Development of the International Financial Reporting Standard for Small and Medium-sized Entities

Ronita Devi Ram

A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy

Discipline of Accounting, The University of Sydney Business School, March 2012.

Acknowledgements:

My PhD journey would not have been possible without the assistance and generosity of several people.

Firstly my heartfelt gratitude to Associate Professor Sue Newberry (my primary supervisor) for her guidance, generosity and encouragement throughout the duration of this study. Her insightful and challenging comments through all phases of my research and writing were very much appreciated. I benefited enormously from her experience, knowledge and expertise in the area of accounting standards and her efforts to push me to think beyond the normal boundary enabled me to achieve new heights. She was the perfect mentor and without her support, this journey would not have been possible. Thank you very much Sue. It was my good fortune to have you as one of my supervisors.

I would not have been able to embark on this journey if it was not for Professor Sid Gray who saw my potential and encouraged me to undertake the PhD as one of his students. I am grateful for his continuous encouragement, support and guidance throughout this journey. The expertise and wealth of knowledge in the area of international accounting standards that he shared with me were invaluable to my thesis. I have indeed been blessed to have Prof Sid as my other supervisor.

I would like to extend my appreciation to the interviewees for taking part in my study. In particular I would like to thank Sir David Tweedie, the chairman of the IASB, Tom Jones, the vice-chairman of the IASB, and Dr Paul Pacter, the director of the SME project for their time and their willingness to share their experiences and knowledge about the development of the SME project. They provided an invaluable source of information from which this thesis has benefited greatly. I am also indebted to Professor Walton for his assistance and generosity in providing me with the IStaR Reports and allowing me to use them in this thesis. These reports were a very important source of information for my study and added enormous credibility to the findings of this thesis.

I wish to also thank the visiting academics at the University of Sydney, in particular Professor Geoff Whittington, Professor Axel Haller and Professor Chris Nobes for providing insights into the development of the SME project and for their suggestion of important people involved in developing the SME project.

I am also grateful to Professor John Roberts, Chair of the Discipline of Accounting for providing me with much needed PhD study leave so that I could concentrate on finishing the thesis. This leave was indeed very helpful as it expedited the completion of my thesis. I would also like to thank the

Asia Pacific Interdisciplinary Research in Accounting’s Emerging Scholars Committee and the Discipline of Accounting for funding the field work of this study. This funding made it possible for me to attend some of the key meetings and conduct interviews in Europe and Nepal. I would also like also to acknowledge the University of Sydney’s Faculty of Economics and Business scholarship that I received during my candidature.

I wish to pay tribute to my mum and dad for providing me with the strong educational background that enabled me to undertake PhD studies. I am grateful to them for always putting my education first before anything else in life. I have been able to undertake this study because of their inspiration and continuous support.

To my husband Sushil, I thank him for his unfettered love and support and for being by my side throughout this journey. I thank him for his understanding and for enduring the long hours that I had to put into my study and for sharing the ups and downs of my PhD journey. His assurance that I can do this and was nearing the completion made me stronger and more determined.

Finally, I would like to thank the Almighty God for guiding me though this process. I also thank God for giving me the strength and courage to successfully complete this PhD journey. Without his blessing, this may not had been possible.

Abstract

This thesis examines how and why the International Accounting Standards Board (IASB) added the project on Small and Medium-sized Entities (SMEs) onto its active agenda, and examines the complete SME project to understand the IASB’s standard setting activity. This study covers events from March 2000 to July 2009 and is important because it is the first to examine the IASB’s agenda setting activity and accounting standard setting in such depth.

Conventional thinking since the 1950s has been that one set of reporting requirements should be applicable to all entities, regardless of size. From the time of its establishment in early 2001 the IASB’s constitutional mandate was to “develop in the public interest a single set of high quality ... accounting standards ... to help participants in the various capital markets of the world” (IASB, 2004: para 8, emphasis added). In 2009, however, the IASB promulgated an accounting standard International Financial Reporting Standards (IFRS) for Small and Medium Entities (SMEs), that seemed to overturn this thinking.

This research applies historical research methods, observation at key meetings and interviews to carry out this study. This study employs a wide range of documents relating to the SME project and observations of key meetings. It also goes beyond the evidence in the public domain and includes 32 interviews with key people with an interest and involvement in the development of the standard. It also draws on International Standard-setting Report (IStaR) documents that provide detailed observer accounts of the IASB board meetings.

Kingdon’s (1984) policy oriented agenda setting framework provides a means of interpreting the research material obtained. This framework identifies three streams—problem, policy and politics— to understand how issues gain entrance onto a policy maker’s agenda, and is also useful for interpreting the more detailed policy formulation.

Key findings of this thesis show that the SME project was opposed within the IASB by both some board members and senior staff, who did not believe that the IASB had the mandate to produce another set of standards. There was a possibility that the project could have been blocked or sidetracked by those opposed to the project. Sir David Tweedie, the chairman of the IASB, removed these obstacles by seeking a change in the International Accounting Standard Committee Foundation (IASCF)’s constitution and creating a new senior position to direct the project. The director of the SME project reported directly to Tweedie.

A legacy issue inherited from the IASB’s predecessor, the International Accounting Standards Committee (IASC), noted a “strong demand exists for more work on the application of accounting standards to reporting by small enterprises” (IASC, 2000: para 29). As the IASB discussed this issue with its stakeholders, this potential project on SMEs was extended to include developing countries. Before the SME project was added onto the IASB’s agenda in July 2003, the project focus was narrowed to SMEs. The IASB assumed that SMEs and developing countries had similar reporting needs and that by developing the SME standard it would address the needs of developing countries.

The IASB added the SME project onto its agenda for several reasons. The IASB was under external pressure to develop a simplified set of reporting standards for SMEs. There were also other groups, including the United Nations Conference on Trade and Development (UNCTAD), the European Financial Reporting Advisory Group (EFRAG), and the International Federation of Accountants (IFAC), which had indicated they would step into the IASB’s standard setting domain if the IASB did not

i commit to the SME project. This possibility seemed to be a threat to the IASB, which wanted to protect its standard setting domain.

Even before adding the project on SMEs to its active agenda the IASB had identified its proposed policy proposal if it were to act which was to minimise divergence from full IFRS. When the IASB issued its discussion paper in June 2004, it identified multiple objectives for the project of which the two primary objectives were to focus on meeting the needs of users of SME financial reports, and to reduce the reporting burden on SMEs. One of the secondary objectives was to facilitate transition to full IFRS, and this secondary objective seemed to be consistent with the IASB’s earlier proposed policy to minimise divergence.

During the course of the project the IASB increasingly concentrated on the secondary objective of facilitating transition to full IFRS. The IASB seemed to resist changes sought via the public due process that would have simplified the recognition and measurement criteria in the SME standard. However, private lobbying by other groups such as EFRAG seemed more influential in convincing the IASB to provide some recognition and measurement simplifications.

The IASB claimed that it was developing a standard for SMEs that would also assist developing countries, but it used a narrowly defined concept of public accountability to determine which entities can use the eventual standard. SMEs were described as those entities that do not have public accountability and that publish general purpose financial statements for external users. An entity was deemed to be publicly accountable if it was trading in the public market to raise funds or if it was holdings assets in a primary fiduciary capacity. The criteria used to determine which entities can use the standard were inconsistent with the description of the standard’s target users. Those entities that meet the criteria will not necessarily be SMEs. Rather it will be those regarded as non- publicly accountable, according to the IASB’s definition of public accountability. The board struggled to find an appropriate title for the standard that aptly described the scope of the standard. The title of the project was changed five times but eventually, two months before the standard was released, it was re-titled IFRS for SMEs, despite the IASB’s awareness that the title is inconsistent with the criteria used to determine which entities can use the standard. However, the title IFRS for SMEs was considered to be widely understood and to give a positive impression of the standard.

This study makes four contributions to the accounting standard setting literature. First, this study responds to a gap in the literature in relation to how issues are added on to the IASB’s agenda. This study showed that the IASB may add a project onto its agenda for several reasons other than those described in its Due Process Handbook. Second, the study showed that the IASB had already identified its proposed policy before adding the project onto its agenda. During the course of the project it became apparent that the IASB may not be open to making substantial changes to its predetermined policy as part of its due process. Third, the literature identified the need to understand the role of the technical staff in defining and managing projects. This study showed that the role of the technical staff extends beyond acting as an intermediary on the technical aspects of the project and includes managing projects to build support for and to market projects. Fourth, this study is the first to use only Kingdon’s framework to examine standard setting process of an international accounting standard setting body—the IASB. By using the Kingdon’s framework this study has highlighted subtleties embedded in the IASB’s standard setting process. This provides a better understanding of IASB’s agenda entrance process and how it develops a standard after it is added onto its agenda.

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Statement of Originality

This is to certify that to the best of my knowledge, the content of this thesis is my own work. This thesis has not been submitted for any degree or other purposes. I certify that the intellectual content of this thesis is the product of my own work and that all the assistance received in preparing this thesis and sources have been acknowledged.

Ronita Ram

March 2012

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Table of Contents

Abstract ...... i Statement of Originality ...... iii Table of Contents ...... iv List of Tables ...... vii List of Boxes ...... viii List of Figures ...... viii Abbreviations ...... ix Chapter One Introduction ...... 1 1.1 Thesis Objectives ...... 1 1.2 Significance of SMEs and Developing Countries ...... 1 1.3 Context of the Thesis ...... 3 1.4 Structure of the Thesis...... 6 Chapter Two Agenda Setting Theoretical Framework ...... 8 2.1 Introduction ...... 8 2.2 Agenda Setting ...... 9 2.2.1 Processes of Agenda Setting ...... 12 2.2.2 Policy Formulation...... 16 2.2.3 Studies that Used Agenda Setting in the Accounting Literature ...... 18 2.3 Agenda Entrance and Accounting Standard Setting Literature ...... 20 2.3.1 Agenda Entrance ...... 20 2.3.2 Accounting Standard Setting ...... 22 2.4 Summary ...... 25 Chapter Three The History of Simplified Reporting ...... 26 3.1 Introduction ...... 26 3.2 Background ...... 26 3.3 Accounting for SMEs ...... 28 3.3.1 Perceived Problems Confronting SMEs ...... 28 3.3.2 Response from National Jurisdictions ...... 31 3.4 Accounting for Developing Countries ...... 33 3.5 Response by International Accounting Standards Committee ...... 37 3.6 Summary and Conclusion ...... 42 Chapter Four Research Methods ...... 44 4.1 Introduction ...... 44 4.2 Historical Research Method ...... 44 4.2.1 What is History? ...... 44 4.2.3 Historical Evidence and Limitations ...... 46 4.3 Data Sources ...... 49 4.3.1 Documentary Materials ...... 51 4.3.2 Key Meetings ...... 54 4.3.3 Interviews ...... 56 4.4 Data Validity ...... 62 4.4.1 Data Analysis ...... 65 4.5 Presentation of Research Findings ...... 66 4.6 Summary ...... 67 Chapter Five Agenda Entrance ...... 69 5.1 Introduction ...... 69

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5.2 Problem Stream ...... 70 5.3 Policy Stream ...... 74 5.4 Politics Stream ...... 79 5.5 Merging the Streams ...... 81 5.6 Summary and Conclusion ...... 91 Chapter Six Due Process (1) ...... 94 6.1 Introduction ...... 94 6.2 Development of the Discussion Document ...... 95 6.3 Publication of the Discussion Document ...... 102 6.3.1 Responses to the Discussion Document ...... 108 6.4 Proceeding with the SME Project ...... 113 6.5 Providing Recognition and Measurement Simplifications ...... 116 6.5.1 Responses Relating to Staff Questionnaire on Recognition and Measurement Simplifications ...... 118 6.5.2 Other Activities to Proceed with Recognition and Measurement Simplifications ...... 121 6.5.3 IASB’s Decisions on Recognition and Measurement Simplifications ...... 124 IAS 16 Property Plant and Equipment ...... 125 IAS 17 Leases ...... 128 IAS 36 Impairment of Assets...... 128 IAS 41 Agriculture ...... 129 6.6 Analysis Using Kingdon’s Three Streams of Problem, Policy and Politics...... 131 6.6.1 Policy Stream ...... 132 6.6.2 Politics Stream ...... 138 6.6.3 Problem Stream ...... 139 6.7 Summary and Conclusion ...... 141 Chapter Seven Due Process (2) ...... 144 7.1 Introduction ...... 144 7.2 Development of the Exposure Draft ...... 145 7.3 Release of the Exposure Draft ...... 151 7.4 Field Test ...... 154 7.5 Responses to Exposure Draft ...... 157 7.6 Further Developments ...... 161 7.6.1 Entities for which the SME Standard was Developed ...... 162 7.6.2 Title of the Standard ...... 166 7.6.3 Stand-alone Document ...... 166 7.6.4 Use of Fair Value ...... 170 7.7 Release of the Final Standard—IFRS for SMEs ...... 172 7.8 Changes made in the Final Standard: Recognition and Measurement Simplifications ...... 174 7.8.1 Section 16 Property Plant and Equipment ...... 175 7.8.2 Section 18 Business Combinations and Goodwill ...... 177 7.8.3 Section 19 Leases ...... 182 7.8.4 Section 35 Specialised Industries ...... 185 7.9 Analysis Using Kingdon’s Three Streams of Problem, Policy and Politics...... 187 7.9.1 Policy Stream ...... 189 7.9.2 Politics Stream ...... 195 7.9.3 Problem Stream ...... 198 7.10 Summary and Conclusion ...... 200 Chapter Eight Conclusions ...... 205 8.1 Introduction ...... 205 8.2 Key Findings of the Thesis...... 206 8.3 Contributions to the Accounting Standard Setting Literature ...... 213

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8.3.1 Agenda Entrance ...... 213 8.3.2 Processes to Develop Standards ...... 215 8.3.3 Role of Staff ...... 218 8.3.4 Application of Kingdon’s framework ...... 219 8.4 Limitations and Further Research ...... 221 8.4.1 Limitations ...... 221 8.4.2 Further Research ...... 223 References ...... 225 Appendix 1 World Standard Setters’ Survey Results ...... 238 Appendix 2 Discussion Document...... 240 Appendix 3 Staff Questionnaire on Recognition and Measurement Simplifications ...... 246 Appendix 4 Exposure Draft ...... 257 Appendix 5 Changes in Recognition and Measurement Criteria ...... 274

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List of Tables

Table 3.1: Summary of differential reporting frameworks ...... 32 Table 4.1 Summary of key events in the development of the SME standard ...... 50 Table 4.2 Documents used in this study ...... 53 Table 4.3 Interviews classified as elite and other ...... 56 Table 4.4 Interview schedule ...... 60 Table 5.1 Members of the advisory panel ...... 77 Table 5.2 List of countries that responded to survey ...... 86 Table 5.3: “Seize or Cede” questions asked to the WSS participants ...... 88 Table 6.1 Issues in the discussion paper Preliminary Views on Accounting Standards for Small and Medium-sized Entities ...... 103 Table 6.2 Analysis of the submissions to the discussion paper by country ...... 109 Table 6.3 Summary of the responses to the discussion paper ...... 111 Table 6.4 New members to the working group ...... 115 Table 6.5 List of topics for question 1 that may cause recognition and measurement problems for SMEs ...... 117 Table 6.6 List of topics for question 2 that may not be relevant for SMEs ...... 118 Table 6.7 Analysis of the submissions to the staff questionnaire on recognition and measurement simplification by country ...... 119 Table 7.1 Topics in the exposure draft ...... 152 Table 7.2 Questions in the exposure draft ...... 153 Table 7.3 Analysis of the submissions to the exposure draft by country ...... 158 Table 7.4 Topics in the final standard—IFRS for SMEs ...... 173 Table A2.1 Complete list of questions in the discussion paper ...... 240 Table A2.2 List of respondents to the discussion paper ...... 242 Table A2.3 Summary of issues identified by responses commenting on developing countries...... 245 Table A3.1 List of respondents to the staff questionnaire on recognition and measurement simplifications ...... 246 Table A3.2 Topics that were suggested to be deleted from the proposed SME standard ...... 249 Table A3.3 Summary of issues identified by responses on developing countries in the staff questionnaire on the recognition and measurement simplification ...... 250 Table A3.4 IAS 16 Property, plant and equipment- summary of the issues and board decisions ...... 251 Table A3.5 IAS 17 Leases-summary of the issues raised and board decisions ...... 254 Table A3.6 IAS 36 Impairment of Assets-summary of the issues and board decisions ...... 255 Table A3.7 IAS 41 Agriculture-summary of the issues and board decisions ...... 256 Table A4.1 List of responses to the exposure draft...... 257 Table A4.2 Issues raised in response to question one in the exposure draft ...... 261 Table A4.3 Issues raised in response to question two in the exposure draft ...... 263 Table A4.4 Question eight in the exposure draft on adequacy of guidance ...... 264 Table A4.5 Summary of responses to exposure draft commenting on developing countries ...... 266 Table A5.1 Section 16 Property, plant and Equipment—summary of issues and decisions made .... 274 Table A5.2 Section 18 Business Combinations and Goodwill—summary of issues and decisions made ...... 278 Table A5.3 Section 19 Leases- summary of issues and decisions made ...... 282 Table A5.4 Section 35 Specialised Industries- summary of issues and decisions made ...... 286

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List of Boxes Box A4. 1 EFRAG’s proposed structure for the SME standard ...... 270

List of Figures Figure 4. 1 Voting requirement for the IASB’s publication ...... 66 Figure 5. 1 Seize or cede game (first question) ...... 89 Figure 5. 2 Seize or cede game (2nd last slide) ...... 89 Figure 5. 3 Seize or cede game (last slide) ...... 89 Figure 6. 1 Informal user panel ...... 100

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Abbreviations AASB Australian Accounting Standards Board AICPA American Institute of Certified Public Accountants CAPA Confederation of Asian and Pacific Accountants CPA Certified Public Accountant EC European Commission ECSAFA Eastern Central and Southern African Federation of Accountants EFRAG European Financial Reporting Advisory Group EU European Union FASB Financial Accounting Standards Board FEE Federation of European Accountants FRSSE Financial Reporting Standards for Smaller Entities GAAP Generally Accepted Accounting Principles IAA InterAmercian Accounting Association IASB International Accounting Standards Board IASC International Accountings Standards Committee IASCF International Accountings Standards Committee Foundation IFAC International Federation of Accountants IFRS International Financial Reporting Standards IOSCO International Organization of Securities Commission IMF International Monetary Fund ISAR Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting IStaR International Standard-setting Report NPAE Non-publicly Accountable Entities NSS National Standard Setters NYSE New York Stock Exchange PFI Private Finance Initiative ROSC Reports on the Observance of Standards and Codes SAC Standards Advisory Council SAFA South Asian Federation of Accountants SMEs Small and Medium-sized Entities SMEGA Accounting and Financial Reporting Guidelines for Small and Medium-sized Enterprises SMP Small and Medium Practices WSS World’s Standard Setters UNCTAD United Nations Conference on Trade and Development UN United Nations

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Chapter One Introduction

1.1 Thesis Objectives

This thesis examines how and why the International Accounting Standards Board (IASB) added the project on Small and Medium-sized Entities (SMEs) to its standard setting agenda, and then examines the complete SME project to understand the IASB’s standard setting activity. It covers events from March 2000 to July 2009. This study is important, not only because the SME project was controversial, but also because it provides insights into the IASB’s agenda setting process and its standard setting activity.

