the issue.

22 © 2006 IASC Foundation, all rights reserved. SME Concerns: References to Full IFRSs in the IFRS for SMEs  Cross-references to full IFRSs:  Transactions unusual for SMEs:  Omit from IFRS for SMEs, but refer back to IFRS.  Such as defined benefit pension.  Accounting policy options:  Include simple option in IFRS for SMEs. Allow complex option by referring back to IFRS. Examples: –Fair Value for investment property. –Revaluation of PP&E and intangibles. –Capitalisation of borrowing cost.

23 © 2006 IASC Foundation, all rights reserved. SME Concerns: Options  Accounting policy options:  Each jurisdiction may choose to eliminate options.  Therefore reval option for PP&E and intangibles can be deleted from national adoption of IFRS for SMEs.  Likewise for FV for investment property.  Likewise equity method and proportionate consolidation.  SME financial statements would still conform to IFRS for SMEs.

24 © 2006 IASC Foundation, all rights reserved. SME Concerns: “Maintenance”  Worried about frequent updating of IFRS for SMEs:  Board has not yet decided frequency.  We recognise need for stability, and limited resources of SMEs.  Staff proposal is every 2 or 3 years.  Not every new or revised IFRS or Interpretation will trigger a revision of IFRS for SMEs.  Occasionally a new IFRS may require quicker updating.

25 © 2006 IASC Foundation, all rights reserved. What About Small Listed Companies?  IASB tentative view is that the IFRS for SMEs is not appropriate for any listed companies large or small:  Full IFRSs are designed for public capital markets.  Reporting to non-management investors.  Investor protection.  The solution: NEXT SLIDE...

26 © 2006 IASC Foundation, all rights reserved. What About Small Listed Companies?  A jurisdiction could adopt the IFRS for SMEs in its entirety as national GAAP for SMEs including small listed companies.  Auditor’s report and basis of presentation note would refer to conformity with “Country X financial reporting standards for SMEs”, not to “IFRS for SMEs”.  The note could even say that “Country X financial reporting standards for SMEs are identical to the IFRS for SMEs developed by the IASB”.

27 © 2006 IASC Foundation, all rights reserved. Next Steps Please understand that these dates are tentative:  Exposure Draft – by 30 June 2006 (maybe later in summer).  Field tests? Visits to SMEs?  Final Standard – by 30 June  Effective – 2008.

28 © 2006 IASC Foundation, all rights reserved. Thank you. There will be time for questions and comments after Nelson, Carlos, and Franco make their presentations.