Comment letter on ED/2013/9 Proposed amendments to the International Financial Reporting Standard for Small and Medium-sized Entities

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1 Tel +44 (0) Salisbury Square Fax +44 (0) London EC4Y 8BB mark.vaessen@kpmgifrg.com United Kingdom Mr. Hans Hoogervorst International Accounting Standards Board 1 st Floor 30 Cannon Street London EC4M 6XH Our ref Contact MV/288 Mark Vaessen Dear Mr Hoogervorst Comment letter on ED/2013/9 Proposed amendments to the International Financial Reporting We appreciate the opportunity to comment on the International Accounting Standards Board s (IASB) ED/2013/9 Proposed amendments to the International Financial Reporting Standard for Small and Medium-sized Entities (the ED). We have consulted with, and this letter represents the views of, the KPMG network. Overall, we agree that the IFRS for SMEs (the Standard) should be reviewed on a regular basis to consider whether and to what extent it needs to be amended to address specific issues or to be brought up to date with the latest developments in full IFRS, and we believe that the IASB s comprehensive review process offers a good basis for doing so. However, it can be further improved to ensure that the Standard provides a stable platform and to help SMEs cope with changes in a cost-effective manner. To improve the process and increase its efficiency, we recommend that the Board develop criteria for assessing the following: whether the Standard needs to be updated for changes in full IFRS, considering different timing for updates depending on the nature of changes e.g. some fundamental flaws could be fixed quickly, whereas the decision about whether to update for more complex requirements could be made after the respective full IFRSs have been applied for a few years (e.g. this could be timed together with or carried out as part of the postimplementation review); whether an issue needs to be addressed urgently outside the three-year cycle; and whether the Standard needs to be updated at all for minor amendments arising from annual improvements. We also appreciate that, before developing the ED, the Board sought the views of interested parties through the Request for Information Comprehensive Review of the IFRS for SMEs, a UK company limited by guarantee, is a member of KPMG International Cooperative, a Swiss entity. Registered in England No Registered office: 8 Salisbury Square, London, EC4Y 8BB

2 (RfI). However, we are disappointed that the IASB did not take on board the following recommendations made by constituents: introduce an option to use the revaluation model for property, plant and equipment; remove the option to recognise actuarial gains and losses in profit or loss; and require share subscriptions and similar receivables to be recognised as assets if they meet the definition of a financial asset. Notwithstanding the above, overall we support the individual proposals in the ED, including the proposal to bring the accounting for income taxes by SMEs back in line with IAS 12 Income Taxes and the proposal not to update the Standard for changes to full IFRS introduced by IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 13 Fair Value Measurement, subject to our comments and suggestions included in Appendix 1. Please contact Mark Vaessen +44 (0) or Irina Ipatova +44 (0) if you wish to discuss any of the issues raised in this letter. Yours sincerely MV/288 2

3 Appendix 1 KPMG s responses to specific questions posed by the Board Question 1: Definition of fiduciary capacity The IASB has received feedback that the meaning of fiduciary capacity in the definition of public accountability (see paragraph 1.3(b) of the IFRS for SMEs) is unclear as it is a term with different implications across jurisdictions. However, respondents generally did not suggest alternative ways of describing public accountability or indicate what guidance would help to clarify the meaning of fiduciary capacity. Based on the outreach activities to date, the IASB has determined that the use of this term does not appear to create significant uncertainty or diversity in practice. (a) (b) Are you aware of circumstances where the use of the term fiduciary capacity has created uncertainty or diversity in practice? If so, please provide details. Does the term fiduciary capacity need to be clarified or replaced? Why or why not? If you think it needs to be clarified or replaced, what changes do you propose and why? We appreciate that the Board acknowledges in paragraph BC25 of the basis for conclusions to the ED that not-for-profit (NFP) entities may not be automatically publicly accountable simply because they solicit and accept contributions. However, we are disappointed that the Board did not follow the recommendation of constituents made in response to the RfI to clarify this in the Standard itself. We disagree that paragraph 1.4 of the Standard is sufficiently clear that soliciting and accepting contributions does not automatically make NFP entities publicly accountable, because that paragraph applies to entities that hold assets in a fiduciary capacity for reasons incidental to a primary business [emphasis added]. Although this may be true for some charitable organisations, it may not be incidental to NFP entities, in general, to accept contributions and use them in a manner consistent with their objectives. Therefore, we recommend clarifying in the Standard itself rather than in the basis for conclusions that NFP entities are eligible to use the IFRS for SMEs. Question 2: Accounting for income tax The proposal to align the main principles of Section 29 Income Tax with IAS 12 Income Taxes for the recognition and measurement of deferred tax (see amendment number 44 in the list of proposed amendments at the beginning of this Exposure Draft) is the most significant change being proposed to the IFRS for SMEs. When the IFRS for SMEs was issued in 2009, Section 29 was based on the IASB s Exposure Draft Income Tax (the 2009 ED ), which was issued in March However, the 2009 ED was never finalised by the IASB. Consequently, the IASB has concluded that it is better to base Section 29 on IAS 12. The IASB proposes to align the recognition and measurement principles MV/288 3