Howieson (2009: 595) called for empirical examination of how issues get onto the IASB’s agenda, “especially given the pre-eminence of the IASB as the global standard setter”; this study is the first to answer that call by examining the IASB’s agenda setting process. Others have called for closer examination of how international accounting standard setters make decisions (Barth, 2000; Cooper and Robson, 2006; Larson, 2007). By following the SME project until promulgation of the standard in July 2009, and going beyond evidence in the public domain, this thesis provides insights into how the IASB develops a standard after the project enters its agenda.

This chapter is organised as follows. Section 1.2 discusses the significance of SMEs and developing countries. Section 1.3 provides the context of the thesis and section 1.4 outlines the structure of the thesis.

1.2 Significance of SMEs and Developing Countries

SMEs are the key drivers of employment, economic growth and development in every country (UNCTAD, 2000a). They provide about 45–70 per cent of employment in every country. For example in Colombia, 95 per cent of entities are SMEs and provide 65 per cent of employment (CL 49, DP). In Japan, over 5 million entities are SMEs that account for more than two-thirds of overall employment in the country (CL 59, DP). In Europe, SMEs provide about 67 per cent of employment (Thaibault, 2010).

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The Chairman of the IASB, Sir David Tweedie, has acknowledged that “in every country in the world including developed ones, over 98 per cent of entities are [SMEs]...”(IASCF, 2008a: 38).

Despite the importance of SMEs to the world economy, there is no universal definition of an SME because “no single definition can capture all the dimensions of ‘small’ or ‘medium’ business size” (UNCTAD, 2000a: 5). Most of the definitions of SMEs used by countries and development agencies are based on financial measures such as “number of employees, balance-sheet total, or annual turnover” (UNCTAD, 2000a: 5). However none of these definitions are applicable at the international level (UNCTAD, 2000a).

Developing countries also play an important role in the world’s economy (WTO, 2011). According to the International Monetary Fund (IMF), as a group, developing countries account for about one third of the world’s trade (IMF, 2008). It is predicted that by 2050, developing countries like Brazil, China, India and Russia could play a far greater role in the world’s economy (Wilson and Purushothaman, 2003).

There is also no universal definition of developing countries (Nobes, 1998). This is because developing countries are a diverse group in which each country is different in terms of gross national product, population, culture, degree of literacy, and economic and political system (Wallace, 1990a). A number of different criteria have been used by international agencies to define developing countries. For the purposes of this thesis, the World Bank’s criteria for classifying economies based on the Gross National Income per capita is used to identify developing countries (World Bank, 2008). According to the World Bank, “low income and middle income economies are referred to as developing countries” (World Bank, 2008). Under these criteria, 149 of world’s 209 countries (71 per cent) would be classified as developing countries. There are also different terms used for developing countries. Some of the other commonly used terms to refer to developing countries include developing economies, emerging economies and transitional economies. For consistency, the term developing countries is used in this thesis.

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In the drive to promote cross border trading by multinational companies, the financial reporting needs of SMEs and developing countries, which make up the largest portion of the world’s economy, have been overlooked (CAPA, 2003).

1.3 Context of the Thesis

Conventional thinking, since the 1950s, has been that one set of financial reporting standards should be applicable to all entities regardless of size. As companies increasingly traded across borders, the nature of transactions became more complex. To capture these complexities in trading financial reporting requirements also became complicated (Schuetze, 1994).

Within individual developed countries, which set their own accounting standards, the complexity of accounting standards imposed problems on SMEs. In other words, the effect of trying to standardise financial reporting imposed burdensome reporting requirements on SMEs. To alleviate this reporting burden, many countries, including Australia, Canada, New Zealand, UK, and US, introduced some form of differential or simplified reporting (Hepp and McRae, 1982; Abdel-Khalik, 1983; Carsberg et al., 1985; McCahey and Ramsay, 1989; Holmes et al., 1991; CAPA, 2003). Identifying those entities that qualified to apply differential reporting involved criteria that used either quantitative measures such as turnover, assets, and number of employees, or qualitative criteria, such as the reporting entity concept in Australia (CAPA, 2003).

With the formation of the International Accounting Standards Committee (IASC) in 1973, efforts commenced to work towards one set of standards internationally (Garrido et al., 2002). The IASC initially focused its efforts on harmonising the accounting standards set in individual countries, mostly those following the Anglo-American accounting model, to increase comparability of standards internationally (Emenyonu and Gray, 1996; Larson and Kenny, 1999). Many developing countries that did not have the resources to develop their own standards adopted international accounting standards. One set of views was that adopting international accounting standards would support economic development in developing countries (Nobes, 1998). However, some argued that developing countries did not have the infrastructure or the resources to apply these standards, which had been developed for the advanced economies of the world (Scott, 1968; Briston, 1978; Samuels

3 and Oliga, 1982; Perera, 1985). Therefore, demand emerged for standards that would cater to the needs of developing countries.

During the 1990s, as the IASC worked on seeking the endorsement of the International Organization of Securities Commission (IOSCO) for its standards for use in cross-border listings (Casabona and Shoaf, 2002), the international accounting standards became increasingly complex. In the late 1990s the IASC made two attempts to consider accounting in developing countries, but both of these attempts were unsuccessful due to lack of political support (Camfferman and Zeff, 2006). However, the demand for accounting for SMEs was noted. The IASC’s transition document, prepared in December 2000 to be passed to its successor, the International Accounting Standards Board (IASB), noted that “strong demand exists for more work on the application of accounting standards to reporting by small enterprises”(IASC, 2000: para 29).

Since the establishment of the IASB in 2001, the development of international accounting standards has been rapid and designed primarily to address the information needs of the world’s capital market participants (IASB, 2004a: para 8, DP). The new standards produced by the IASB were referred to as International Financial Reporting Standards (IFRS). At the time, many countries were committing to the adoption of IFRS from 2005 or were in the process of aligning their standards with the international accounting standards, and this imposed significant pressure on the IASB, which focused on producing standards for the world’s capital markets participants.

The move by developed countries to adopt IFRS potentially superseded the differential reporting regimes used in those countries, and aroused concerns about how the adoption of IFRS from 2005 would affect SMEs. This seemed to increase demand for a simplified set of standards for SMEs.

The International Accounting Standards Committee Foundation (IASCF) an independent, not-for-profit organisation is the oversight body of the IASB and specifies the IASB’s constitutional mandate. Although the IASB “has sole responsibility for setting accounting standards”, it is required to act in “accordance with its [constitutional] mandate” (IASCF,

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2003: 18). From the time of the IASB’s establishment in 2001, the constitution required the IASB: to develop in the public interest a single set of high quality understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the various capital markets of the world and other users of the information to make economic decisions (IASCF, 2003b: 4, emphasis added).

This implied that the IASB’s role was limited to developing IFRS for the world’s capital market participants, and that developing any special standards for SMEs or developing countries was outside its constitutional mandate. Having inherited the project on accounting for SMEs as a legacy issue from its predecessor (IASC, 2000), the IASB was reluctant to add it to its standard setting agenda. In July 2003, the IASB did add the SME project on to its agenda, and issued its IFRS for SMEs in July 2009. This seemed to overturn the thinking that the IASB’s role was focused on capital market participants and that there should be a single set of high quality global accounting standards.

Kingdon’s agenda setting theoretical framework is used to interpret the findings of this thesis. This framework identifies problem, policy and politics streams to consider how issues gain entrance onto the policy maker’s agenda and it can also be used to interpret events during detailed policy formulation. Although the IASB has a well publicised due process for its standard setting activities, neither its criteria for adding items to its agenda, nor its website information provide a clear indication of the IASB’s agenda setting process (Howieson, 2009).

Once an item is added to the accounting standard setter’s agenda, the analysis of written submissions provides “insufficient explanation” of how the eventual standard was developed (Hodges and Mellett, 2002: 148). Studies that focus on written submissions avoid “completely the development of the exposure draft” and focus on what might be relatively insignificant influences (Hodges and Mellett, 2002: 148). There are hidden pressures that are not apparent from the information in the public domain but are influential in shaping the eventual standard (Hodges and Mellett, 2008). For this reason the nature of the standard setting process has been described as taking place within a “black box” (see Hodges and Mellett, 2008: 3). There is a need to go beyond the evidence in the public domain to understand political activity surrounding the development of a standard. This thesis highlights the value of going beyond the evidence in the public domain.

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1.4 Structure of the Thesis

The remaining chapters of this thesis are organised as follows. Chapter two explains the agenda setting theoretical framework used in this study. This chapter then reviews the agenda setting literature that discusses Kingdon’s three streams of analysis—problem, policy and politics—to explain how issues gain entrance on to the policy maker’s agenda. These three streams can also be used to explain the detailed policy formulation once a topic has gained entrance onto the agenda. Chapter two also discusses the accounting studies that have applied the agenda setting theory.

Chapter three provides the historical context to demands for simplified sets of standards, whether for SMEs or developing countries. To understand the rationale for the need for a simplified set of standards, this chapter provides a brief background to contextualise the reporting environment in the early 1950s and then reviews literature on SMEs and the accounting problems perceived to be confronting SMEs. It then reviews the literature on developing countries to identify the accounting concerns facing this group and discusses how the IASC responded to the concerns of developing countries.

Chapter four explains the historical research method employed to carry out this study. It also sets out the data sources, which include a range of documentary materials. As well as observation of meetings, including the IASB’s webcasts, a Standards Advisory Council (SAC) meeting, a Confederation of Asian and Pacific Accountants (CAPA) meeting and a meeting of the United Nations Conference on Trade and Development (UNCTAD) Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR); and interviews with key people interested in, and involved in developing, the standard. It also comments on data validity issues and explains how the data gathered was analysed and presented.

Chapter five explains how and why the SME project was added onto the IASB’s agenda. This chapter covers events from early 2000 to September 2003. Chapters six and seven examine the complete SME project to understand the IASB’s standard setting activity. Chapter six covers events from September 2003 to December 2005. It follows the IASB’s due process by first setting out a narrative historical account of the events that occurred in developing the SME standard, and then applies Kingdon’s three streams of analysis to interpret the events.

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Chapter seven covers events from January 2006 to July 2009, during which time the remaining steps of the IASB’s due process occurred. As with chapter six, this chapter first sets out a narrative historical account of the events, and then applies Kingdon’s three streams of analysis to interpret the events.

Finally chapter eight presents the key findings of the thesis, and draws conclusions and explains how this study contributes to the accounting standard setting literature. This concluding chapter also acknowledges the limitations of this research and identifies several areas for future research.

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Chapter Two Agenda Setting Theoretical Framework

2.1 Introduction

This study examines the development of the IFRS for SMEs standard within the context of a policy oriented agenda setting theoretical framework. Using the case of the SME project, the aim of this study is to examine how and why the SME project was added onto the IASB’s agenda. This study also examines the complete SME project as a means to understand the IASB’s standard setting activity.

Policy making for the last four decades has been considered as a rational process (Howlett and Ramesh, 1995: 5). The rational approach assumes that policies are made in a logical sequence of activities. The series of activities include establishing a goal for solving the problem, exploring and listing all alternative strategies of achieving the goal, predicting and estimating the probability of all significant consequences of each alternative strategy, and finally selecting the strategy that most nearly solves the problems or solves them at least cost (Carley, 1980: 11 cited from Howlett and Ramesh, 2003: 167).

Decision makers using this approach were considered to operate as technicians or business managers, who collect and analyse information that allows them to find the most effective or efficient way to solve any problem they confront (Howlett and Ramesh, 2003). Although the rational approach was perceived as the scientific way to deal with policy making, there were concerns about its application. Critics argued that it was beyond the capabilities of a decision maker to consider an almost infinite number of alternatives to a problem and to know the consequences of each decision in advance (Simon, 1955). Further, politics is an important element that is not considered in the rational approach, thus implying that policy making process is highly technical.

Accounting standard setting, which is also a form of policy making, is a highly political rather than purely a technical exercise. Given the highly politicised nature of standard setting activity, Hodges and Mellett (2008) argued that the standard setting process occurs within a ‘black box’ where hidden pressures may be influential in shaping the outcome of a standard. Therefore, it is important to go beyond the conventional thinking of rationalism to understand how accounting standards are developed, as well as to understand the

8 processes within the ‘black box’ where “sets of inputs are translated by policy makers into outputs” (Birkland, 2001: 221).

Section 2.2 firstly discusses the agenda setting theoretical framework where the two frameworks sometimes used in accounting—Cobb and Elder’s and Kingdon’s frameworks are reviewed. It also provides further insight into how policies may be formulated once a project is added onto the decision maker’s agenda. This is followed by discussion of incremental approaches to decision making that may supplement these frameworks and studies that have used agenda setting theoretical frameworks in the accounting literature. Section 2.3 then reviews the literature on agenda entrance and accounting studies that identify gaps in the agenda entrance literature. Section 2.4 provides a summary and conclusion for the chapter.

2.2 Agenda Setting

An agenda is defined as a set of issues that receives serious attention in a polity (Cobb and Elder, 1972). Agenda setting is the “process by which problems and alternative solutions gain or lose public and elite attention” (Birkland, 2001: 106). Agenda setting studies originate from the political science literature and provide a means to understand the interaction between groups, power, and agenda that set the boundaries of political policy debate. Agenda setting therefore is a combination of these factors: [t]he likelihood that an issue will rise on the agenda is a function of the issue itself, the actors that get involved, institutional relationships, and, often, random social and political factors that can be explained but cannot be replicated or predicted (Birkland, 2001: 131).

The strength of an agenda setting approach to examining how policy makers add items to their agenda is that it allows “an otherwise disparate range of facts to be merged” to aid in understanding the forces that move policy formulation processes in one direction or the other (Cobb and Elder, 1972: viii). That is, it provides structure to analysing issues coming from different institutions and actors in the policy making process.

Two agenda setting frameworks discussed are the seminal works of Cobb and Elder (1972), further developed by Cobb et al. (1976)and Kingdon (1984). The idea of agenda setting was the subject of research by Kingdon (1984) and Cobb and Elder (1972), who provided an understanding of the ways in which various groups in a population become aware of, and participate in, political debate to push an issue onto a decision maker’s agenda. Cobb and

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Elder (1972) identified the role of the public and formal agenda in explaining how an issue comes to the notice of a decision maker. The public agenda consists of those issues that have achieved a high level of public interest and visibility, while the formal agenda consists of items that decision makers have formally accepted for serious consideration. Issue creation, issue expansion and issue entrance were the three phases used to explain how an issue gained entrance on the formal agenda (Cobb and Elder, 1972; Cobb et al., 1976). Issue creation relates to how an issue is created on the public agenda. Issue expansion concerns the way in which the issue created is expanded to gain wider public support. Issue entrance occurs when an issue gains considerable support in the public agenda and as a result is moved onto the formal agenda where the decision makers consider the issue for policy formulation.

To elucidate the various stages in the process of agenda setting three models: outside initiative model, mobilisation model and inside access model were identified by (Cobb et al., 1976). The outside initiative model describes a situation in which a group or organisation outside the government structure articulates a grievance. This group then tries to expand interest in the issue to gain a place on the public agenda so that it can create pressure on decision makers to place the issue onto the formal agenda for their serious consideration (Cobb et al., 1976). Transfer of the issue from the public agenda to the formal agenda does not guarantee that the final outcomes or the actual policy implementation will be in favour of the grievance group. Often the grievance group’s position is either modified or rejected (Cobb et al., 1976).

The mobilisation model describes the process of agenda setting where institutions and political and/or institutional leaders seek support for their objectives so that issues may be moved from the formal to the public agenda. Under this model, issues are directly placed on the formal agenda by political leaders or those who have access to decision makers. Cobb et al. (1976) outlined that mobilisation was necessary in a situation where a policy required widespread voluntary compliance.

The inside access model describes the situation where it is easiest to be successful in achieving formal agenda status and implement the proposed policy with the fewest changes. Under this model, the “policy originates within a governmental agency or within a

10 group which has easy and frequent access to political decision makers” (Cobb et al., 1976: 135). The issue reaches the formal agenda relatively easily because of the position of the initiating group. However, the issue is not expanded to the public agenda. Since the initiators do not want the issue on the public agenda, they try to limit issue expansion to the public agenda. As a result initiators of the issue seek a more private decision within the government, and generally stand to be defeated when the issue is sufficiently expanded to include public groups that might oppose the issue (Cobb et al., 1976). Under this model, at no point is the public greatly involved and no effort is taken by initiators to get the issue on to the public agenda.

One shortcoming of Cobb and Elder’s work was that it presented the phases of the agenda setting process as sequential (Howlett and Ramesh, 2003). Also Cobb and Elder’s framework does not describe what happens after a project enters the decision maker’s agenda. It would be naive to believe that all the projects that gain entrance are addressed or that they are addressed in an orderly manner as suggested by Cobb and Elder (1972).

