The Financial Reporting Council (FRC) has criticised IASB's proposed changes to IFRS for SMEs, saying the scope is too narrow and the focus should be a more comprehensive standard developed that is fit for purpose for a broader range of SME businesses.
In its response to the Exposure Draft ED/2013/9 the FRC said while it does not disagree with the amendments themselves, it is concerned that the standard is being designed with a focus only on the very smallest SME entities, which it says risks 'leaving a significant gap in the standard setting framework'.
The FRC takes issue with what it sees as a discrepancy between the stated scope of the IFRS for SMEs and IASB's interpretation of this in the standard itself. The stated scope is 'entities that do not have public accountability and publish general purpose financial statements for external user'. However, the FRC says the IASB proposals focus on 'entities that do not have public accountability and that typically have less complex transactions, limited resources to apply full IFRSs and that operate in circumstances in which comparability with their listed peers is not an important consideration.'
The FRC warns that as a result the IASB may be limiting the ability of jurisdictions to adopt the IFRS for SMEs, forcing them to either maintain a set of local GAAP not based on IFRS or to take the IFRS for SMEs and adapt it to suit their needs.
The UK regulator wants the IASB to reconsider whether its interpretation of the scope is appropriate for an international accounting standard that could see some large and complex entities fall within its scope, if applied in economies with more advanced financial reporting and regulatory frameworks, such as the UK. Alternatively, it says IASB should consider amending the stated scope of the IFRS for SMEs to reduce potential confusion.
The FRC also does not agree that the list of principles developed by the IASB for dealing with new and revised IFRSs is appropriate, or that the principles are clear enough to indicate to constituents when amendments to the IFRS for SMEs could be expected as a result of changes to full IFRSs. For example, it is unclear whether amendments made to the hedge accounting requirements of IFRS 9 Financial Instruments will result in amendments to the IFRS for SMEs.
In its letter, the FRC acknowledges that the IASB has drawn on a significant number of drafting improvements that the FRC identified when developing FRS 102. The UK regulator highlights some additional technical issues which have arisen since, in the areas of classification of financial instruments and hedge accounting, which it says the IASB should now consider.
However, the FRC also notes that IASB's SME Implementation Group 'made several sensible recommendations that we believe would have improved the quality of the standard, but these have not been taken forward'.
The FRC has asked for comments on its draft response by 24 January 2014. Responses can be made HERE