4 in Section 29 with IAS 12 (see paragraphs BC55 BC60) whilst retaining some of the presentation and disclosure simplifications from the original version of Section 29. The IASB continues to support its reasoning for not permitting the taxes payable approach as set out in paragraph BC145 of the IFRS for SMEs that was issued in However, while the IASB believes that the principle of recognising deferred tax assets and liabilities is appropriate for SMEs, it would like feedback on whether Section 29 (revised) can currently be applied (operationalised) by SMEs, or whether further simplifications or guidance should be considered. A clean version of Section 29 (revised) with the proposed changes to Section 29 already incorporated is set out in the appendix at the end of this Exposure Draft. Are the proposed changes to Section 29 appropriate for SMEs and users of their financial statements? If not, what modifications, for example further simplifications or additional guidance, do you propose and why? In general, we support the proposal to bring the accounting for income taxes by SMEs back in line with IAS 12 while providing presentation and disclosure simplifications. We understand that other differences from IAS 12 are intended to keep the Standard simple and concise but are not meant to result in different accounting for income taxes by SMEs. However, we believe that the following differences from IAS 12 may have unintended consequences and therefore need to be addressed. Under the proposals in the ED, investment tax credits would be in the scope of Section 29, unlike under IAS 12. We note that investment tax credits may vary in nature i.e. some of them are akin to a government grant and some of them are akin to a tax allowance. We believe that accounting for investment tax credits by analogy to government grants or income taxes depending on specific facts and circumstances would provide users of the financial statements of SMEs with more relevant information. Therefore, we recommend scoping investment tax credits out of Section 29, consistent with IAS 12. This would not introduce an accounting policy choice, but rather would allow SMEs to follow an approach that best reflects the economic substance of the investment tax credit. As drafted, Section 29 includes some but not all of the criteria contained in paragraph 36 of IAS 12 for the assessment of whether a deferred tax asset can be recognised for unused tax losses and tax credits. Some could argue that not bringing into the IFRS for SMEs the criterion requiring entities to consider identifiable causes for tax losses and their likelihood of recurrence heightens the threshold for recognition of a deferred tax asset and makes the Standard more restrictive. Therefore, we recommend including this criterion in the IFRS for SMEs. Although we generally agree that not bringing all of the detailed guidance from IAS 12 into the IFRS for SMEs would keep the Standard simple, we believe that the guidance in paragraphs 68A 68C of IAS 12 specifying that the excess of the tax deduction over related share-based payment remuneration expense is recognised in equity should be included in the MV/288 4

5 IFRS for SMEs. This would prevent diversity in practice because some SMEs could potentially recognise the excess in profit or loss or OCI. Under the proposals in the ED, the glossary of terms would define substantively enacted. The proposed definition could be read as requiring an entity to consider its past experience with the enactment process in determining whether a tax rate or tax law is substantively enacted e.g. whether a president of a country has previously exercised his power to veto a decision made by the government. We note that IAS 12 does not include such guidance and we recommend that the Board remove the reference to past experience from the definition of substantively enacted in the IFRS for SMEs because it may impact the interpretation and application of IAS 12. Lastly, we recommend including the list of simplifications and other differences from IAS 12 in the basis for conclusions to the Standard for clarity. Question 3: Other proposed amendments to the IFRS for SMEs The IASB proposes to make a number of other amendments to the IFRS for SMEs. The proposed amendments are listed and numbered 1 43 and in the list of proposed amendments. Most of those amendments are minor and/or clarify existing requirements. (a) (b) Are there any amendments that you do not agree with or have comments on? Do any of the amendments require additional guidance or disclosure requirements to be added to the IFRS for SMEs? If so, which ones and what are your suggestions? If you disagree with an amendment please state any alternatives you propose and give your reasoning. We generally agree with the proposed clarifications, exemptions and disclosure simplifications. We also support incorporating guidance developed as Q&As into the Standard and believe that, when included in the Standard, such guidance should be consistent with that published as Q&As i.e. it should not result in changes in interpretation or application of the Standard. We note that, under the proposals in the ED, the guidance on the undue cost or effort exemption includes the additional words incremental in relation to excessive cost and additional in relation to excessive effort, which could be read as implying that the scope of the exemption has been narrowed compared with the original Q&A. In addition, we have the following comments on the proposals. Accounting for contingent consideration is scoped out of Section 12 Other Financial Instruments and Section 22 Liabilities and Equity but at the same time it is not covered in Section 19 Business Combinations and Goodwill. It is not clear how SMEs should account for contingent consideration in a business combination. We continue to believe that fair MV/288 5