Kingdon (1984) added an additional level of insight by using the streams of problem, policy and politics to demonstrate how issues get onto a decision maker’s agenda. Drawing from the ‘garbage can’ model of Cohen et al. (1972 ) Kingdon developed this unique way to explain an agenda setting process that can be organised into two parts—processes of agenda setting and policy formulation.

Kingdon used the terms government agenda and decision agenda to explain how an issue comes to the policy maker’s attention. The government agenda refers to “the list of subjects that are getting [public] attention” and needs to be addressed, while the decision agenda refers to “the list of subjects within the governmental agenda that are up for an active decision” (Kingdon, 1984: 4). In this study the government agenda is referred to as the ‘public agenda’ and the decision agenda is referred to as the ‘decision maker’s agenda’ to make the distinction between these two agendas clear.

Kingdon (1984) also emphasised the important role participants play in the agenda setting process, and divided participants into those inside and those outside of the policy making organisation. Participants inside the policy making organisation mainly include the policy

11 makers and the staff that undertake the technical aspects of the policy formulation process. Participants outside the policy making organisation include: academics, researchers, consultants, bureaucrats, media and interest groups. Interest groups are groups or individuals that may have an interest in a certain issue that they want considered by the policy makers. The activities of the interest groups vary as some may affect agenda setting and others may affect the specification of alternatives that policy makers consider (Kingdon, 1984). Interest groups also affect issues on the public agenda because to mobilise support for an issue they “… [write] letters, send delegations, and [stimulate] its allies to do the same” so that the policy makers give attention to issues raised (Kingdon,1984: 52).

2.2.1 Processes of Agenda Setting

Kingdon (1984: 17) identified “three kinds of processes: problem, policies and politics” to explain how “agendas are set and alternatives are specified”. In the problem stream recognition and definition of a problem is important. Kingdon argued that whether an issue is to be recognised as a problem by a policy maker is dependent on how a policy maker comes to know about the problem and how the problem has been defined. Problems can be conveyed to policy makers through indicators that provide the assessment of change in conditions, focusing events that include disasters and personal experience of a policy maker or feedback about the operation of the existing policies (Kingdon, 1984). Budgetary constraint is another factor that may either constrain or promote recognition of a problem. In other words, a problem may not be considered by a policy maker if it cannot fit it within its allocated budget or the proposed project to address the problem may require a huge sum of money that is beyond the budgetary allocation of a policy maker.

Problems may sometimes fade away for several reasons. Amongst these reasons are that policy makers believe they have solved the problem by passing legislation; policy makers fail to solve or address a problem; people become used to the condition so that it is no longer considered necessary to solve the problem; or it may be that there is no longer interest in the problem (Kingdon, 1984).

Kingdon further argued that solving a problem is not the only reason why policy makers may add a project to their agenda: Several considerations independent of problem solving prompt [policy makers] to act. Bureaucrats propose initiatives designed to help them keep their jobs or expand their turf.

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Prevailing values change, resulting in new problem definition. Simple interest group pressure or other expressions of preferences may gain issue prominence, independent of a problem being solved. There are many reasons for agenda status, apart from the straightforward impulse to identify problems and solve them (Kingdon, 1984: 120).

The policy stream is the process by which proposals to address a problem are generated and debated until accepted for serious consideration (Kingdon, 1984). The policy stream comprises policy communities, which examine problems and propose solutions to them. These policy communities, according to Kingdon (1984), are made up of specialists in a given policy area. Some communities can be characterised as closed and tightly knit where the members have narrowly defined ideas; other communities are diverse and fragmented. The extent of closeness or fragmentation amongst the policy community members affects the policy making. A fragmented community is most likely to lead to policy fragmentation, whereas a tightly knit policy community leads to “common outlooks, orientations and ways of thinking” (Kingdon, 1984: 123). Within this policy community working on the policy problem Kingdon identified hidden and visible clusters of participants. The visible cluster consists of participants who receive press and public attention, such as policy makers. The hidden cluster consists of academics, researchers, and bureaucrats and the staff employed by the policy makers to undertake detailed aspects of policy formulation (Kingdon, 1984). Interest groups on the other hand can be found in both clusters as some of their activities are public while others are hardly visible at all.

The policy community is also the home to the policy entrepreneur who attempts to ‘soften up’ both policy communities and the public at large by initiating discussion, educating and promoting their ideas through such activities as public speeches, and lobbying. Kingdon argues that: Softening up seems to be necessary before a proposal is taken seriously. Many good proposals have fallen on deaf ears because they arrived before the general public, the specialized publics, or the policy communities were ready to listen (Kingdon, 1984: 137).

The policy entrepreneur’s aim is to ensure that the relevant public is ready for a certain type of proposal when its time has come. For any proposal to survive, the proposal must firstly be feasible and should work when implemented. Secondly, it should also be compatible with the values of the members of the policy community. Thirdly, it must satisfy future constraints, such as budgetary cost, political approval and public acceptance (Kingdon, 1984: 138). At the same time, it is also important to build consensus in the policy stream “through the process of persuasion and diffusion” as Kingdon argues that “if an idea

13 survives scrutiny according to a set of criteria for survival, it diffuses within the policy community” (Kingdon, 1984: 167). This is to create “ ... agreement on solutions or proposals” (Kingdon, 1984: 147). With this diffusion and acceptance “something akin to a bandwagon effect often occurs” (Kingdon, 1984: 147) where people in the wider policy community also start talking about the idea.

The politics stream is made of three main components. The first component of the policy stream is composed of “public mood, pressure groups, campaigns, election results, partisan or ideological distributions … and changes of administration” (Kingdon, 1984:152). Policy makers can sense the mood in the politics stream “from various communications that come to them, including mail, visits, trip home, newspaper coverage, and conversation with constituents” (Kingdon, 1984: 170). A change in environment or structure affecting policy makers may make some proposals viable when they had not been previously (Kingdon, 1984). Advocates for those proposals that are not favoured must adapt their ideas or wait for change in thinking to shift in their direction.

The second component of the politics stream is made up of events outside the policy making body such as organised political forces, including interest group pressure, mobilisation of political forces, and the behaviour of political elites (Kingdon, 1984). For instance, if the organised forces share similar views on a proposal then the entire environment provides a powerful impetus to move in that direction. However, if there is some conflict among the organised forces, then political leaders may try to strike a balance between those advocating and those opposing a given proposal. Interest groups may also attempt to influence the selection of alternatives by “…trying as best they can to bend the outcomes to their advantage, either by affecting the final compromises over the alternatives to be considered or, in some cases, by defeating proposals altogether” (Kingdon, 1984: 172).

The third component of the politics stream is made up of events within the policy making body such as “turnover of key personnel” and “jurisdictional boundaries” (Kingdon, 1984: 161). Existing key personnel within the policy making body can sometimes “change their priorities and push new agenda items” or a turnover of key personnel can bring “new priorities onto the agenda by virtue of the turnover” (Kingdon, 1984: 160). Questions about

14 the jurisdictional boundaries or “battles over turf” (Kingdon, 1984: 162) can lead to some items being ignored by the policy maker as “they are ‘defined away’ by drawing of jurisdictional boundaries”(Kingdon, 1984: 162) but Kingdon argued that policy makers generally expect to “defend their turf” (Kingdon, 1984: 163).

Consensus building is another important feature of the political stream and this occurs by “bargaining” (Kingdon, 1984: 167) to build wider support in the political stream. Here, coalitions are being built through the granting of concessions in return for support of the coalition, or as actual or potential members make bargains. Joining the coalition occurs not because one has simply been persuaded of the virtue of that course of action, but because one fears that failure to join would result in exclusion from the benefits of participation (Kingdon, 1984: 167).

Each of the three streams outlined above may develop independently of the others (Kingdon, 1984). The politics stream acknowledges the importance of political support that is needed to push the proposal on to the decision maker’s agenda at the right time. Policymakers do not need to identify problems first and then seek solutions to them; rather, solutions may actually precede the problems to which they are eventually attached (Kingdon, 1984). Alternatives are an essential part of the agenda setting process because a viable alternative or solution must be available before an issue can attain a position on the decision maker’s agenda.

The probability of an issue moving onto the decision maker’s agenda is greatly increased when the problem, politics and policy streams converge. It is this convergence of the three streams that pushes an issue onto the decision maker’s agenda (Kingdon, 1984). Entrepreneurs play an important role in converging the previously separate streams— “[t]hey hook solutions to problems, proposals to political momentum, and political events to policy problems” (Kingdon, 1984: 191) so that a particular problem and its policy response can be placed on the decision maker’s agenda. This convergence is most likely to occur when a ‘policy window’ opens. A policy window opens either when there is compelling change in the problem stream or change in political events (Kingdon, 1984). Since the policy window does not remain open for long, once the window has opened the entrepreneur moves the issue quickly to the decision maker’s agenda for policy formulation (Kingdon, 1984).

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2.2.2 Policy Formulation

Once an item is placed on the decision maker’s agenda and a commitment is made to deal with that issue, Kingdon argued it is then passed to the hidden cluster for detailed policy formulation, which has the technical expertise and specialisation in that area: …the visible participants try to affect agendas, and then they turn to specialists in the less visible policy community like bureaucrats, staffers, researchers, and interest groups for the alternatives from which an authoritative choice can be made (Kingdon, 1984: 74).

Although Kingdon does not explicitly discuss the formulation of a policy, his ideas on the ‘alternative specification’ of policies are applicable here. This is because Kingdon suggests that the policy or key features of the policy may already have been decided, before the problem is placed on the agenda.

In formulating the policy, the head of the policy making organisation and staff who undertake the detailed technical work play an important role. Kingdon argues that the chairman or the head of the policy making body has a central role to play because he or she has: “…a set of institutional resources, including the veto and the prerogative to hire and fire” (Kingdon, 1984: 26). Kingdon further argued that the head of the policy making organisation may dominate policy making, but cannot determine what will be the final outcome of the policy (Kingdon, 1984). Majone (2006), however, suggested that institutions that hold the power to control the agenda can achieve almost any outcome they desire: …those who control the agenda can engage in all sorts of manipulations. A monopoly agenda setter can achieve almost any outcome she wishes, provided she can appropriately order the sequencing of paired options considered by the voting group operating under majority rule (Shepsle, 1979 cited from Majone 2006: 30).

Staff in the hidden cluster also plays an important role in the policy formulation process as they do most of the work in developing the technical aspects of the policy (Kingdon, 1984). Kingdon argued that although: [t]hey lead harried lives, to be sure; they have their own deadlines, and their own meetings with lobbyists and pleaders. But they at least focus their attention on a narrower set of substantive concerns…it is generally up to committee staff to draft legislation, negotiate the details of agreements amongst the interested parties, arrange for hearing witness lists, and write speeches and briefing materials for the members (Kingdon, 1984: 44).

Staff also work closely with the policy makers “…to sense what will fly in the committee when it comes to voting” (Kingdon 1984: 45). The staff’s close involvement in the policy formulation process suggests that they can influence the alternatives from which the policy

16 makers make a choice but “they cannot control the choice set entirely” (Kingdon, 1984: 45). Also, the staff must work within the mandate developed by the policy maker because if the policy maker “discovers that his appointees are not responsive concerning items of major importance to him, they usually don’t last long in the job” (Kingdon, 1984: 26).

Since, in practice, agendas are set with specific alternatives in mind by the decision maker, the agenda setting process and the alternatives identified are not independent (Robinson, 2000). Robinson (2000: 40) argued that the actors involved in determining the agenda are likely to play a significant role in the selection of policy alternatives.

Kingdon recognised that policy makers may pursue an incremental approach: …incrementalism might still characterize the generation of alternatives. As policy makers consider the alternatives from which they will choose, they repair to ideas and approaches with which they are already familiar (Kingdon, 1984: 87).

Incrementalism is well recognised as part of policy development, the elements of such an approach including (Lindblom, 1979:517): 1. Limitation of analysis to a few somewhat familiar policy alternatives…differing only marginally from the status quo; 2. An intertwining of analysis of policy goals and other values with the empirical aspects of the problem (that is, no requirement that values be specified first with means subsequently found to promote them); 3. A greater analytical preoccupation with ills to be remedied than positive goals to be sought; 4. A sequence of trials, errors, and revised trials; 5. Analysis that explores only some, not all, of the important possible consequences of a considered alternative; 6. Fragmentation of analytical work to many (partisan) participants in policy making (each attending to their piece of the overall problem domain) (Lindblom, 1979:517).

Using an incremental approach, decision makers develop policies by making ‘successive limited comparisons’ with earlier decisions, those with which they are familiar (Lindblom, 1959). Policies made in this manner would differ only marginally from existing policies, therefore making only limited incremental changes from the status quo (Lindblom, 1959). This approach was considered beneficial in those areas of policy making where there were stable and established policies (Lindblom, 1959).

In summary, (Kingdon, 1984) used the three streams approach of problem, policy and politics to explain how an issue is placed on the decision maker’s agenda. The convergence

17 of the three streams increases the probability of an issue being placed on the decision maker’s agenda: Kingdon’s work has rightly been seen as one of the most significant contributions to the agenda setting debate. His model is almost unique in that it combines the role of actors, problems and exogenous developments in an attempt to develop a comprehensive model of agenda setting (Robinson, 2000: 36).

Kingdon (1984) also argued that policy formulation occurs in the hidden cluster that comprises specialists in that area to address the problem. Kingdon emphasised the important role played by the staff in policy formulation.

2.2.3 Studies that Used Agenda Setting in the Accounting Literature

Over the last 40 years accounting standard setters have tried to project their standard setting activities as thorough and comprehensive, suggesting a sequential process like that proposed by (Cobb and Elder, 1972; Cobb et al., 1976). Gerboth (1972) challenged this idea, arguing that accounting standard setters follow a more incremental approach. Using the case of the Accounting Principles Board, he explained that accounting standard setting does not possess the “virtues of orderliness and completeness” (Gerboth, 1972: 47): What Board critics condemn as inexcusable bungling may well be the same sort of sophisticated “muddling through” characteristic of policy making in many other contexts (Gerboth, 1972: 47).

Comparing the rational with the incremental approach, (Gerboth, 1972: 46) explained that: [Rational] policy-making stresses long-range positive goals, preliminary study, comprehensive analysis and complete solution. Incremental policy-making, on the other hand, emphasizes short-term remedial goals, feedback, fragmented analysis and incomplete solutions. The [rational] approach is a prescription for solving problems by mastering them. The incremental approach is a strategy for coping with problems that cannot be mastered. The [rational] approach is plainly normative-it holds up an ideal that is beyond human attainment.

Several accounting standard setting studies have drawn from the agenda setting literature using both Cobb and Elder (1972), further developed by Cobb et al. (1976), and Kingdon (1984). Walker and Robinson (1994) applied Cobb et al. (1976) to examine the contest between government agencies and the accounting profession over the proposal for cash flow reporting in Australia between 1984 and 1992 in which the profession was successful in adding cash flow reporting to the decision maker’s agenda due to the invention of the Australian Stock Exchange.

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Jones et al. (2004) used Cobb et al. (1976) to compare and contrast the competing standard setting reform agendas between the Australian accounting profession and the government. They discussed the events that occurred in relation to the different models of agenda setting and used this to explore why the Corporate Law Economic Reform Program agenda succeeded over that of the Australian accounting profession.

Klumpes (1994), applied Cobb and Elder (1972) and Cobb et al. (1976), to divide conceptually the events that occurred in the Australian pension fund industry over the 1974-93 period into a four-stage agenda-building process: issue creation, issue expansion, issue entrance and decision stage. He adapted Cobb and Elder (1972) and Cobb et al. (1976) to include the decision stage (see Mitnick, 1980). Using this framework Klumpes described the unfolding contest between the accounting profession and an alliance of interest groups, and presented possible explanations why the alliance prevailed over the accounting profession. Klumpes (1994) attributed the accounting profession’s failure to the alliance’s greater access to government and the power of a government agency, the Insurance and Superannuation Commission, to influence the outcome.

Ryan (1998) applied Cobb et al. (1976) with modifications drawn from Kingdon (1984) to examine the emergence of accrual accounting in the Australian public sector. She devised an analytical framework consisting of issue creation, issue expansion and policy response phases, where each of these three phases was shaped by developments taking place in the political and policy agenda to examine the development of accrual financial reporting policy in Australia.

The studies reviewed above used Cobb and Elder (1972), Cobb et al. (1976) or/and Kingdon (1984), albeit with modifications, to analyse accounting standard setting. These studies demonstrated the idea that the national standard setting process was not merely a result of rational technical process. They showed the usefulness of the agenda setting theoretical framework to analyse accounting standard setting process.

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2.3 Agenda Entrance and Accounting Standard Setting Literature

2.3.1 Agenda Entrance

How particular accounting problems are shaped and how issues gain entrance onto the accounting standard setter’s agenda has received little attention (Walker and Robinson, 1993). This is an important stage of the accounting standard development process, because studies that examined issues that were already on the agenda provided “limited insights into the nature of political activity surrounding” those developments (Walker and Robinson, 1993: 9). Young (1994) using the case of accounting for loan fees, leases, and non-profit organisations at the Financial Accounting Standards Board (FASB) identified that it is important that problems must also be constructed and interpreted as appropriate for the accounting standard setter’s action (Young, 1994). Merely constructing a particular issue as a problem is not necessarily sufficient to ensure that the problem will emerge onto the accounting standard setter’s agenda (Young, 1994).

The literature on agenda entrance identifies that there are various means by which an item can be placed on a decision maker’s agenda. Pressure from external parties can be used as a major means of attaining agenda entrance. This was evident from Johnson and Swieringa’s (1996) study, describing how accounting for investments in debt and equity securities was placed on the FASB’s agenda, following the savings and loan crises in the early 1990s. At that time a project on financial instruments was on the FASB’s agenda. External parties exerted pressure on the FASB to add a narrower project on accounting for certain marketable securities onto its agenda. Following this intense pressure, the FASB added a narrowly focused project to its technical agenda.

