Last month, we looked at IFRS for SMEs as very much the younger sibling of the full IFRS accounting standards, receiving an update many years after new standards have been released. The standard-setter, the International Accounting Standards Board (IASB), has made a number of tentative decisions on the proposed changes for the update of the standard, and aims to release an exposure draft by the end of 2022.
The revenue section of IFRS for SMEs is likely to be almost completely rewritten so as to be consistent with the new terminology under IFRS 15, Revenue from Contracts with Customers. This means that the old approach of ‘have risks and rewards transferred’ will be replaced by considering the different performance obligations within a contract and whether they have been satisfied.
The proposals also cover a wider variety of topics within revenue, making this a large change. The new standard will specifically address items such as contract modifications, variable consideration, warranties, licences and principal-versus-agent considerations.
The standard is trying to cover a wide range of areas. While that means many of the topics are unlikely to be applicable to individual entities, it also means that individual entities are likely to find something in there that is relevant to them.
The introduction of the concept of incremental costs of obtaining a contract and recognising these as an asset is also likely to be new for many SMEs and is something that will need to be looked at by preparers.
As with the implementation of IFRS 15, it is likely that preparers of accounts will need to take time to examine the suggested changes to IFRS for SMEs closely and not assume that revenue will simply be recognised in the same pattern as it is currently.
A slightly surprising element is that there is no proposed change to the accounting for leases
Some significant changes noted relate to consolidated financial statements. The requirement to amortise goodwill remains (possibly putting IFRS for SMEs ahead of the curve in case the IASB ever decides to reintroduce it under full IFRS Standards), as does the requirement to measure the non-controlling interest at the proportionate share of net assets.
There are some specific changes that are likely to have an impact on a number of preparers. The most significant of these is that it is now proposed to expense acquisition-related costs in relation to a subsidiary. In addition to this, contingent consideration will be measured at fair value, rather than the probability-based approach used currently.
The proposal will also include guidance on step acquisitions and step disposals, but these are likely to be less widespread than the changes noted above.
A slightly surprising element is that there is no proposed change to the accounting for leases. That means IFRS for SMEs will still diverge considerably from the full IFRS equivalent here. The implementation of the lease standard for larger businesses has often been a costly and complex process, and it is likely that the IASB has decided that the costs outweigh the benefit of smaller entities producing accounts in this way.
There are some proposals relating to financial instruments. Currently an SME can choose to apply the principles of IAS 39, Financial Instruments: Recognition and Measurement, but under the proposals, the option to do this will be removed. Other than the removal of this option, the most significant change in accounting treatment may be the requirement for entities to use an expected credit loss model for assets held under amortised cost.
A simpler but perhaps more significant proposal is that the IASB is currently taking feedback on whether to allow the capitalisation of development costs if the development criteria used by IAS 38, Intangible Assets, has been met. This could result in a number of entities recording intangible assets and amortising them, as opposed to expensing all of the costs in the year they are incurred.
Other changes under the standard will include the change in definition of fair values and the introduction of the fair value hierarchy used in IFRS 13, Fair Value Measurement. More guidance will be included on how to apply the hierarchy. The related disclosure requirements are likely to be moved to a new section that will be created in the standard.
As IFRS for SMEs has not been updated since 2015, it is not surprising that the changes appear substantial
As IFRS for SMEs has not been updated since 2015, it is perhaps not surprising that the changes appear to be substantial, particularly in relation to the newer IFRS accounting standards. Many preparers will need to slowly go through the standard and the new examples, particularly in relation to accounting for revenue.
In some cases, it feels like these proposals could lose the simplicity of the SMEs standard, particularly in relation to matters surrounding revenue. There is the risk that while the younger sibling of IFRS is receiving a delayed upgrade, SMEs may also find that things are now a little too big for them, with topics and examples that will feel irrelevant for the vast majority.
Perhaps like any frugal parent, the IASB has decided that it’s better for something to be a little too big for many SMEs at the moment. After all, like many a younger sibling, SMEs may well be able to grow into it.
AB will be running a webinar on 18 October discussing the changes to the IFRS for SMEs. Revisit these pages for more information in coming weeks.