6 value accounting for contingent consideration may be complex for SMEs and that simplifications by the Board in this area would be appropriate. The Board may consider, for example, bringing contingent consideration within the scope of Section 21 Provisions and Contingencies. We generally agree with the proposal not to update the Standard for changes to full IFRS introduced by IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements. However, we urge the Board to consider whether the Standard should focus on how to prepare consolidated financial statements rather than when and when not to prepare them. SMEs do not have public accountability and national, regional or local bodies that oversee financial reporting requirements may provide a relief from the requirement to prepare consolidated financial statements in addition to that contained in paragraph 3 of Section 9 Consolidated and Separate Financial Statements. We note that national bodies overseeing financial reporting may be more appropriately placed to determine when and what type of financial statements should be prepared by entities in their jurisdiction and if they provide a relief from the requirement to prepare consolidated financial statements, then the Standard should not override it. We support the proposal to clarify how to prepare consolidated financial statements if group entities have different reporting dates and generally agree with the proposed amendment to paragraph 16 of Section 9. However, similar to the full IFRS, we recommend specifying the threshold for the difference between the year end of the parent and the subsidiary. This would help to ensure that the consolidated financial statements of a SME provide relevant information to its users. We also agree with the proposal not to update the Standard for changes to full IFRS introduced by IFRS 13 Fair Value Measurement. However, we believe that the existing guidance on fair value measurement should be made more prominent and easily accessible, and therefore suggest bringing together in a separate section all of the guidance on fair value measurement that is dispersed throughout the Standard. Lastly, we recommend that before finalising the amendments, the glossary of terms is updated for all changes made to the terms throughout the Standard e.g. the definitions of public accountability and small and medium-sized entities should be updated in the glossary. Question 4: Additional issues In June 2012 the IASB issued a Request for Information (RfI) seeking public comment on whether there is a need to make any amendments to the IFRS for SMEs (see paragraphs BC2 BC15). The RfI noted a number of specific issues that had been previously identified and asked respondents whether the issues warranted changes to the IFRS for SMEs. Additionally, the RfI asked respondents to identify any additional issues that needed to be addressed during the review process. Any issues so identified were discussed by the IASB during its deliberations. MV/288 6

7 Do respondents have any further issues that are not addressed by the 57 amendments in the list of proposed amendments that they think the IASB should consider during this comprehensive review of the IFRS for SMEs? Please state these issues, if any, and give your reasoning. We appreciate that, before developing the ED, the Board sought the views of interested parties through the Request for Information Comprehensive Review of the IFRS for SMEs (RfI). However, we are disappointed that the IASB did not take on board the following recommendations made by constituents. Revaluation model for property, plant and equipment: We are disappointed that regardless of overwhelming support for the revaluation option from constituents and their feedback that it would not add significant complexity to the Standard (as noted in paragraphs BC40 and BC42 of the basis for conclusions to the ED) the Board fails to find the arguments sufficiently convincing. Without reiterating all of the arguments in favour of introducing the option to account for property, plant and equipment using the revaluation model, we note that the objective of the financial statements of SMEs is to provide information that is useful for economic decision-making by a broad range of users, and that if those users expressed a genuine need for the revalued amounts of a SME s property, plant and equipment, then the Standard should cater for it. We do not agree with the Board s argument in paragraph BC43 of the basis for conclusions to the ED that additional disclosure of the revalued amounts would help to meet users needs. Option to recognise actuarial gains and losses in profit or loss: The Board seems to be inconsistent in its approach to accounting policy options in the IFRS for SMEs. Although it is refusing to introduce the revaluation option for property, plant and equipment, it does not propose removing the option to recognise actuarial gains and losses in profit or loss. We believe that the removal of this option would further simplify the Standard and improve comparability between SMEs. In addition, this would bring the Standard closer to the revised IAS 19 Employee Benefits. Share subscription receivables: We disagree with the Board s arguments in paragraph BC66 of the basis for conclusions to the ED for not reconsidering the accounting for share subscription receivables. We do not believe that the current guidance in paragraph 7(a) of Section 22 Liabilities and Equity makes the requirements easier to apply. We believe that share subscription receivables and similar receivables should be recognised as assets if they meet the definition of (financial) assets. Question 5: Transition provisions The IASB does not expect retrospective application of any of the proposed amendments to be significantly burdensome for SMEs and has therefore proposed that the amendments to the IFRS for SMEs in Sections 2 34 are applied retrospectively. MV/288 7