Informal means of communication between the decision makers and key interested players have also been found to be influential in placing issues onto the decision maker’s agenda. Rahman et al. (1994) examined the adoption in New Zealand of a standard on investment property accounting (SSAP 17), its withdrawal and subsequent reissue. They described how the need for this standard arose initially because of the inconsistencies in methods used for accounting for investment properties. In 1983, SSAP 17 was introduced but withdrawn after the stock market crash in 1987, ostensibly because of the high level of non-compliance.

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Their study revealed that in both the introduction and withdrawal of SSAP 17 auditors were the most concerned parties who wanted some form of consistency in the reporting practices of accounting for investment by companies. Further to that Rahman et al. (1994) reports that the need for a standard was communicated to the standard setters in the Financial Accounting Committee and the Accounting Research and Standards Board by the auditors through informal means of communications and that this communication was significant in setting the agenda.

Availability of feasible solutions to address a problem is important in determining whether an issue gains entrance on the accounting standard setter’s agenda. Young (1994) using the case of accounting for loan fees, leases and non-profit organisations examined the process of enacting change to the recognition criteria in practices. In the case for lease accounting she found that the FASB did not add the accounting for leases onto its agenda for reconsideration because there was an apparent tension between either to ‘capitalise all lease’ or ‘no capitalisation’ of lease. Capitalising all lease was seen as a radical proposal while no capitalisation of a lease was seen as an effort to assist small businesses concerns and reduce complexity but did not have any theoretical underpinning. Also if no capitalisation was selected it could have meant confrontation between the FASB and the Securities Exchange Commission. Given this “conflicting expectations about an acceptance solution to the problem”, the FASB decided that it would not add accounting for lease onto its agenda for reconsideration (Young, 1994: 97).

Political issues of the day and individuals with privileged access can also play an important role in influencing the accounting standard setter’s agenda. Around early 2000, the Private Finance Initiative (PFI) in the UK aroused significant debate. Hodges and Mellett (2005) examined the development of public sector accounting policy for the UK’s PFI, finding that the PFI was added to the ASB’s agenda due to private sector concerns about the issue. The influence and support of individuals with privileged access and influence were highly important to PFI being placed on the agenda.

The agenda entrance literature also sheds light on the FASB’s experience of the agenda formulation process. Howieson (2009: 594) reviewed statements by the board’s members about their experiences of agenda formulation. He also examined the Australian Accounting

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Standards Board (AASB) and IASB’s criteria for adding items to their agenda, by reviewing the information available on their websites. He reports that the AASB provides little insight into its standard setting process (Howieson, 2009). The IASB does provide some explanation of how it sets its agenda (see IASCF, 2006: para 19-26). User needs of financial statements is said to be used as the overarching criteria in deciding whether to add an issue to the IASB’s agenda. It seems that the IASB works on the assumption that all the other groups of users have similar needs to those of investors (see IASCF, 2006: para 20). When deciding whether an item will address users’ needs, the IASB considers the following:

(a) the relevance to users of the information and the reliability of information that could be provided (b) existing guidance available (c) the possibility of increasing convergence (d) the quality of the standard to be developed (e) resource constraints

Howieson (2009) however, argued that these five factors provide no explanation of the process the IASB uses to add projects to its agenda. He called for the empirical examination of how issues get onto the IASB’s agenda, “especially given the pre-eminence of the IASB as the global standard setter” (Howieson, 2009: 595).

2.3.2 Accounting Standard Setting

Accounting standard setters have projected their standard setting activities as sequential, thorough and comprehensive, suggesting they follow a rational approach to developing standards. The IASB’s due process procedures outlines a rational approach in developing accounting standards and highlights that its accounting standard setting activities are thorough and comprehensive (IASCF, 2006). Little is known about the extent to which the rational approach to developing an accounting standard, as projected by the accounting standard setters, represents what happens in the actual standard setting process. Gerboth (1972: 47) argued that standard setting does not have the “virtues of orderliness and completeness” as standard setters go through disorganised, messy and jumbled processes, which he called “muddling through” to develop standards.

Many studies have examined the accounting standard setting process of national standard setters (for example Nobes, 1991; Klumpes, 1994; Walker and Robinson, 1994; Gordon and Morris, 1996; Ryan, 1998) and the IASC’s standard setting process (Wallace, 1990b; Kwok

22 and Sharp, 2005), but there is little understanding of the IASB’s standard setting process (Larson, 2007). Larson (2007) identified that, as the IASB is regarded as the global standard setter, it is it is important to go beyond the IASB’s board membership and comment letters to explore other aspects of constituent participation. As the IASB is recognised as the global standard setter (Whittington, 2005) it makes it even more important to understand its standard setting process.

Accounting standard setters try to persuade the wider policy community that its standard setting activity is legitimate and fair. Young (2003: 622) argued that FASB board members and staff continuously engage in efforts to persuade others outside of the FASB that its work is “valuable, appropriate, useful, and correct”. She further explained that the FASB’s persuasion efforts include the statement “the process followed in selecting problems and (re)solving them is legitimate and fair” (Young, 2003: 622). The means used to persuade include speeches given by FASB members and staff, articles published by the FASB, meetings with a wide range of interested parties and groups, publishing an exposure draft, and the final standard and other FASB documents (Young, 2003).

The information placed in the public domain does not provide a complete picture of the standard setting process. There are some standard setting activities that are not reported in the public domain. For this reason the nature of the accounting standard setting process has been described as taking place within a “black box” (see Hodges and Mellett, 2008: 3). Hodges and Mellett (2008) argued that forces that were not visible in the public domain were more influential on the accounting standard that emerged than the public domain evidence, such as written submissions, would suggest. Consequently to understand how accounting standards are developed and the nature of the political activity surrounding that development, it is important to go beyond the evidence in the public domain. According to Hodges and Mellett (2008: 22) it is “helpful to interview those involved in the process of accounting standard setting including members and technical staff of the standard setting body and to look to identify those outside who actively lobbied them during the exposure draft”. The studies that have gone beyond the evidence on the public domain and used interviews to understand the standard setting activities include (Klumpes, 1994; Mezias and Scaselletta, 1994; Rahman et al., 1994; Walker and Robinson, 1994; Young, 1994; Johnson and Swieringa, 1996; Ryan, 1998; Hodges and Mellett, 2005).

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Technical staff are normally identified as playing a key role in the formulation of a accounting standard. Typically, technical staff define, manage and finalise projects. In their management of technical projects the technical staff produce summaries of submissions and informal discussion (Walker and Robinson, 1993). Accounting standard setters rely on these staff summaries that have been described as “difficult and subjective” to prepare for developing accounting standards (Walker and Robinson, 1993: 12). However, little is known about the role of staff in shaping the agenda (Walker and Robinson, 1993) and in “defining and managing technical projects” (Howieson, 2009: 595). The IASB’s due process does acknowledge the role staff play in all the six stages of its standard setting process (see para 19-53 IASCF, 2008b). There are a few studies (Dick and Walton, 2007; Richardson and Eberlein, 2011) that have noted the role and importance of the IASB’s technical staff in its standard setting process. Hoffmann (2011) empirically examined the summaries produced by the IASB staff to understand the use of verbal quantifiers such as “a few, many or some” to “evaluate the ... issues raised in the comments sent to the IASB” (Hoffmann, 2011: 3). Such a study provides little understanding of how the close involvement of the IASB’s technical staff in the IASB’s standard setting affects the development of the eventual standard.

In summary the accounting literature that examines accounting standard setting has identified that given the emergence of the IASB’s role as the global standard setter, there is a need to empirically examine how the IASB adds issues onto its standard setting agenda (Howieson, 2009). A review of the literature on accounting standard setting has shown that little is known about the role of technical staff in defining agenda topics and in managing the IASB’s projects (Walker and Robinson, 1993; Howieson, 2009) and to what extent the close involvement of staff affect the eventual standard produced. Further to that, studies have identified the need to go beyond the evidence in the public domain to understand the accounting standard setting process (Hodges and Mellett, 2008). This study therefore responds to these gaps in the agenda entrance and accounting standard setting literature. This study uses the case of the SME project to examine how and why the SME project was added onto the IASB’s agenda. It also examines the complete process of the SME project in order to understand the IASB’s standard setting activity.

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2.4 Summary

The agenda setting literature provided two conceptual frameworks that are sometimes used in studies of accounting standard setting—Cobb and Elder (1972) further developed by Cobb et al. (1976) and Kingdon (1984). Cobb and Elder (1972) and Cobb et al. (1976) seem to assume that policy making takes place in a sequential manner but the literature on standard setting argued that accounting standard setting is not sequential and does not occur in an orderly manner. For that reason, Kingdon’s framework was selected because it allows different actors and events to be analysed in a meaningful manner without necessarily following the sequential order. Kingdon used the three streams of problem, policy and politics to explain how issues gain entrance onto the policy maker’s agenda. Once a problem has gained entrance onto the policy maker’s agenda, Kingdon argued that the task of solving that problem is then passed to the hidden cluster for detailed policy formulation. Kingdon’s ideas of how alternative policy solutions are developed in the policy stream can be used to understand how the problem that was added to the agenda has been developed into a policy solution.

This study responds to the gaps identified in the agenda entrance and accounting standard setting literature. Using the case of the SME project this study examines how and why the SME project was added onto the IASB’s agenda; and examines the complete SME project to further understand the IASB’s standard setting activity.

This study uses Kingdon’s three streams of problem, policy and politics to understand the development of the IFRS for SME standard. Using these three streams of analysis this study also attempts to provide some insight into the ‘black box’ nature of the standard setting process by examining not only the comment letters, but also going beyond the evidence in the public domain to obtain additional documentary material and insights of some of the participants involved to better understand the IASB’s standard setting activity. The next chapter provides a background review of the literature that explains some history of the calls for simplified financial reporting standards.

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Chapter Three The History of Simplified Reporting

3.1 Introduction

Since the early 1950s conventional thinking was that all companies should follow one set of reporting. This was based on the principle that if a company is given the right to operate in society, it must disclose its financial statements to the users in the same way as any other company (Chambers et al., 1978). This may have been the ideal way of reporting at the time but as businesses expanded and increasingly traded across borders, the volume and complex nature of transactions grew exponentially as did the sophistication of company structures. To capture these complexities, the financial reporting requirements became increasingly complex.

To understand the rationale for the need for a simplified set of standards, the concerns raised by SMEs and developing countries of the perceived accounting problems confronting the two groups are reviewed. This chapter is organised into five sections. Section 3.2 provides a background to contextualise the reporting environment in the early 1950s. Section 3.3 reviews literature on SMEs and presents the accounting problems perceived to be confronting SMEs and section 3.4 reviews the literature on developing countries to understand the accounting concerns facing this group. Section 3.5 of the chapter then discusses how the IASC responded to the developing countries’ demand for a separate set of standards. Section 3.6 provides a summary and conclusion of the chapter.

3.2 Background

Most early work to develop accounting standards and guidelines was conducted in the United States (US); therefore the literature reviewed in this section is largely confined to the US environment. The purpose of this section is not to provide a historical account of accounting standards but to highlight those aspects that provide an understanding of how standards over time became complex. This then provides a context to explain the perceived problems facing SMEs and developing countries.

In the early 1900s, there were no formal accounting standards and at that time, accounting guidelines, bulletins and principles, which were issued by the accounting profession were regarded as the best reporting practice. One of the most important documents in the

26 history of accounting regulation according to Zeff (1972) was produced during the 1930s, when the US accounting profession, together with the New York Stock Exchange (NYSE), developed a list of broadly used accounting principles. This publication provided the foundation for the codification and acceptance of Generally Accepted Accounting Principles (GAAP) (Zeff, 1972). Although these pronouncements from the early 1930s were intended to be used by companies listed on the Stock Exchange (Zeff and Dharan, 1994), they were also imposed on SMEs through the Certified Public Accountants’ (CPA) association.

The GAAP requirements in the 1930s were not mandatory but members of the accounting profession were required to follow GAAP to the best of their ability in their work, or in the accounts they prepared (Mosso, 1981). If CPA members failed to comply with GAAP requirements, they faced disciplinary actions or were fined. This meant that CPA members were under some obligation to make all financial reports conform to GAAP requirements, regardless of whether that was needed by the companies.

Changes in the objectives of reporting also contributed to the complexity of standards over time. Initially, in the 1890s, the objective of reporting was to provide information that was useful for creditors and bankers. For example, in 1894, the American Association of Public

Accountants (predecessor to the American Institute of Certified Public Accountants (AICPA)) provided an order of presentation in the balance sheet, which had the emphasis of providing information to creditors and bankers (Hendriksen, 1977). Over time, the focus of reporting changed not only to providing information to creditors, but also to stockholders. This changed the general objective of accounting statements, which included an increased emphasis on the cost basis and going-concern concept, greater focus on the need for consistency in the application of procedures, and reflecting the need for better information for investors (Hendriksen, 1977). The focus of accounting statements from the 1950s was geared increasingly towards the needs of the investors. This shift in reporting focus from creditors to investors implied that the information provided in the financial statements was becoming more complex and complicated. This was because investors sought information that provided information about decision usefulness and future growth of business while creditors sought information mainly to ensure that their clients can repay their debts and loans (Hendriksen, 1977).

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The highly litigious environment of the US also contributed to why accounting standards became very detailed and as a result complex (Zeff and Dharan, 1994). Schuetze (1994) argued that most of the recent complexity arose around the early 1950s because preparers of financial statements and CPA firms had asked for it. Consequently, over time GAAP became increasingly complex. This posed problems for SMEs.

3.3 Accounting for SMEs

SMEs play an important role in both developed and developing economies. They make up about 95 per cent of companies in all economies (UNCTAD, 2000a). Despite being such an important part of the economy, calls for a simplified set of standards for SMEs had been largely ignored for many years (CAPA, 2003). Over the last four decades, SMEs have complained that the accounting requirements with which they have to comply have become onerous, and it is not cost-effective for them to keep up with enormous reporting requirements. Most of the literature that documents the problems perceived to be confronting SMEs comes from the professional literature and is largely confined to the US and UK environments (Benis, 1978; Chazen and Benson, 1978; Epaves, 1978; Mosso, 1981; Carsberg et al., 1985).

This section reviews the problems perceived to be confronting SMEs. It then discusses how accounting standard setters in different countries responded to provide relief to SMEs and concludes with discussion of how adoption of IFRS had intensified the demand for a separate set of reporting.

3.3.1 Perceived Problems Confronting SMEs

The problems perceived to be confronting accounting for SMEs emerges from the outdated legislative requirements imposed on SMEs in many countries. Legislative requirements in many countries require the same set of financial reporting standards to be followed by all entities irrespective of the size or nature of entity (World Bank, 2004a). With the increasing complexities in reporting requirements and in particular accounting standards, accounting for SMEs over the last four decades has became increasingly complex and enormous.

The complexity in reporting requirements was viewed to have led to accounting standards overload for SMEs (AICPA, 1981). Accounting standards overload can be defined as having

28 too many standards, standards that are too detailed, excessive disclosures, complex measurements, and standards not being able to cater for differences in the needs of preparers, users and CPAs (AICPA, 1981). This was perceived as a problem because it was not cost-effective for SMEs to produce financial statements in compliance with GAAP.

SMEs perceived that they incurred enormous cost in producing GAAP compliant financial statements (Lippitt and Oliver, 1983). Complying with accounting standards was costly and complex because SMEs were of the view that: (1) they incurred additional cost of reporting as they did not have the expertise to produce GAAP compliant reports; (2) they faced the stigma of qualified reports when they did not qualify with requirements they thought were irrelevant: and (3) the users of SMEs accounts had different user needs.

Firstly, many SMEs were of the view that they incurred additional cost of reporting as they did not have the expertise to produce GAAP compliant reports. Many SMEs that did not have in-house technical expertise were compelled to resort to CPAs for accounting services (Benis, 1978; Lippitt and Oliver, 1983). As a result, SMEs had to bear costs such as increased external accountants and auditors’ fees in order to comply with irrelevant rules (Chazen and Benson, 1978; Hepp and McRae, 1982; Carsberg et al., 1985).

Secondly, SMEs faced the stigma of a qualified audit opinion if the accounts prepared were not in accordance with the standards (Mosso, 1981). For instance, if a business omits a GAAP requirement because it is irrelevant or too costly or competitively damaging, it suffers the stigma of a qualified opinion. Further to that, if a small business needed a review or compilations instead of an audited report, it still had to bear the financial burden of GAAP disclosures due to the CPAs’ association. That is, the CPAs cannot produce the information in any manner that would suit the needs of SME users, rather they had to prepare it in compliance with GAAP, which imposed unnecessary accounting costs for small businesses. Compliance with irrelevant standards was described as gouging (Mosso, 1981). The CPAs were seen to be creating an image of gouging.1 That is, setting requirements just for the purpose of increasing fees, when GAAP compliance is required, or else to qualify opinion, despite agreeing that certain information is irrelevant (Mosso, 1981).

1 According to Mosso (1981), the US literature refers to gouging as forcing clients to use unnecessary additional services in order to increase fees.

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SMEs, as a result, were of the view that they spent resources complying with standards which were not relevant to their businesses and did not aid in decision making. Time and resources used by SMEs in complying with standards could have been used in other profitable opportunities for their business (Carsberg et al., 1985). Studies argued that SMEs incurred an opportunity cost as they could not afford to pay for both the information necessary to comply with accounting standards and other information that would be more useful (Hepp and McRae, 1982). As such, it was noted that SMEs had to forego development of relevant information, which could have been produced if reports were not to be produced in compliance with GAAP (Epaves, 1978; Mosso, 1981).

