Project Director Peter Godsall reports on the publication by the IASB of an Exposure Draft of an IFRS for Small and Medium-sized Entities (SMEs) and outlines the ASB’s own consulation and next steps.

In February the International Accounting Standards Board (IASB) published an Exposure Draft (ED) of its proposed International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). The IASB is seeking comments to 11 questions to be submitted no later than 1 October 2007.

The IASB is developing the IFRS for SMEs to:

• provide high quality, understandable and enforceable accounting standards suitable for SMEs globally;
• reduce the financial reporting burden on SMEs that want global standards; and
• meet the needs of users of SME financial statements.

The IASB uses the term ‘SMEs’, but in fact defines them as entities that (a) do not have public accountability and (b) publish general purpose financial statements for external users.

The ED has been eagerly awaited and is already provoking a good deal of reaction.

Given the importance of the document, the ASB is issuing in April 2007 the ED of the IFRS for SMEs in full for consultation together with an accompanying ASB invitation to comment (ITC) on the ED and the potential implications for UK and Irish entities. The ASB is publishing this ITC for two reasons: a) to help inform its response to the IASB on the SME document; and b) to receive further feedback from constituents as to how the SME document might fit into the Board’s strategy for convergence of UK standards with IFRS (last reported on in Inside Track 49).

To help constituents, the ITC provides an analysis of the significant differences between UK GAAP and the proposed IFRS for SMEs and an analysis of the significant differences between the ASB’s existing Financial Reporting Standard for Smaller Entities(FRSSE) and the proposed IFRS for SMEs it also makes reference to the significant differences between full IFRS and the IFRS for SMEs - as published in the Basis of Conclusions of the IASB’s ED.

The ASB is of the opinion that there are three main implications that need to be considered by constituents. Firstly, constituents need to consider what other role the IFRS for SMEs may play within the ASB’s convergence project i.e. is it suitable for a midtier of companies above the current range for the FRSSE but below those currently required to apply full IFRS? Secondly, is the IFRS for SMEs an appropriate replacement for the FRSSE? Finally, if the IFRS for SMEs is to be considered a suitable basis for middle tier companies, or as a replacement for the FRSSE, what changes should to be made? The ASB is inviting constituents’ views by 31 July 2007. The document is available on the website at www.frc.org.uk/asb.

In summary, the ASB’s previous tentative decision on UK convergence was to support a two-tier approach, with the lower level potentially (and ideally) being based on the outcome of the IASB’s IFRS for SMEs project. Consequently, the ASB has decided to defer any final decisions on convergence until feedback from the above ITC has been analysed and discussed by the ASB; at which time a judgement can be made as to whether or not it is suitable for the needs of the UK and Republic of Ireland.

As part of the consultation process, the ASB is participating in a number of public roundtable meetings to discuss the IASB’s proposals and their implications. The first of these meetings, organised with the Institute of Chartered Accountants of Scotland (ICAS), took place in March in Edinburgh, and further events are planned in London in May (at the Institute of Chartered Accountants in England and Wales) and in Dublin in June (at the Institute of Chartered Accountants in Ireland).