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IASB's SME Implementation Group Responds to Small/Midsized Entity Concerns

  • By Salome J. Tinker, CPA
  • Published: 4/22/2011


The IASB has created the SME Implementation Group (SMEIG) that specifically addresses small midsized entity concerns.  The FASB also is considering forming a comparable group for U.S. small, midsized and nonpublic companies. Thus, it is important to pay attention to the standard setting made under this group should FASB successfully decide that differential accounting treatment is needed for the small, midsized and nonpublic companies. These decisions will serve as building blocks for U.S. standard setting.   


The SMEIG issued the following Q&A document (PDF) on IFRS for small midsized entities:  


Consolidation of a sub into the parent company - In some jurisdictions parent entities are required, or choose, to prepare separate financial statements in addition to consolidated financial statements. Separate financial statements are sometimes presented together with the consolidated financial statements and sometimes as a separate document. If a group is required to present consolidated financial statements in accordance with full IFRSs, can the parent entity present its separate financial statements in accordance with the IFRS for SMEs  


IASB Response:  If a parent entity itself does not have public accountability, it may present its separate financial statements in accordance with the IFRS for SMEs.  An entity is eligible to use the IFRS for SMEs if it does not have public accountability (paragraph 1.2). A parent entity assesses its eligibility to use the IFRS for SMEs on the basis of its own public accountability without considering whether other group entities have, or the group as a whole has, public accountability.  Comments are due by April 4th 


Captive insurance subsidiaries - A parent company that is not otherwise publicly accountable sets up a captive insurance subsidiary. The parent prepares consolidated financial statements that include the captive insurance subsidiary.  Does the captive insurance subsidiary cause the group to be publicly accountable and hence not permitted to produce consolidated financial statements in accordance with the IFRS for SMEs? Is the captive insurance company itself a publicly accountable entity and hence not permitted to produce individual financial statements in accordance with the IFRS for SMEs  

IASB Response:  A captive insurance company is an insurance company that is set up with the specific objective of insuring the risks of a single entity (often its parent company) or the risks of entities within the same group of entities that are related to the captive insurance company (i.e. fellow subsidiaries or parent entities). Where this is the case, the captive insurance company holds assets in a fiduciary capacity for other group entities, which would not be considered a broad group of outsiders. Therefore the captive insurance entity itself is not publicly accountable, and it follows that the group will not be publicly accountable.  Occasionally a captive insurance company insures risks of entities in its own group and also sells insurance directly to other parties such as associates, joint ventures and unrelated third parties. In this case, if the other parties constitute a broad group of outsiders the captive insurance entity will be publicly accountable.  Comments are due by June 15.


Interpretation of ‘traded in a public market’ - An entity has public accountability ‘if its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market’ (paragraph 1.3). How broadly should ‘traded in a public market’ be interpreted in the definition of public accountability? For example, in Europe does it include only those markets defined as ‘regulated markets’ for the purpose of EU accounting regulations or does it also include other markets such as growth share markets and over-the-counter markets? Also, would a listing of convenience, i.e. a market on which a ‘net asset value’ price is published but no trading occurs in that market, make an entity publicly accountable?    


IASB Response:  Public market’ is defined in paragraph 1.3 as ‘a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets’. A ‘public market’ is not restricted to recognized and/or regulated stock exchanges. It includes all markets that bring together entities that seek capital and investors who are not involved in managing the entity. For a market to be public it must be accessible by a broad group of outsiders. If the instruments can only be exchanged between parties related to the entity, such as owner-managers, the instruments are not traded in a public market.  In some jurisdictions, a shareholder of a small or medium-sized entity is permitted by law to publicly advertise those shares for sale, for example, on a website or in a newspaper, without any active involvement (or sometimes without even the knowledge) of the entity issuing those shares. Since the entity did not take an affirmative step to permit public trading of shares (such as but not limited to share registration), such advertising by a shareholder does not, by itself, create an over-the-counter public market and would not prevent an entity that otherwise meets the criteria in Section 1 from using the IFRS for SMEs . Furthermore, the availability of a published price does not necessarily mean that an entity’s debt or equity instruments are traded in a public market. For example, in some countries over-the-counter shares have a quoted price but the market has no facility for trading and so buyers and sellers deal with each other directly. This would not constitute trading in a public market. However, if trading occurs only occasionally on a public market, even just a few times a year, this would constitute trading. In other words, the frequency of such transactions is irrelevant.  Comments are due by June 15. 


Investment funds with only a few participants - An entity is publicly accountable if it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks (paragraph 1.3(b)). Does the criterion ‘broad group of outsiders’ mean that investment funds or similar entities that restrict their ownership to only a few participants are not publicly accountable under paragraph 1.3(b)? 


IASB Response:  The intention under paragraph 1.3 is to capture those entities that hold and manage financial resources entrusted to them by a broad group of outsiders, i.e. a broad group of investors or other resource providers who are not involved in the management of the entities. Such entities include, for example, mutual funds, unit trusts, undertakings for collective investments in transferable securities (UCITS), and other professionally managed collective investment programs. Taking investment funds from the general public makes those entities publicly accountable. However, if an entity holds and manages financial resources for only a few investors then this, on its own, would not constitute a broad group. In contrast, an investment fund that has a large number of outside investors who are not directly involved in the fund’s investment and management decisions is likely to be publicly accountable even if those outside investors own a relatively small proportion of the fund’s shares (or units). What is important is whether there is a broad group of outsiders contained within the total participants in the fund. The comment deadline ends on June 15.


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