Thirdly, the information produced by SMEs in compliance with accounting standards was complex and beyond the decision making needs of the users of SMEs. Financial statements produced in compliance with GAAP were seen as not enhancing the information content of SME financial statements (Benis, 1978). GAAP requirements were argued to require the presentation of information that was not useful to the needs of SMEs (Epaves, 1978; Mosso, 1981). As a result, it was questioned whether: (1) certain standards were relevant to SMEs and produce useful information to financial statement users; and (2) GAAP financial statements are needed by the owners and management of SMEs and by the users of their financial statements (Hepp and McRae, 1982)

The users of SMEs may be classified into two groups—internal and external. Internal users are generally managers and management (McCahey, 1986) and they do not need GAAP compliant financial statements to make their decisions. The decision needs of internal users are focused mainly on managing the business and they can demand any report they want in order to aid their decision making. External users on the other hand, are mainly bankers, trade creditors, credit agencies and major suppliers (Nair and Rittenberg, 1983; Lowe, 1987) and they are in a position to demand special purpose reports. The needs of the external users of SMEs financial statements are mainly focused on ensuring that SMEs are able to repay their debts. The financial reports of SMEs may be used to make lending decisions.

There is a significant gap in the literature on users and their use of SMEs accounts, which is a problem for regulators (Jarvis, 1996). There is no consensus on how bankers use the

30 financial statements produced by SMEs or whether there is any difference between how they use the financial reports of SMEs and the big companies to make their lending decisions. Given the above discussed concerns, SMEs sought relief to alleviate the reporting burden placed on them.

3.3.2 Response from National Jurisdictions

In response to the growing concerns about increasing complexity in the reporting requirement imposed on SMEs in many countries including the US and UK, different measures were put in place to provide relief to SMEs.

Differential reporting in Australia, US and the UK was proposed as a means of alleviating the perceived accounting standards overload problem (Hepp and McRae, 1982; Abdel- Khalik, 1983; Carsberg et al., 1985; McCahey and Ramsay, 1989; Holmes et al., 1991). Differential reporting originates from the idea that different entities should be subject to different accounting rules (Harvey and Walton, 1996). It is built on “the notion that some entities should be allowed to depart from some particular requirements of accounting standards or the entire accounting standards in preparing their financial statements” (CAPA, 2003: 7).

Differential reporting to some extent was seen as a threat to the idea of one set of standards for all. Although differential reporting was seen as a viable option to provide relief to SMEs, there were concerns that it would create two sets of standards and that the companies complying with SME standards would be looked upon as inferior or second class citizens (Cheney, 2003).

In the US, the FASB provided exemption for SMEs by not requiring SMEs to comply with certain standards and providing exemption for disclosure requirement. Other countries provided similar differential reporting regimes for SMEs. A summary of the differential reporting regimes adopted in various countries is presented in Table 3.1. The introduction of differential reporting, to some extent, provided relief to the accounting standards overload problem for SMEs, however, with the introduction of IFRS the problem resurfaced and intensified the need for an SME standard.

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Table 3.1: Summary of differential reporting frameworks Country Document Guiding principle Quantitative measure Australia SAC 1 Dependent on Size benchmark measures not given but alluded to user needs Australian corporations law: Small if it satisfies at least two of the following: a. gross operating revenue less than A$10m for the year b. Gross assets less than A$5m at end of year; and c. Fewer than 50 employees at end of year New Framework for Dependent on Size measure, considered large if exceeds any two of Zealand Differential Reporting user needs the following: (a) total revenue: $5m (b) total assets:$ 2.5m (c) 20 employees US Statement No.126, Public /non public n/a Exemption from Certain Required Disclosures for Certain Non-public entities UK Financial Reporting size Small as Per Companies Act 1985: Standard for Smaller (a) Annual turnover of up to £ 2.8m Entities (b) Total assets not exceeding £ 1.4m “FRSSE” (c) Average number of employees not exceeding 50 Canada Section 1300 and the Public /non public No size measure related amendments to other sections of the CICA handbook set out the options available to entities qualifying for differential reporting EU EU 4th and 7th Listed/non-listed Size criteria used. Directives Malaysia MASB SOP 1, Dependent User Size : large if exceeds any two of the following: Exempt Enterprises needs (a)annual gross rev of RM 10m (b) gross assets of RM5m at year end (c) average 50 employees for financial year Sri Lanka Sri Lanka Listed/ non listed Size measure: Accounting and Size (1) Annual turnover between Rs. 50 – 500 Mn; Standards for (2) At the end of the previous financial year, had: Small Enterprises - shareholders' equity between Rs. 10 – 100 Mn; - gross assets between Rs. 30 – 450 Mn; -liabilities to Banks and other Financial Institutions between Rs. 10 – 100 Mn; and - staff between 100 to 1000 persons South DP 16 - limited Dependent user Size not measured Africa purpose financial needs standards Hong Consultation paper on Dependent user An entity is small if it does not exceed any two of the Kong a proposed needs following: Framework for a. total revenue $50m Differential b. total assets $ 50m Reporting c. 50 employees (Source: adapted from CAPA, 2003).

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With the establishment of the IASB in 2001, the development of international accounting standards has been rapid and designed primarily to address the information needs of the world’s capital market participants (UNCTAD, 2002). The focus on producing standards for the world’s capital markets participants meant that standards were becoming increasingly complex and complicated. Around this time, many countries were committing to adopt IFRS from 2005 or were in the process of aligning their standards with international accounting standards.

The move by countries to adopt IFRS potentially superseded the differential reporting regimes used in their countries. There were concerns amongst the adopting countries as to how adoption of IFRS from 2005 would affect SMEs in their countries.

In summary, the perceived problems facing SMEs has existed for more than four decades. Although differential reporting regimes had been introduced to alleviate the problems, the introduction of IFRS superseded the differential reporting regimes used in various countries. This intensified the need for an SME standard. The demand for separate set of standards was also coming from the developing countries. The next section reviews the problems perceived to be confronting developing countries.

3.4 Accounting for Developing Countries

According to the World Bank’s definition, about 71 per cent (149) of the world’s 209 countries could be classified as developing countries (World Bank, 2008). Developing countries also sought a simplified set of standards that would take into account their needs. This section reviews the literature on developing countries to understand their demand for a separate set of standards.

One controversial issue since the early 1950s has been whether one set of accounting standards is appropriate for application in all countries of the world. Several studies have raised serious doubts as to whether standards that have been devised by those from developed countries, largely for use in a capital market environment, are relevant or appropriate for application in developing countries (Scott, 1968; Briston, 1978; Samuels and Oliga, 1982; Perera, 1985).

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The view that one set of IFRS is suitable for all has been imposed almost by default through the gradual importation into developing countries of the accounting practices and standards of developed countries, often via overseas aid conditions and colonialism (Nobes, 1998). Overseas aid may include exchanges of staff, provision of scholarships for local students and grants of textbooks from developed countries, thus contributing to the importation of the accounting practices of developed countries (Briston, 1978). Adding to this impetus has been the World Bank and IMF, both of which have long insisted on international accounting firms auditing the projects they finance, thus indirectly requiring the use of developed country accounting systems and practices (Hove, 1986: 91; Perera, 1989). Indeed, the World Bank has for many years promoted efforts in developing countries to “develop the accounting profession, install IASC and auditing standards, and prepare students and members of the accountancy profession to use them” (Camfferman and Zeff, 2006: 441). As one of the largest users of financial statements from developing countries, the World Bank became a “major force” in efforts to impose one set of IFRS (Walton, 1998): We have 5,000 sets of audited financial statements coming in every year. It is in our interests to have a common basis for accounting. We also did not want to see developing countries go through the business of evolving a standard-setting process, which is handled very well by the IASC. There is no need to reinvent the wheel (Randolph Andersen, World Bank, cited in Walton, 1998: 10).

The desire is also reflected in the World Bank’s accounting manual, first published in 1995: In the absence of any superior national standards, the Bank requires the use of IASs in the preparation of financial statements because their use facilitates comparability between projects and countries, ensures consistent presentation of financial statements, and facilitates their interpretation (Camfferman and Zeff, 2006: 442).

Between the 1960s and 1990s various studies reported that accounting practices were found to be irrelevant, inconsistent or incompatible with the environment in developing countries or their accounting information needs (AICPA, 1964; Enthoven, 1979; Hassan, 1998). In a comprehensive literature review about developing countries’ accounting practices since from the early 1960s, Wallace (1990a) identified a shortage of skills in developing countries to cope with sophisticated imported accounting technologies, and concluded this shortage resulted in deficient accounting, poor internal control, lack of management accounting concepts, unauditable systems, and late, incomplete, inaccurate and irrelevant financial reporting.

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It has long been argued that the environments of many developing countries are so different from the developed countries, and from each other, that the applicability of the accounting technologies of developed countries for application in at least some developing countries is debatable (Briston, 1978; Hoarau, 1995; Points and Cunningham, 1998): In the case of developing countries where socio-political, economic and cultural differences tend to be not only highly pronounced but also in a highly dynamic and fluid state, the relevance of international accounting standards becomes even more questionable (Samuels and Oliga, 1982: 69).

Developing countries were also seen to be continually adopting foreign accounting systems when in fact that they have little or no control over the relevance of imported accounting and this further ignites the problems faced by such countries (Wallace and Briston, 1993): Developing countries continue to adopt foreign accounting and educational systems. This is often expensive, and the adopting country has little control over the relevance of imported accounting… The main issue is whether the objectives of the assistance granting country (or aid agency) and receiving country are congruent… The biggest problem developing countries have is that of too many foreign “experts” marketing half-baked solutions to problems that neither they nor the recipient nations understand (Wallace and Briston, 1993: 216-217).

SyCip (1979: 19) recommended that international accounting standard-setters consider the circumstances of developing countries because, “[c]ertain standards or principles that may seem logical and appropriate from the viewpoint of a western developed country may be inappropriate or may work undue hardships…in a developing country.” Various events and arrangements seemed to affect some developing countries differently from developed countries in relation to, for example, inflation, devaluation and foreign exchange losses, consolidation of subsidiary interests, transfer pricing and capitalisation of interest (SyCip, 1967; 1981).

Arguments mounted that a country’s accounting principles should suit its local conditions (Talaga and Ndubizu, 1986) and that, especially in those developing countries without sophisticated capital markets, or with relatively large local and national governments and a smaller private sector, the main users of financial statements may differ from those in the developed countries (Hove, 1986).

The Asian financial crisis prompted the World Bank’s “increasing recognition that a sound basis of financial reporting is essential” and, it seems, increased desire for application and

35 enforcement (via the Reports on the Observance of Standards and Codes (ROSCs) of IFRS in developing countries (Walton, 1998, citing Andersen). The idea that IFRS should be applied in developing countries, however, remained controversial, because of problems caused by overly-sophisticated technologies (Hassan, 1998: 74), the expense imposed by requiring full scale IFRS (Nobes, 1998), and because the intended major user group served by the IASC’s conceptual framework is users/investors in public companies. In developing countries, however, economic planners (Hassan, 1998) and other user groups require consideration: The main users/use combinations for accounting in developing countries are; (1) decisions by investors in public companies, (2) decisions (including on accountability) by owners and others in private companies, (3) reporting to tax authorities, (4) decision by managers. (Nobes, 1998: 5).

The World Bank, the Asian Development Bank, the IMF and other lending organisations continued to push for the adoption of IFRS internationally, Pakistan and Bangladesh (both developing countries) doing so in response to those pressures (Ashraf and Ghani, 2005; Mir and Rahaman, 2005). Whether this really has improved financial reporting in Pakistan (Ashraf and Ghani, 2005), and whether IFRS are relevant in developing countries remains a matter of debate. Mir and Rahaman (2005), for example, reporting on Bangladesh observed that IFRS provides no guidance for such major sectors as jute, tea, garments, and oil and gas.

Summarised, these contrasting views are that one set of IFRS (and, thus, the systems and practices required to support compliance) is suitable for all countries and, indeed, will support economic development in developing countries, while the contrary view is that developing countries have special needs and circumstances that should be allowed for and therefore that the financial reporting standards of developed countries are not necessarily appropriate for application in developing countries. Those that advocated the need for standards specifically for developing countries were not happy with the accounting technologies, including accounting standards, adopted from aimed at developed countries. There was a demand for a standard that would cater for the needs of developing countries. However, the precise needs of developing countries were not clear, nor what exactly developing countries wanted in their standard. The next section reviews how the IASC responded to the demand for a standard for developing countries.

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3.5 Response by International Accounting Standards Committee

From the time of its establishment in 1973, the IASC was perceived to be focused on gaining recognition of its standards for use by multinational businesses in a globalising capital market. Its early standard setting efforts, however, were more accepted in developing rather than developed countries, the standards being flexible and the IASC promoting them as a lower cost alternative instead of developing countries establishing their own standard setting infrastructure. Even so, criticisms mounted that the IASC issued standards without regard to the circumstances of developing countries (CAPA, 2003; Camfferman and Zeff, 2006: 1, 190).

The IASC had made two attempts to deal with accounting for developing countries, but remained silent on the issues facing SMEs. The first attempt was made to deal with developing countries’ concerns in 1989. At the IASC meeting that approved IAS 29 Financial Reporting in Hyperinflationary Economies the IASC agreed to form a steering committee that would conduct “a comprehensive review of the financial reporting needs of developing and newly industrialized countries” (Camfferman and Zeff, 2006: 289). The issue of developing countries thus entered the IASC’s formal agenda, albeit as a research project.

The steering committee that was formed comprised members from both developed and developing countries, as well as from international organisations such as the United Nations and the World Bank. The committee employed R. S. Olesegun Wallace as an international research fellow. The steering committee was led under the chairmanship of Talal Abu- Ghazaleh from the Jordanian delegation (Camfferman and Zeff, 2006: 289).

The IASC agreed to terms of reference for the project, at the board meeting in October 1989. The terms of reference were tightly drawn in order to limit the project, which was within the IASC’s mandate, and which mainly came from the IASC Constitution and similar documents (David Cairns, pers. comm., 8 December 2008). The terms of reference developed were as follows: • The Steering Committee will carry out a comprehensive review of the financial reporting needs of developing and newly industrialised countries with a view to making recommendations to the Board of IASC on the improvement and harmonisation or regulations, accounting standards and producers relating to the presentation of financial statements in such countries.

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• In making its recommendations, the Steering Committee should consider the financial reporting needs of all commercial, industrial and business enterprises, whether in the private sector or the public sector, in developing the newly industrialised countries in general, whether or not the countries are members of IFAC and IASC (Fleming, 2000: 10).

The steering committee met for the first and only time in December 1989 in Paris where Georges Barthes (chairman of the IASC) emphasised the role of the steering committee and its terms of reference. This however did not prevent Talal Abu-Ghazaleh persuading the steering committee to extend well beyond the terms of reference in developing the proposal (David Cairns, pers. comm., 8 December 2008).

In March 1990, the proposal of the steering committee was discussed at the meeting of the IASC Board and Consultative Group. At this meeting: Talal Abu-Ghazaleh put forward an alternative proposal from Jordan for the establishment of an independent advisory board. This would be sponsored by international organisations interested in carrying out a comprehensive review of financial reporting needs of developing and newly industralised countries for the purpose of formulating a plan of action for the improvement and harmonisation of their standards and for providing assistance in implementing such a plan. The proposal envisaged a joint project of IASC, IFAC, United Nations, UNDP, the International Finance Corporation, the International Labour Organisation, the International Federation of Stock Exchanges and IOSCO. It would be funded by the sponsoring international organisations and its program and timetable would be determined by the advisory board. Its secretariat would be provided by the IASC or another sponsor. The proposal put forward by Talal Abu-Ghazaleh went way beyond the project’s terms of reference and the IASC’s mandate (David Cairns, pers. comm., 8 December 2008: 4).

The proposal caused considerable discomfort to the board and some clearly saw this proposal as a threat to create a separate organisation. Although the Board approved the project in principle, it was subject to some very significant limitations and without any commitment to proceed. It was also agreed that the Board “would reconsider the proposal in June 1990 when it would also decide whether its existing project would continue” (David Cairns, pers. comm., 8 December 2008: 5).

At the June 1990 Board meeting, the Board agreed that “it should not take the initiative in establishing such an advisory board. It agreed that it would be more appropriate for International Federation of Accountants (IFAC) to take such an initiative, if the council and IFAC so decided” (David Cairns, pers. comm., 8 December 2008: 5). Following the board’s decision, Talal Abu-Ghazaleh announced that he would resign from both the chairmanship

38 and as a member of the Jordanian delegation to the IASC steering committee, as he did not believe that the project served any useful purpose (David Cairns, pers. comm., 8 December 2008: 5). Following the resignation of Talal Abu-Ghazaleh, the steering committee operated under French chairmanship.

During the 1990s, as ideas about the possibility of global financial markets and global financial reporting standards became increasingly accepted the IASC sought from the IOSCO its approval of the IASC’s standards. During the 1990 and 1991 period the IASC board was heavily committed with the ‘improvements’ project and it struggled many times to meet the deadlines set by that project.2 As a result, the developing countries project slipped down the priority list. According to (Fleming, 2000: 10) in 1993, the general project on ‘developing and newly-industrialised countries’ was discontinued. Camfferman and Zeff (2006) explained that a major weakness of the project was that many board members were not convinced that developing countries had reporting needs that should be addressed by separate standards: A major weakness of the project throughout its life was that many in the board were not convinced that developing countries had reporting needs that should be addressed by separate standards. It was agreed, though, that small companies or specific industries might have reporting needs where the IASC could play a useful role (Camfferman and Zeff, 2006: 290).

Given the politics and controversies involved the first attempt to deal with a developing countries project was unsuccessful. The views of those that did not believe in a separate set of standards for developing countries seemed to have prevailed.

The IASC decided in 1998 to approach the topic afresh. The immediate cause of this was the World Bank donation granted in 1997 “with the condition that it be linked to work that was relevant for developing countries” (Camfferman and Zeff, 2006: 405). Although the World Bank funding escalated the project onto the IASC’s agenda, it was not a top priority for the IASC because at that time it was still busy with IOSCO’s core project.3 This delayed any progress on developing countries project:

2 The IASC had started this Improvements Project in 1987. The aim of this project was “to reduce or eliminate alternatives and make the standards more detailed and prescriptive”. This Improvements project was completed in 1998 with approval of ten revised IAS. However, at this stage the IOSCO did not endorse IASC standards for use in cross-border securities trading (IASplus, 2011a). 3“In July 1995, IOSCO agreed to endorse IASs for use in cross-border listings on securities exchanges in all major countries when the IASC had satisfactorily completed a specified set of high-quality

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The topic was re-introduced to the Work Programme in 1998 when the IASC Board approved a project to investigate the implementation of IAS in emerging markets and economies in transition. However, lack of adequate staff resources and the demands of the IOSCO ‘core standards’ project meant that the process of appointing the committee and organising its first meeting were delayed (Fleming, 2000: 10).

