In July 2009, the IASB published the accounting standard IFRS for SMEs. As reported in the August edition of XYZ Financial Reporter, there has been considerable debate as to the benefits of implementation of this standard in an Australian context.

At the September 2009 meeting of the AASB, a draft consultative paper that had been prepared jointly by the AASB, FRC and Commonwealth Treasury was tabled on a proposed reduced disclosure regime for non-publicly accountable private sector entities.

In the paper, there are a number of concerns listed about adopting the IASB’s IFRS for SMEs standard in Australia for a number reasons including:

• there would be a loss of comparability across all types of entities’ general purpose financial statements, within Australia
• some of the policy options that have been removed would be the favoured accounting policies for many entities
• it would deprive entities from applying improvements and simplifications as they become available at the full IFRS level because the IASB has stated that it will only update the IFRS for SMEs once there have been two years of broad adoption and, thereafter, every three years
• simplifications in some accounting policy options would force subsidiaries to adjust accounting policies for consolidation with parents that apply full IFRSs;
• possible benefits that might result from comparability with overseas entities applying the IFRS for SMEs would depend on how widely adopted it becomes, which is unknown at this stage
• adoption of the IFRS for SMEs may be seen as a retrograde step in a country that has already adopted full IFRS recognition and measurement accounting policy options
• in the event that an entity moves to, or from, full IFRS, there are costs involved in migrating from one tier of reporting to another.

The paper explores various alternative models for reducing disclosure requirements but concludes that the most promising model for non-publicly accountable private sector entities is to retain the full IFRS recognition and measurement requirements whilst significantly reducing the disclosures corresponding to the requirements.

All publicly accountable entities would continue to apply full IFRS and prepare financial statements in accordance with all accounting standards with the accompanying disclosures. The definition of publicly accountable is still to be confirmed for Australian application but is expected to be similar to the definition in the IFRS for SMEs standard supplemented by examples of publicly accountable entities in the Australian context.

Under the IFRS for SMEs standard, publicly accountable entities are those that meet either of the following conditions:

1. have their debt or equity instruments traded in a public market or who are in the process of issuing such instruments for trading in a public market; or
2. hold assets in a fiduciary capacity for a broad group of outsiders as one of their primary businesses (e.g. banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks).

For entities that are not publicly accountable in the for-profit private sector, there may be two options. The first option is to apply full IFRS. The alternative is to prepare financial statements prepared in accordance with the recognition and measurement requirements of all accounting standards but with reduced disclosures. The disclosures under this regime would be less than those under full IFRS and are likely to be determined by applying principles similar to those outlined in the IASB’s IFRS for SMEs standard.

The reduced-disclosure regime (suitably modified) would also be available as a choice for entities in the not-for-profit private sector and for certain entities in the public sector.

Under the new regime, there may be an increase in the disclosures required by entities that are currently preparing a special purpose financial report and applying the minimum disclosure requirements to satisfy the reporting requirements of Part 2M.3 of the Corporations Act 2001 (e.g. unlisted public companies, large private companies).

The consultative paper is expected to be published for public comment before the end of the year with the intention that disclosure requirements can be reduced for the June 2010 reporting season if possible.