8 Do you agree with the proposed transition provisions for the amendments to the IFRS for SMEs? Why or why not? If not, what alternative do you propose? We generally agree that the proposed amendments should be applied retrospectively if this does not create challenges for SMEs. However, if an amendment to the IFRS for SMEs was triggered by a similar amendment to the full IFRS and that amendment was applied prospectively, then we believe that such amendment should be applied prospectively by SMEs as well. In addition, it would be significantly less burdensome for SMEs to apply amendments impacting the accounting for specific transactions e.g. business combinations prospectively because information for applying such amendments retrospectively may not always be available or may be available only with undue cost or effort. Question 6: Effective date The IASB does not think that any of the proposed amendments to the IFRS for SMEs will result in significant changes in practice for SMEs or have a significant impact on their financial statements. It has therefore proposed that the effective date of the amendments to the IFRS for SMEs should be one year after the final amendments are issued. The IASB also proposes that early adoption of the amendments should be permitted. Do you agree with the proposed effective date and the proposal to permit early adoption? Why or why not? If not, what alternative do you propose? We agree with the proposed effective date and the proposal to permit early adoption. Question 7: Future review of the IFRS for SMEs When the IFRS for SMEs was issued in 2009 the IASB stated that after the initial comprehensive review, the IASB expects to propose amendments to the IFRS for SMEs by publishing an omnibus Exposure Draft approximately once every three years. The IASB further stated that it intended this three-year cycle to be a tentative plan, not a firm commitment. It also noted that, on occasion, it may identify a matter for which an amendment to the IFRS for SMEs may need to be considered earlier than in the normal three-year cycle; for example to address an urgent issue. During the comprehensive review, the IASB has received feedback that amendments to the IFRS for SMEs once every three years (three-year cycle) may be too frequent and that a five-year cycle, with the ability for an urgent issue to be addressed earlier, may be more appropriate. Do you agree with the current tentative three-year cycle for maintaining the IFRS for SMEs, with the possibility for urgent issues to be addressed more frequently? Why or why not? If not, how should this process be modified? MV/288 8

9 We generally agree that the Standard should be reviewed on a regular basis and believe that the current three-year cycle for maintaining the Standard provides a good basis for that. However, the process itself could be further improved to ensure that the Standard serves the needs of the users of SMEs financial statements while retaining a stable platform and allowing SMEs to cope with changes in a cost-effective manner. We recommend that the Board develop specific criteria that would guide it in deciding whether and to what extent the IFRS for SMEs needs to be amended to address specific issues or to be brought up to date with the latest developments in full IFRS. In particular: whether the Standard needs to be updated for changes in full IFRS, considering different timing for updates depending on the nature of changes e.g. some fundamental flaws could be fixed quickly, whereas the decision about whether to update for more complex requirements could be made after the respective full IFRSs have been applied for a few years (e.g. this could be timed together with or carried out as part of the postimplementation review); whether an issue needs to be addressed urgently outside the three-year cycle; and whether the Standard needs to be updated at all for minor amendments arising from annual improvements. In addition, we recommend that the Board clarify the objective and role of Q&As developed by the SMEIG. We note that paragraph 24 of the Terms of Reference and Operating Procedures for the SMEIG states that Q&As are non-mandatory guidance and are developed as education material, whereas paragraph 36A mentions that all existing Q&As would be incorporated in the IFRS for SMEs (which presumably would make them mandatory) or educational material during each periodic review. If the role of Q&As is to provide guidance that is to become mandatory when incorporated in the standard, then this needs to be explicitly stated so that constituents are aware upfront. If the role of Q&As is to provide non-mandatory guidance, then the Board should make it clear as well and consider changing the format to avoid giving the impression that they are interpretations of selected requirements. Question 8: Any other comments Do you have any other comments on the proposals? No other comments. MV/288 9