The IASC formed a preparatory committee on developing country issues, following this with the formation of a steering committee in November 1998. This committee “included, for the first time, representatives from the People’s Republic of China and the Russian Federation” (Camfferman and Zeff, 2006: 406). The first task of the committee was to identify the needs of the countries concerned and to make recommendations to the Board. However, there was an understanding from the beginning that there would be “little tolerance for changes in standards for recognition and measurement”, but presentation and disclosure simplifications were valid topics that could be discussed (Fleming, 2000: 10).

A number of issues were identified by the committee at the March 2000 meeting. It was noted that in many emerging markets a majority of enterprises did not have adequate accounting systems and there was usually no guidance on how such systems could be developed and maintained (Fleming, 2000: 10). The committee was of the view that the IASC should develop, or sponsor the development of, basic formats for the required financial statements and footnotes for the financial statements required by IASC standards.

The committee concluded that there was no need for any further “industry-specific standards at [the time]” (Fleming, 2000: 15). There were no accounting issues that were unique to emerging economies apart from barter transactions. The conclusion was that the emerging economies needed assistance in educating its accountants and in implementation of the standards: with the possible exception of barter transactions, there were no accounting issues that were unique to emerging markets and suggested that any future project committees should ... include representatives from emerging economies. In their view, what was needed was educational and implementation materials to help accountants in emerging and transition economies (and elsewhere) to understand how a particular accounting standard worked and should be applied (Fleming, 2002a: 15).

accounting standards (known as the "core" standards). The set of "core" standards was initially expected to be completed in early 1998, but the IASC did not complete the full set of "core" accounting standards required until early 1999”(Casabona and Shoaf, 2002: 16).

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In 2000, the steering committee decided to study barter transactions, thus presumably, using the World Bank’s donation for the specified purposes (Camfferman and Zeff, 2006: 406).

In December 2000, IASC’s transition report to the newly formed IASB advised that, “A demand exists for a special version of International Accounting Standards for Small Enterprises” (IASB, 2004a: IN5, DP) but this legacy document did not mention developing economies. An extract of the transition document is reproduced below: During the last few years, the Board has detected various indications that strong demand exists for more work on the application of accounting standards to reporting by small enterprises. The demand has been noted first in developing countries and countries in transition to market economies. People in those countries have commented that International Accounting Standards are becoming more and more complex as a result of focus on the needs of the largest multinational companies and users in the major capital markets. Small businesses make up a large body of the preparers who use International Accounting Standards in developing countries and the complexity of the standards is particularly an issue in countries where International Accounting Standards have been adopted under the law to take on the role of national accounting standards. However, the demand for consideration of the interests of small businesses also comes from developed countries. Those countries contain many small businesses and although those businesses are not, at present, normally required to use International Accounting Standards, they are becoming more interested in doing so in order to achieve comparability with larger businesses and in order to participate in the overall cost economies that will result from having one body of accounting standards in use throughout the world (IASC, 2000: para 29, emphasis added).

Since developing countries were not mentioned in the transition report, it appears that the views of those that did not believe that developing countries had specific reporting needs seem to have prevailed: In the end, developing countries were not mentioned in the IASC’s ‘legacy document’ addressed to its successor. As before, the views of those who did not believe that developing countries had special reporting needs seem to have prevailed. The IASC did urge its successor to consider standards for small enterprises, a project which was indeed taken up by the IASB (Camfferman and Zeff, 2006: 406).

In summary, although IASC had made two attempts to deal with developing countries, both were unsuccessful as there was not enough support for the developing countries project. The project was dismissed on the basis that developing countries did not have unique needs that could be considered. What was evident, however, was that there was a demand

41 for accounting for SMEs and this was mentioned in the transition document to the newly established IASB in 2000.

3.6 Summary and Conclusion

Accounting standards became increasingly complicated in an effort to capture the complexities in trading by businesses. The shift in objectives of reporting from creditors to investors also added to complexity in reporting. That is, with the change in objectives, accounting standard setters focused more on meeting the needs of investors, and decision- useful information for investors in financial markets. The highly litigious environment of the US also contributed to the reasons for accounting standards becoming very detailed and complex. As complexities increased, problems emerged for SMEs.

The perceived problems facing SMEs also emerged from outdated legislation in many countries that required all entities, regardless of their size, to comply with national GAAP, where national GAAP was international accounting standards. This imposed onerous cost on SMEs and it was perceived that the information produced by complying with international standards was not relevant for their user needs. Differential reporting regimes had been introduced to alleviate the problems in many countries but the introduction of IFRS superseded the differential reporting regimes used in various countries. This intensified the need for a standard for SMEs.

The demand for a separate set of standards was also coming from developing countries. One view was that one set of accounting standards was suitable for all countries and this would support economic development in developing countries. The contrary view was that developing countries had special needs and circumstances that should be taken into account and therefore accounting standards developed for the developed countries were not necessarily appropriate for application in developing countries. There was a demand for such a standard that would cater to the needs of developing countries, but it was not very clear what these needs of developing countries were, nor was it clear exactly what was wanted in a standard for developing countries.

The IASC made two unsuccessful attempts to deal with developing countries but there was not enough board support for the developing countries project. Eventually, the idea of a

42 standard for developing countries was dismissed on the basis that there were no unique needs for developing countries that could be considered. What was, however, evident was that there was a demand for accounting for SMEs and this was mentioned in the transition document to the newly established IASB in 2000. Chapter five examines how and why the newly established board—the IASB—dealt with the SME project that it inherited from the IASC as one of its legacy issues. First chapter four sets out and explains the research methods employed to conduct this study.

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Chapter Four Research Methods

4.1 Introduction

This research examines how and why the SME project was added onto the IASB’s agenda. It also examines the complete SME project to understand the IASB’s standard setting activity. The nature of the research question examined in this study suggests the use of a historical research method, and this has been complemented by interviews and observation of key meetings. “Any subject of historical research must be approached by employing research method(s) considered appropriate to the facts being sought and the issues being investigated. That is ‘the problem determines the method’” (Previts et al., 1990a: 144). Given the research questions examined in this thesis, historical research methods, interviews and observation of key meetings are appropriate. This chapter is organised as follows. Section 4.2 discusses the historical research method. Section 4.3 identifies the various data sources used in this study. Section 4.4 discusses data integrity issues and section 4.5 explains the presentation of research findings. Section 4.6 provides a summary of this chapter.

4.2 Historical Research Method

4.2.1 What is History?

History provides “an organised way of studying the past rationalities for and circumstances surrounding decisions taken, connecting the human experience of the past to that of the present” (Hamerow, 1987 cited by Parker, 1999: 20). It has been also described as a “craft that offers a voyage of discovery in the process of consulting sources of evidence and in analysing discourses” (Parker, 1997: 145).

History can be constructed in different forms, including as a story, an event or a form of knowledge (Stanford, 1987; Fleischman et al., 1996). History when constructed as a story places greater emphasis on the personal experience of the historical researcher, which makes this form of construction subjective. Under this construction the past is seen as an imagination rather than being factual and objective (Fleischman et al., 1996). When history is presented as a story, the historian may interpret people’s experiences in an artistic manner. This construction of history considers “historical writing as simply another species of fiction, best analysed using the forms of literary criticism” (Fleischman et al., 1996: 58).

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History when constructed as an event focuses on providing an understanding of the past event where past is considered as something that has ended or is no longer happening (Collingwood, 1965; Fleischman et al., 1996). Such an approach suggests that it may be possible to obtain objective knowledge of the past (Fleischman et al., 1996).

History can also be constructed as a form of knowledge or a way to learn about people’s experience that can be incorporated into other fields of knowledge, for example, accounting (Fleischman et al., 1996: 58). Under this construction of historical argument, materials are used as a means to “analyse the rationales and ideologies for accounting practices” (Fleischman et al., 1996: 58).

This study can be seen as constructing history as an event or way of knowledge that provides some understanding of a past event, that is, the development of the IFRS for SMEs standard. It also provides insights into the IASB’s standard setting activity. History has been argued to support research in the area of policy making and accounting standard setting activities (Previts et al., 1990b). It also provides a means for the standard setters or the policy makers to understand the relationship between standards or policies developed and their political outcomes (Previts et al., 1990b).

A historian is more likely to critique events, their context and outcomes and to apply historical findings in influencing contemporary thought (Parker, 1999). Discovery and contextualisation are two key phases in accounting history where, during the discovery phase, researchers extract primary materials from archives and perform essentially descriptive work. This descriptive work is then interpreted using a theoretical perspective that adds context and allows a broader interpretation of historical events (Napier, 1989).

Historical studies can be classified as either narrative or interpretational and both types contribute to knowledge and aid understanding of complex matters (Previts et al., 1990b). Narrative historical studies often tell an interesting story by describing historical events in a “non-analytical manner” (Previts et al., 1990b: 2). Such studies mainly document the past events and may go a little further than reproducing historical materials or producing a chronological order of events (Carnegie and Napier, 1996). The manner in which the facts

45 are narrated and how the story is written adds to the credibility of a narrative historical study (Carnegie and Napier, 1996).

Interpretational historical studies go beyond the description to explain and interpret relationships (Previts et al., 1990b). Such studies emphasises “the methods of scientific inquiry and the rigour related thereto”(Previts et al., 1990b: 2).

Historical research in accounting can be classified into different subject areas, including biography, institutional history, development of thought, general history, critical history, and data bases—taxonomies and bibliographies and historiography (for further details see Previts et al., 1990a: 137-144). Studies of accounting rule-making agencies have been classified as institutional studies (Carnegie and Napier, 1996). This research is an institutional history, “an historical inquiry of institutions ... [that] requires the review of records, correspondence, memos, news reports, internal reports, minutes and hearings of committees and boards”(Previts et al., 1990a: 139). In this type of study, providing an assessment and analysis of institutions’ social and political environments is essential (Previts et al., 1990a: 139).

4.2.3 Historical Evidence and Limitations

Historical research centres on documenting and explaining context, causes and consequences of events, decisions and relationships (Bedian, 1998). In historical research “the treatment of evidence is an essential component of the historian’s craft” (Fleischman et al., 1996: 60). For that reason, a clear rationale should be provided of all the processes involved in gathering evidence including: ... analysis and verification of sources; a justification for time periods selected; the classification of concepts [and] methods, ... ; the role of primary and secondary sources; and the population versus sample selected for study (Previts et al., 1990a: 150).

A wide range of documentary evidence may be used in an historical study (Stanford, 1987). Although these documents provide some account of what may have happened in the past, care must be taken in using such documents. It is important for the researcher to understand that the documents are written for a particular purpose, which may not be “to provide future historians with what they want to know” and therefore care must be taken when relying on material from such documents (Stanford, 1987: 66). In other words, the documents may provide a biased account of events as they may have been produced with

46 an intent of persuading or misleading the recipient (Stanford, 1987). Therefore it is important for a researcher to decide how far to look into such sources and the extent to which they may be “taken at face value?” (Napier, 1989: 243).

Availability of documents can also become a problem for a historical researcher. A researcher can never be certain that he/she has “not missed some significant reference in an obscure location” (Napier, 1989: 243). Sometimes historical researchers may find that a vast amount of documents that are relevant to their research exists but for some reason the documents may not be available to the researcher (Stanford, 1987). Sometimes what the researcher may need to know has not been documented (Napier, 1989: 243).

When documents that are needed are unavailable or cannot be obtained, a researcher may use indirect sources of documentary material. In such cases the researcher is faced with the difficulty of deciding how much reliance can be placed on such information as there is a possibility that even some of the authoritative sources of information may reflect “views or description” that may have been filtered to provide a certain viewpoint (Napier, 1989: 243).

Therefore, historical evidence needs to be obtained from other sources beyond documentation, and this may include interviews with key people who may have been involved in the phenomenon under examination. Interviews provide another means to obtain qualitative data (Richards, 1996). This may help to verify the historical evidence, assist with understanding of the documentary material, provide insights into the rationale for certain decisions and actions of policy makers, and identify other resources that would aid understanding.

Observations of key meetings can also be used as a means to supplement the information obtained from documentary materials and interviews. Observing key meetings allows the researcher to note the tone, mood, and tension amongst the participants at a meeting that is not apparent from examining documentary materials. This helps a researcher to better understand the context and the politics involved in making decisions.

Like other research methods, the use of the historical research method has some limitations. A historical study “may not reveal the cause of an event as a certainty but it can

47 indicate probable factors affecting the event” (Previts et al., 1990b: 9). This is because the historical evidence used cannot be conclusive (Stanford, 1987) and there is a need for selectivity. A researcher cannot possibly document all evidence for even a topic that has been most narrowly defined (Parker, 1997). It is also not possible for researchers to either see or experience exactly what has happened in the past, because they rely on what is available through documents, and people’s recollections of those events; these sources may not provide the complete account of historical events (Parker, 1997). When events involve interaction amongst people, it becomes impossible to identify what may have been the cause of any particular event or decision. In such cases, it may only be possible for the researcher to identify what possible causes leading to an event or decision under investigation (Parker, 1997: 136).

Both narrative and interpretational historical inquiries are subject to their own limitations. A narrative historical inquiry may “be incomplete” because it is likely that some, or the majority, of the facts may not be available or known at the time of a particular historical project (Previts et al., 1990b: 8). An interpretational historical inquiry “involves expectations for explanation and causal analysis” (Previts et al., 1990b: 9) and this increases the possibility that the researcher may look for facts and events to fit within his/her theoretical framework, and thus bias the findings. In this process there is a possibility that other important events and facts may be overlooked: The historian searches for patterns of development and attempts to proceed from a determination (what happened) to a contingency (how it happened) basis. Facts are necessarily selected and organized through a judgmental process constrained by time and are provisional according to the historian’s perception of the contextual variables of the period studied (Previts et al., 1990b: 9).

This study examines how and why the SME project was added onto the IASB’s agenda. It also examines the complete SME project to understand the IASB’s standard setting activity. Given the nature of the research questions, this study is both a narrative and interpretational inquiry. Chapter five examines how and why the SME project was added onto the IASB’s agenda and its analysis is more interpretational in nature. Chapters six and seven examine the complete SME project to understand the IASB’s standard setting activity. These two chapters firstly set out the evidence using the IASB’s due process steps (narrative), then use Kingdon’s three streams of problem, policy and politics to interpret and analyse those events (interpretational). This is discussed further in section 4.5. This

48 structure has been used as a means to overcome the limitations of interpretational history that may force the researcher to look for certain facts to fit into Kingdon’s three streams of analysis. It also provides a means to include any event that may be important but may not have been captured as part of the IASB’s due process within the analysis. It therefore provides a means whereby the interpretive history complements and helps to overcome some limitations of narrative history.

4.3 Data Sources Time Period The time period examined in this study covers events from 2000 to the release of the IFRS for SMEs standard in July 2009. The study begins with the IASB’s establishment because this was when the IASB started discussion about whether to add to its agenda the SME project inherited from its predecessor, the IASC. Given the study is focused on examining the development of the IFRS for SMEs standard, this study does not cover events after the release of the eventual standard. The time frame selected for this study provides a coverage of events that provides a richer understanding of the development of the IFRS for SMEs standard. A summary of key events in the development of the IFRS for SMEs standard is provided in Table 4.1.

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Table 4.1 Summary of key events in the development of the SME standard Time Period Events in the development of the SME standard

March 2001 Establishment of the IASB.

IASB inherited the Accounting for SMEs issue as one of its potential future projects from the IASC. April 2001-June 2001 Discussion with Standards Advisory Council (SAC) and National Standard Setters (NSS) and other interested parties whether to add the Accounting for SMEs to its agenda. July 2001 The initial project on Accounting for SMEs was extended to Accounting for SMEs and Emerging Economies. August 2001- May 2002 IASB continued discussions on whether to add the Accounting for SMEs and Emerging economies onto its agenda. June 2002 Accounting for SMEs and developing countries project added onto the IASB’s research agenda July 2003 Paul Pacter appointed as the Director of the SME project.

Accounting for SME project added onto the IASB’s active agenda. September 2003 World Standards Setters (WSS) Meeting June 2004 Discussion Paper issued April 2005 Staff Questionnaire on Recognition and Measurement issued September 2005 World Standard Setters (WSS) Meeting October 2005 Public Round-tables on Recognition and Measurement Simplifications February 2007 Exposure Draft issued June 2007 Field testing of Exposure Draft April 2008 Discussion of issues raised in the comment letters and field tests May 2008- March 2009 IASB working on providing further simplifications in the proposed IFRS for SMEs standard. April 2009 Draft ballot for the Exposure Draft July 2009 IFRS for SMEs Standard issued

Since 30 June 2009 there have been some changes in the IASB’s board membership and changes in the titles used within the IASB’s structure. These changes were as follows:

• June 2009 – the term of Tom Jones, the vice-chairman of the IASB expired. • July 2010 – Paul Pacter the director of the SME project was appointed as IASB board member. • July 2010 – the Standards Advisory Council was renamed as the IFRS Advisory Council (IASB, 2010, webpage). • July 2010 – the IASC Foundation was renamed the IFRS Foundation (IASB, 2010, webpage). • July 2011 – Sir David Tweedie, the chairman of the IASB, was replaced by Hans Hoogervorst.

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• July 2011 – Ian Mackintosh was appointed as the new vice-chairman of the IASB. • The following board members’ terms on the IASB expired—Mary Barth (June 2009); Jim Leisenring, Gilbert Gelard, Robert Garnett (June 2010); Tatsumi Yamada, Warren McGregor (June 2011). This study will refer to the positions held by the board members and the names used within the IASB’s structure at the time this study was undertaken.

Data used in this study were gathered from three main sources—documentary materials, attending key meetings and interviews with key participants.

4.3.1 Documentary Materials

A wide range of documentary material relating to the SME project was collated for use in this study. These documentary materials, identified in Table 4.2 have been divided as either public or private documents. The public documents are those documents that were publicly available, including material from the IASB, European Financial Reporting Advisory Group (EFRAG), World Bank and ISAR. The private documents are those documents that were not publicly available and were obtained via private correspondence. These private data includes selected International Standard-setting Reports (IStaR). The IStaR report is a detailed proceeding of the IASB board meeting. It is produced by Professor Walton, a long standing observer of the IASB’s board meetings. IStaR report details discussion of the debate and the positions taken by individual board members. These reports provide far greater insights than could be obtained from the IASB’s Update and Insights Newsletters. Selected IStaR reports were used for those months when the SME project was discussed at the IASB board meeting. Other private documents include private files and documents from Professor Cairns and Paul Pacter. The documentations used in this study are listed in Table 4.2.

As this study employs a range of different IASB publications, such as observer notes, annual reports and IASB updates, to aid the reader with the material discussed, the in-text citation includes a brief description of the document that is cited. For example, reference to the IASB observer notes for December 2005 is cited as (IASB, 2005, Observer Notes).

There were three issues encountered in using the IASB documents. The first issue was that some publicly available documents were available to the public for a limited time and were

51 no longer available at the time of this research. Attempts made to obtain these documents from the IASB were unsuccessful. These documents were: IASB Observer Notes December 2004; IASB Observer Notes December 2005; World Standard Setters (WSS) Meeting documents September 2005. This shows that documents that were publicly available at the time of the project are not necessarily available later and limits the possibilities for historical research information even for very recent IASB projects.

The second issue was that when a full account of a particular meeting was unavailable there was no choice but to rely on staff summaries or second hand reporting. In some cases, the actual account of the meeting could only have been obtained by attending those meetings, and they were not necessarily open to the public. For that reason, this study relies on the staff summaries of the discussion for the working group meetings, the public round-tables and the field test results.

The third issue was that the IASB documents sometimes use the generic term the ‘IASB’ to describe activities that may have been undertaken by the staff or board members. Although this study tried to make explicit the role of technical staff in developing the SME standard, it was difficult at times to discern from the IASB’s documents who was carrying out the reported activity. In cases where it was not clear who was carrying out the reported task, this study uses the generic term the ‘IASB’ as reported in the IASB documents to avoid any confusion.

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Table 4.2 Documents used in this study Source Documents Public/Private IASB -IASB Updates Newsletters (2002-2009) Public -IASCF Annual Report (2001-2009) -IASB Insight Newsletters (2003-2009) -IASB Due Process Handbook 2006, 2008 and 2010 -IASB Constitution Documents 2003, 2004 and 2005 -IASC Foundation’s 2003 and 2004 Constitution Review Documents -First and Second round of comment letters to the constitution review document

-Discussion Paper: Preliminary Views on Accounting Standards for Small and Medium-Sized Entities (IASB, 2004a, DP) -120 Submissions to the Discussion Paper -Staff Questionnaire: Staff Questionnaire on Possible Recognition and Measurement Modifications for Small and medium-sized Entities (SMEs) (IASB, 2005i, SQ) -101 Submissions to the Staff Questionnaire

-Exposure Draft: Proposed IFRS for Small and Medium-Sized Entities (IASB, 2007b, ED) -Basis for Conclusion: Exposure Draft (IASB, 2007a, BC of ED) -161 Submissions to the Exposure Draft -Field test questionnaire: IFRS for SMEs (IASB, 2007c, FT). -IFRS for SMEs standard (IASB, 2009c, IFRS for SMEs) -Basis for Conclusion—IFRS for SMEs standard (IASB, 2009d, BC of IFRS for SMEs). IASB -IASB Board Meeting papers (Observer Notes 2003-2009) Private/Public UNCTAD/ ISAR’s 19th-25th session reports (1999-2009) Public ISAR UNCTAD annual reports (2003-2009) World Bank ROSC reports (2001-2009) Public Other World Bank documents EFRAG EFRAG annual review (2004-2009) Public Colin Selected IASC Insight Newsletters 2000 -2002 Private Fleming Prof Peter Selected IStaR reports* Private Walton 2002: February 2003: July, September 2004: February, April, May, June, July, October, December 2005: February, March, July 2006: January, February, October 2007: January, September 2008: April, May, June, July, September, October, November 2009: January, February, March, April. Prof Cairns Private documents relating to IASC’s project on developing countries Private Paul Pacter A few selected files that were used at presentations made by the Paul Private Pacter *Permission was obtained from Professor Walton—author for use of IStaR reports in this research.

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4.3.2 Key Meetings

IASB Board Meetings - Web casts and audio

Some IASB board meetings that discussed important issues in the development of the SME standard were observed through the web cast. These meetings were: • 2008: April, September, October, November and December • 2009: January, February, March, April and May

In other cases the recorded versions of the meetings that were later placed on the IASB’s website were used to understand the dynamics of the discussions.4 These meeting were:

• 2006: July, September and October • 2007: January and September • 2008: March, May, June, and July Recorded versions of the IASB’s board meeting between 2003 and 2005 were not made available by the IASB and therefore could not be used in this study.

Standards Advisory Council (SAC) Meeting

The SAC is established under the IASCF constitution (IASCF, 2006). It is a forum for the IASB to consult a wide range of representatives “from user groups, preparers, financial analysts, academics, auditors, regulators, professional accounting bodies” and investor groups that are affected by, and interested in, the IASB's work (IASCF, 2006). The SAC meets three times annually to advise the IASB on a range of issues, including the IASB’s agenda and work programme (IASCF, 2006).

The SAC meeting attended by the author was held from 13-14 November, 2008 in London. At this SAC meeting the director of the SME project presented the progress on the development of the SME standard. Attending this meeting facilitated a better understanding of the SME project, and also provided an opportunity to observe the dynamics and politics involved in standard setting and to interview key IASB and SAC members. This meeting was attended by SAC members, IASB board members and

4 The IASB board meeting in November 2008 was not attended during the trip to Europe to conduct the interviews because of the cost and the additional time required of staying back in London.

54 representatives from international organisations such as the World Bank, IMF, Basel Committee and the European Commission (EC).

UNCTAD’s ISAR Meeting ISAR is a working group of accounting experts operating under UNCTAD. ISAR “assists developing countries and economies in transition to implement best practices in corporate transparency and accounting in order to facilitate investment flows and economic development” (UNCTAD, 2009). This group meets annually to discuss issues facing its member countries.

The meeting of the 25th Session of ISAR was held from 3-6 November, 2008 in Geneva Switzerland. This meeting was attended by more than 250 participants from UNCTAD member countries around the world, representatives from international organisations, and other invited participants. At this 25th session the 25th anniversary of ISAR was noted and participants reflected on the achievements of ISAR over time. SME reporting has been recognised as one of its main achievements. ISAR’s Level III guidelines for micro entities was one of the issues discussed during this session (UNCTAD, 2008). Attendance by the author at this forum enabled a better understanding of the issues emerging from the documentary analysis and provided the opportunity to interview some of the key participants.

Confederation of Asian and Pacific Accountants (CAPA) Meeting CAPA represents national accountancy organisation in the Asia-Pacific region and it has a membership of 34 accountancy organisations in 24 jurisdictions (CAPA, 2009). The 15th Board meeting of CAPA was held from 7-10 May, 2008 in Kathmandu, Nepal and this meeting was attended by the author. It was attended by more than 30 representatives from CAPA member countries, the World Bank, the International Federation of Accountants (IFAC), the Asian Development Bank (ADB) and other invited participants. Issues facing SMEs was the theme for this meeting, where various participants highlighted the issues facing their countries.

Attendance by the author at these three key meetings provided a means to further triangulate the documentary material obtained to ensure that valid interpretation. Also the above mentioned meetings provided the opportunity to interview selected members from

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ISAR, IASB and SAC, who participated in the standard setting process of the IFRS for SMEs, and also to develop a better understanding of the issues and politics involved. It also provided the opportunity to have discussions with other members attending the meeting.

4.3.3 Interviews

An elite interview focuses on a particular type of interviewee (Richards, 1996). “Elite” individuals are those considered to be influential, prominent, and/or well-informed people in an organisation or community and they are selected for interviews on the basis of their expertise in areas relevant to the research (Marshall and Rossman, 1999: 113). Elite interviews can aid in the interpretation of the personalities involved in the decision making process and also assist to explain the outcomes of certain events under examination (Richards, 1996). They may also be used to further triangulate the documentary and other material obtained but more importantly to substantiate and further understand the material collected. The interviewees were selected on the basis of a literature search that identified key participants in the standard setting process of the IFRS for SMEs standard and suggestions made by university visitors with knowledge of the project and informants in the first round of interviews.

An overview of the interviews that were undertaken classified as elite and other is provided in Table 4.3.

Table 4.3 Interviews classified as elite and other Group Elite Other Total IASB 8 2 10 SAC 1 1 2 EFRAG 1 0 1 ISAR 4 0 4 International Organisations 2 1 3 Regional Professional bodies 2 10 12 Total 32

Interview participants in this study were selected on the basis of their involvement in the development of the SME standard. An attempt has been made to interview not only IASB board members and those involved in the development of the standard, but to interview also participants from other key groups who were knowledgeable and aware of developments in the SME project. This was done to ensure that the study was presenting not only the views of those involved in the development process but also those who were

56 outside the process. This was to ensure that the events that occurred were presented in an objective manner.

Thirty interviews were conducted between May 2008 and December 2008, and a further two in November–December 2011. Details of the interviews that were conducted are as follows: • 15 interviews conducted in conjunction with the CAPA meeting, Nepal, 7-10 May, 2008. • three interviews conducted in conjunction with the UNCTAD-ISAR meeting, Geneva, 3-6 November, 2008. • eight interviews conducted from 9-12 November, 2008 and in conjunction with the SAC meeting 14-16 November, 2008 in London. • three telephone interviews conducted during November–December 2008. • two telephone interviews conducted in November–December 2011. The last two interviews were conducted in November–December 2011 to clarify matters that emerged in the process of analysing the data and in writing the findings of this thesis. These were with Geoff Whittington, a former IASB board member in November 2011, and Stig Enevoldsen, the chairman of the EFRAG at the time the SME standard was developed in December 2011.

The interviews conducted are classified into six groups—IASB, SAC, EFRAG, UNCTAD’s ISAR, international organisations and regional professional bodies. The IASB is the international accounting standard setter that develops international accounting standards. The SAC is the advisory group that advises the IASB on the items that will be added to IASB’s agenda. EFRAG, UNCTAD’s ISAR, international organisations and regional professional bodies are examples of groups that try to lobby or influence the IASB’s standard setting process.

IASB Ten interviews were conducted in this group. Five interviews were conducted with IASB board members, including the chairman and the vice-chairman of the IASB (Sir David Tweedie, Tom Jones, Jim Leisenring, Robert Garnet and Geoff Whittington). Sir David Tweedie and Tom Jones, the chairman and vice-chairman of the IASB were advocates of the SME project. Jim Leisenring consistently opposed the project and he provided valuable

57 insights into why he was in opposition to the board. Geoff Whittington was a member of the sub-committee formed for the SME project and he provided insights about the discussions at this sub-committee. The director of the SME project (Paul Pacter) was also interviewed because he has a closer knowledge of the issues relating to this project. He plays an influential role in providing advice to the board and in producing material for the board discussion. Hence, he plays an important role in the standard setting process. The Director of Operations and Secretary to the IASC Foundation (Tom Seidenstein) was also interviewed to understand the overall politics of the IASB and to get insights into the funding arrangements.

Three interviews were conducted with former IASC members and staff. Professor David Cairns, the former secretary general of the IASC 1985-1994, Colin Fleming, former project manager developing countries project, and Professor Chris Nobes, an IASC board member from 1993 to 2001, were interviewed to obtain insights into the politics and issues that confronted the IASC and, in particular, the developing countries project, which was twice taken on board by the IASC, and their views on the development of the SME project. Professor David Cairns is also a member of the IFRS for SMEs working group and he provided valuable insights about the dynamics of the discussion within the group.

SAC Two interviews were conducted in this group, to gain insights into the influential role SAC plays in advising the IASB of its agenda items. The chairman of the SAC (Professor Nelson Carvalho) and IMF representative to the SAC (Kenneth Sullivan) were interviewed. They provided insights into the discussion at SAC that had been encouraging the IASB to deal with the SME project since the IASB’s establishment.

EFRAG In the process of analysing the data, EFRAG was identified as an influential player in the IASB’s development of the SME standard. The chairman of EFRAG (Stig Enevoldsen) was interviewed to obtain a better understanding of EFRAG’s involvement in the development of the IASB’s SME standard.

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ISAR Four interviews were conducted in this group. The four key ISAR experts that were selected to be interviewed in this group were Professor Robin Jarvis, Professor Peter Walton, Richard Martin and Vickson Ncube. These interviewees provided valuable insights about the development of the UNCTAD’s three-tier reporting guidelines and UNCTAD’s calls for a simplified set of standard for SMEs. Professor Robin Jarvis was also a member of the IFRS for SMEs working group and he shared his experiences and the dynamics of the discussion within the group. Professor Peter Walton is also a long standing observer of the IASB meetings and he provided valuable insights about the politics within the IASB board in developing the SME standard.

International Organisations The three interviewees from the international organisations were: program manager of the World Bank (Dr Zubaidur Rahman); the director of IFAC (Russell Guthrie); and the manager of the Asian Development Bank (ADB) (Kathleen Moktan). These international organisations were considered influential players, with the World Bank in particular strongly encouraging the IASB to take on the SME project. This group of representatives was interviewed to understand the role the international organisations played in the development of the SME project.

Regional Professional Bodies Twelve interviews were conducted in this group. President (Kamlesh Vikamesy), Vice president (In-ki-Joo), Executive director (Leong Chew Poon) and consultant of CAPA (Dr Susela Devi) were interviewed to understand the issues facing developing countries and how, if at all, these issues were considered by the IASB in the development of the IFRS for SMEs standard. The president of SAFA (Syed Mohammad Zaidi) was also interviewed to understand what had been happening in the SAFA region and to what extent the issues facing these regions are considered by the IASB. Other CAPA representatives from Sri Lanka (Sujeewa Mudalige and Yohan Perera), Bangladesh (M Farhad Hussain), Malaysia (Nik Mohamed Yusoff), Canada (Lyle Handfield and Jackie Poirier) and New Zealand (Keith Wedlock) were also interviewed to understand their views about need for SME standard in these countries and what has been done by these countries to provide relief to SMEs. A summary of the details of the interview participants are provided in Table 4.4 .

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Table 4.4 Interview schedule Name Position Elite/ Date Location of Other Interview IASB Sir David Tweedie Chairman IASB Elite 13/11/2008 London Tom Jones Vice-Chairman IASB Elite 25/11/2008 Telephone

Jim Leisenring IASB Board Member Elite 9/11/2008 Paris Robert Garnett IASB Board Member Elite 5/11/2008 Geneva Dr Paul Pacter Director-IFRS for SMEs Project Elite 14/11/2008 London Prof David Cairns Former Secretary General-IASC 1985-1994 Elite 11/11/2008 London IFRS for SMEs- Working Group Member Tom Seidenstein Director of Operation and Secretary IASC Other 14/11/2008 London Foundation Colin Fleming Former Project Manager IASC Other 11/11/2008 London Prof Chris Nobes Professor in Accounting Elite 12/11/2008 London Prof Geoff IASB Board Member Elite 9/11/2011 Telephone Whittington SAC Prof Nelson Carvalho Chairman of Standard Advisory Council Elite 14/12/2008 Telephone Kenneth Sullivan SAC Member Other 13/11/2008 London IMF representative EFRAG Stig Enevoldsen Chairman of EFRAG Elite 9/12/2011 Telephone ISAR Prof Robin Jarvis IFRS for SMEs -Working Group Member Elite 5/11/2008 Geneva ISAR Expert Prof Peter Walton ISAR Consultant Elite 27/11/2008 Telephone Author IStaR reports Richard Martin ISAR Expert, Director ACCA global Elite 6/11/2008 Geneva Vickson Ncube ECSAFA, ISAR expert Elite 6/11/2008 Geneva International Organisation Russell Guthrie Director, IFAC Elite 07/05/2008 Nepal Dr Zubaidur Rahman Program Manager, World Bank Elite 10/05/2008 Nepal Kathleen Moktan Asian Development Bank Other 08/05/2008 Nepal Regional Professional Body Kamlesh Vikamesy President CAPA Elite 07/05/2008 Nepal Dr Susela Devi Academic -University of Malaya Elite 8/05/2008 Nepal Consultant CAPA Jackie Poirier* Past Chair-Certified General Accountants Other 08/05/2008 Nepal Association of Canada (CGA) Jean Ettridge The Institute of Chartered Accountants of Other 11/05/2008 Nepal England and Wales (ICAEW) In- ki-Joo Vice President CAPA Other 10/05/2008 Nepal Leong Chew Poon Chief Executive CAPA Other 10/05/2008 Nepal Syed Mohammad President South Asian Federation of Other 09/05/2008 Nepal Zaidi Accountants (SAFA) Sujeewa Mudalige* Partner, PWC, Sri Lanka Other 09/05/2008 Nepal Yohan Perera* KPMG, Sri Lanka Other 09/05/2008 Nepal Tay Kay Luan Director ASEAN and Australasia-Association Other 11/05/2008 Nepal of Chartered Certified Accountants (ACCA) Keith Wedlock The Institute of Chartered Accountants of Other 08/05/2008 Nepal New Zealand (ICANZ)

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Nik Mohamed Yusoff President-The Malaysian Institute of Other 08/05/2008 Nepal Accountants (MIA) Lyle Handfield* Certified General Accountants Association Other 08/05/2008 Nepal of Canada (CGA) M Farhad Hussain Past President-Institute of Cost and Other 09/05/2008 Nepal Management Accountants of Bangladesh (ICAB) *Joint interview

Interview Process/Protocols The interviews ranged between 20 minutes to two hours and the average length of an interview was about 40 minutes. The interviews were conducted mainly on the premises of the interviewees or at the meeting venues of the key meetings that were attended. All the interviews except two were recorded with the permission of the interviewees and were later transcribed. Detailed notes were taken for the other two interviews.5 Telephone interviews were conducted with three participants due to their unavailability at the time most interviews were conducted in Europe in November 2008. A further two telephone interviews were conducted in November-December 2011 to clarify the matters that were raised in the process of writing the thesis. All the interviewees agreed to be named and identified in this study.

Interview questions were mainly derived from the key themes that emerged from document analysis and were also informed by the agenda setting framework used in this study. Interviewees were sent the interview questions one week prior to the interview. The interview questions were semi-structured to gain the interviewees’ insights into the pertinent issues. Questions were asked of the interviewees based on their knowledge or involvement in the development of the IFRS for SMEs standard. Therefore, not all interviewees were asked the same questions in many cases. The interviews were transcribed and copies of the transcription was sent to each interviewee, who was given the opportunity to correct, add and contextualise the transcripts to ensure that it reflected the interviewee’s views.

Although interview provides insight information about a particular event that may not be documented, it also has its own limitations (Richards, 1996). There is always a possibility

5 The two interviews that were not recorded but where notes were taken were with representatives from regional professional bodies.

61 that interviewees may provide a biased account of events, or disclose only some information about a particular event by withholding any information that may be controversial (Richards, 1996). Information obtained from the interviews may also be limited to the interviewees’ recollection of events in which case the complete account of the events that occurred may not be obtained. The interview material used in this study is complemented by the documentary material and therefore there is some triangulation. To ensure objectivity is maintained, a range of key people involved in the process of developing the SME standard was interviewed, including the board member that opposed the project, Jim Leisenring, a long standing observer of the IASB’s board meeting, Professor Peter Walton, and members of the working group for the SME project.

4.4 Data Validity

Ensuring the validity of the research data is an important element of any research. Four criteria (Scott, 1990) that can be used to ensure that the quality and reliability of the data exists are:

1) authenticity—is the evidence obtained genuine? 2) credibility—is the evidence free from error? 3) representativeness—is the evidence typical of its kind, and if not is the extent of its untypicality known? 4) meaning—is the evidence clear and comprehensible?

Authenticity of the documentary material is ensured by using documents from genuine sources. For example, a range of the IASB’s formal documents including the IASB’s Update and Insight newsletters, IASCF annual reports, observer notes of the IASB’s board meeting and other documents produced relating to the SME project were obtained from the IASB’s website. Other documents relating to EFRAG, UNCTAD, the World Bank and IFAC were obtained from their respective websites. By obtaining a range of formal documentary materials from genuine sources these can be used as a means of assurance for the authenticity of the data used in this study.

Credibility of the research evidence implies that the data used in a study is free from error, free from any evasion and has not been distorted in any manner (Scott, 1990). It has been acknowledged that documents may be produced with a particular intent and may also be

62 filtered to present a particular view (Stanford, 1987). To ensure the credibility of the data used and to reduce the chances of presenting a biased account of events multiple data sources have been used to cross-check and supplement the material produced by the IASB. For example, IStaR reports were used to cross-check the information produced by the IASB and to report on those events where the IASB’s publications did not give much detail. In many instances, it was found that the IASB’s Updates and Newsletters provided highly concise summaries of board meetings, from which it was difficult to understand the context of discussion and rationale behind why a certain decision was made. This gap was filled by using IStaR reports for those board meetings. In some instances, it was also found that the IASB Updates and Newsletters did not report about some events or information that was important. This missing information was picked up by listening to a web cast of board meetings and from the IStaR reports.

To obtain further assurance that the documentary evidence obtained was credible, the key people involved in the development of the SME standard were interviewed. These key people were those who have power in developing and making decisions for the SME standard, for example the director of the SME project, the chairman and vice chairman of the IASB. Also a board member who opposed the project was interviewed to seek alternative views in the interview material. To ensure that the interview material was free from error, the interview participants were given the opportunity to correct the transcripts before use in this study. The interview data then was used to supplement the documentary material and to add credibility to the information.

Representativeness means that the documentary evidence used should be typical of its kind (Scott, 1990). This suggests that, where possible, full sets of documents covering the whole project should be used in a study. Also, a wide range of documents relating to the SME project was used in this study (see Table 4.2). For example the range of IASB produced documents used include the IASB Update and Insight Newsletters, IASCF annual reports, IASCF Constitution, IASB Due Process Handbook, Observer Notes of the IASB board meetings and comments letters to the various consultation documents relating to the SME project. There were a few instances where some of the IASB’s observer notes relating to the SME project were not available, for example, IASB’s observer notes for December 2004, November 2005 and the WSS meeting documents for September 2005. Attempts made to

63 obtain these missing documents from the IASB were unsuccessful. For that reason, where possible information relating to those missing documents was obtained from alternative sources, such as IStaR reports and IASB Updates, or was acknowledged as missing reports. Apart from those IASB documents, a wide range of other documentation was also obtained, which included the EFRAG annual review that documented EFRAG’s input into the development of the IASB’s SME standard, UNCTAD’s ISAR documents relating to development of its three-tier reporting guidelines and the World Bank’s documentation on the Reports on the Observance of Standards and Codes (ROSC) program that highlighted the need for a simplified set of reporting for SMEs.

Representativeness also requires that information is obtained from different sources. A wide range of sources were also used to obtain the information required in this study. For example, to avoid heavy reliance on the IASB’s documentary evidence a wide range of other sources of information was also used. Information was obtained from attending key meetings of SAC, UNCTAD and CAPA, by observing selected IASB board meetings via webcast and audio recordings, as well as by conducting interviews to clarify the documentary evidence that was collected.

To ensure that the meaning of the evidence collected is clearly understood and appropriately interpreted it is important to understand the terminology and codes that may be used in the documents. To ensure that the documentary evidence was appropriately interpreted, it was substantiated by watching and/or listening to the IASB web casts and audio recording of the IASB meetings to understand the dynamics and the overall context of the issues that were discussed in the documents. By watching the web casts or the audio recordings of the IASB’s board meetings the tone, mood and tension at the meetings could also be observed to understand the politics involved in certain decisions that were made. In some instances, where the meaning of some terminology or codes used in the IASB publication was not clear, it was clarified during interviews with the IASB’s board members. There is this possibility, however, that sometimes official documents may be produced with a particular intent or aim to justify a course of action or decisions. Therefore certain terminology that may be misleading can be used to conceal the real intent (Scott, 1990). For example, the IASB documents that were publicly available did not provide a detailed breakdown of the results of any of its consultative documents relating to the SME project.

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The observer notes of such board meetings also used quantifiers that did not give information about the response of the comments letters. For example, instead of providing percentages, words such as “a few”, “some” and “many”, or at times no quantifiers, were used at times to report the findings of the comment letters to the staff questionnaire and the exposure draft. Therefore the comments letters to the discussion paper, the staff questionnaire, and the exposure draft were analysed as part of this study to provide analysis with percentages to give some indications of what were the responses for various consultative documents.

4.4.1 Data Analysis

Given the large volume of data that was gathered covering almost eight years, Nvivo software was used to help analyse the data. Nvivo software provides researchers with a tool that provides detailed and systematic analysis on both small and large volumes of data (QSR, 2009). Nodes were developed from the key themes that emerged from the agenda setting theoretical framework. Using Kingdon’s (1984) problem, policy and politics streams, the interview material and other documentary material were coded using Nvivo software into the three streams and then further coded into different elements of each stream.

For the purpose of this study, the IASB’s policy community comprised 14 board members and its technical staff. The IASB’s policy community is then further divided into hidden and visible clusters. This is discussed in chapter five.

To narrow down the scope of this study, of the 27 technical standards covered in the IFRS for SMEs standard, four standards were selected for closer analysis. These standards were: IAS 16 Property Plant and Equipment; IAS 17 Leases; IAS 36 Impairment of Assets; and IAS 41 Agriculture. These four standards may not be a representative sample of all the standards in the SME standard because there is a differing degree of complexity and issues amongst standards. IAS 16, IAS 17 and IAS 36 were selected as these standards would commonly apply to a typical small business. IAS 41 was one of the standards thought to be of particular interest to developing countries. The IASB had indicated that the eventual SME standard would also be beneficial for developing countries so for that reason this standard was selected. Also some aspects of IAS 16, 17 and 41 were provided by optional or mandatory fallback to full IFRS. By examining these three standards the analysis is also able

65 to capture the board’s decision on optional and mandatory fallback to full IFRS. One limitation of such analysis is that the findings of these four standards cannot be generalised across the remaining 23 standards.

4.5 Presentation of Research Findings

The IASB’s due process provides the schema to structure and analyse the vast amount of information collated in this study. The IASB’s voting requirements occur at key points of the project, and these are an important part of the due process. For the IASB to add a project onto its active agenda, issue a discussion paper, other discussion documents and administrative decisions, it requires a simple majority of votes, that is out of the 14 board members, the IASB needs to get at least eight votes. Prior to July 2005, the requirement to approve the exposure draft, IFRS or the interpretations of IFRS required eight votes. But under the revised Constitution in July 2005, this requirement was raised from eight to nine votes (IASCF, 2005b) as shown in Figure 4. 1.

Figure 4. 1 Voting requirement for the IASB’s publication

(IASCF, 2006: 15)

The IASB’s Due Process Handbook also states that when deciding whether to add a project onto its agenda and in developing a standard it is guided by its due process procedures; for that reason, the findings chapters of this thesis are structured using the IASB’s due process steps, which are:

(a) The staff are asked to identify and review all the issues associated with the topic and to consider the application of the framework to the issues; (b) Study of national accounting requirements and practice and an exchange of views about the issues with national standard-setters; (c) Consulting the SAC about the advisability of adding the topic to the IASB’s agenda;* (d) Formation of an advisory group to give advice to the IASB on the project; (e) Publishing for public comment a discussion document;

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(f) Publishing for public comment an exposure draft approved by at least nine votes of the IASB, including any dissenting opinions held by IASB members;* (g) Publishing within an exposure draft a basis for conclusions; (h) Consideration of all comments received within the comment period on discussion documents and exposure drafts;* (i) Consideration of the desirability of holding a public hearing and of the desirability of conducting field tests and, if considered desirable, holding such hearings and conducting such tests; (j) Approval of a standard by at least nine votes of the IASB and inclusion in the published standard of any dissenting opinions;* and (k) Publishing within a standard a basis for conclusion, explaining, amongst other things, the steps in the IASB’s due process and how the IASB dealt with public comments on the exposure draft. (IASCF, 2006: 30-31). (The steps that are required under the terms of the IASC Foundation Constitution are indicated by an asterisk*).

Using these 11 steps of the IASB’s due process this study divides the findings of the study into three chapters. Chapter five examines the steps (a)—(d) of the due process. Chapter six examines step (e) of the due process and chapter seven examines steps (f)—(k). The events in developing the SME standard are structured in chronological order to show how the IASB proceeded with its due process and then Kingdon’s three steams of problem, policy and politics are applied to analyse those events. By using the steps in the IASB’s due process to set out the descriptive nature of the material (narrative) and then using Kingdon’s three streams of problem, policy and politics, the descriptive nature of the material is contextualised to provide a broader understanding of the events (interpretational). This interpretational inquiry goes beyond reproducing the material that has been presented using the IASB’s due process. That is, events that may be important but have not been captured as part of the IASB’s due process are included within Kingdon’s three streams of analysis.

4.6 Summary

This chapter explains the historical nature of this study and the research method employed to conduct the research. This study constructs history as an event or way of knowledge, and may be classified as an institutional historical inquiry because it involves examination of the IASB’s agenda setting and standard setting processes. The specific research question addressed is how and why the SME project was added onto the IASB’s agenda. This study also examines the complete SME project to understand the IASB’s standard setting activity. This study is both a narrative and interpretational historical inquiry. That is, this study provides both a narrative history by documenting the events that occurred in the due

67 process of developing the SME standard and an analysis, using Kingdon’s three streams of analysis, to interpret those events.

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Chapter Five Agenda Entrance

5.1 Introduction

This chapter draws on Kingdon’s three streams of agenda setting—problem, policy and politics—to examine how and why the SME project was added to the IASB’s agenda. It covers events from early 2000 to September 2003 during which time the early stages of the IASB’s due process occurred. The IASB inherited the SME project from its predecessor, the IASC (see chapter three) where the demand for SME accounting was identified as one of the potential topics that the IASB may consider adding onto to its agenda. The IASB’s Due Process Handbook states that the overarching criteria used by the IASB in deciding whether to add a project to its agenda is based on the needs of users of financial statements. This is based on the presumption that the needs of investors will proxy for the needs of other groups of financial statement users (see IASCF, 2006: para 20). When deciding whether an item will address users’ needs, the IASB states that it considers the following five factors:

(a) the relevance to users of the information and the reliability of information that could be provided; (b) existing guidance available; (c) the possibility of increasing convergence; (d) the quality of the standard to be developed; (e) resource constraints.

Further to those factors, the IASB’s Due Process Handbook states that the IASB is guided by steps (a)—(d) of its due process in deciding whether to add a project onto its agenda:

(a) the staff are asked to identify and review all the issues associated with the topic and to consider the application of the framework to the issues; (b) study of national accounting requirements and practice and an exchange of views about the issues with national standard-setters; (c) consulting the SAC about the advisability of adding the topic to the IASB’s agenda;* (d) Formation of an advisory group to give advice to the IASB on the project; (IASCF, 2006: 30).

Step (c) marked by an asterisk is a mandatory step of the due process, which means that the IASB must consult the SAC. Before the IASB can add a project to its active agenda, it requires a simple majority of votes of its 14 board members (IASCF, 2006: 15).

The findings in this chapter are presented using Kingdon’s three streams of analysis and within these streams the four steps of the due process may be observed. Steps (a)—(d)

69 form a small component of the discussion leading to the decision to add the project to the IASB’s agenda because there were various other factors that influenced the IASB’s decision.

This chapter is organised as follows. Section 5.2 shows that within the problem stream there were various groups calling for attention to accounting for a simplified standard for SMEs and developing countries. Section 5.3 then discusses the alternatives being developed by different groups that could have been used to address the perceived accounting problem for SMEs within the policy streams. Section 5.4 examines the politics stream to understand how political support was built within the IASB, and this is followed by discussion in section 5.5 of how the three streams converged and the SME project was placed first on the IASB’s research agenda and then onto its active agenda for policy formulation. Section 5.6 provides the summary and conclusion of the chapter.

5.2 Problem Stream

A problem may be an issue or a condition that needs to be addressed (Kingdon, 1984). Problems may be brought to the attention of a policy maker by a focusing event, such as a crisis or disaster, that calls for attention the personal experience of a policy maker or feedback about the operation of the existing policies (Kingdon, 1984). Kingdon further argued that policy makers may have their own interest in acknowledging a problem (Kingdon, 1984: 120). For that reason once the policy maker recognises that a problem exists, how that problem is then defined becomes important.

Chapter three reported that perceived accounting problems for SMEs and developing countries have existed for more than three decades. The idea that one set of accounting standards may be suitable for all entities seems to have given rise to this concern. Although differential reporting regimes were introduced to alleviate the problems for SMEs in some countries that set their own accounting standards, the introduction of IFRS superseded the differential reporting regimes. This intensified the need for an SME standard. Similar concerns were raised that the accounting standards designed for use in developed countries did not cater for the needs of developing countries. Developing countries made various calls to the international standard setters for simplified standards. The IASC did consider developing countries twice, but there was insufficient support for a developing countries project to proceed. The view that developed was that there were no unique

70 needs of developing countries that could be considered. What was, however, evident was a demand for accounting for SMEs and this was mentioned in the transition document to the IASB (IASC, 2000).

UNCTAD drew attention to both SMEs and developing countries. 6 In 2000 UNCTAD observed that accounting and financial reporting regulations are seldom specifically designed for SMEs. Later that year, UNCTAD’s ISAR reported that many SMEs lacked the skilled accounting personnel and infrastructure necessary to implement existing accounting rules, and further that the resulting financial reports were of little use to them because most SMEs require low-cost, understandable accounting and management guidance rather than sophisticated accounting and auditing advice (UNCTAD, 2000b).

Another UNCTAD review in 2000 highlighted that many developing countries had inherited accounting systems through their colonial heritage, and this had imposed complex reporting requirements on SMEs in those countries (UNCTAD, 2000a). For example, in Anglophone countries legislation was based on the UK’s 1948 Companies Act. UNCTAD argued that the British system was designed around the needs of large, listed companies, and so it was not suitable for many SMEs in developing countries (UNCTAD, 2000a). According to (UNCTAD, 2000a) the colonial history of accounting systems in developing countries meant that: in most developing countries … there is a discontinuous patchwork of regulations developed at different times with different objectives. The colonial heritage means that rules may have been imported without any thought for adaptation to local circumstances, and the tendency of regulations to be enacted to meet specific situations as they crop up means that the initial framework has been complicated by a variety of ad hoc measures. The political will to scrap these and start again with a coherent all-embracing approach is often absent, and accounting is low on the list of priorities for government attention (UNCTAD, 2000a: 8-9).

On the IASB’s establishment in March 2001, its responsibility was predominantly to the world’s capital market participants. The IASB sought:

6 UNCTAD has a history in attempting to develop accounting standards. In the late 1970s UNCTAD began to develop standards for application to transnational companies operating in developing countries. This effort was not well received, mainly by the developed countries, who challenged the UN’s authority to develop such standards (see Rahman, 1998).

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to develop in the public interest a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the various capital markets of the world and other users of the information to make economic decisions (IASB, 2004a: para 8,emphasis added, DP).

This stated aim seemed to leave outside the IASB’s jurisdictional boundary, in Kingdon’s term, the mandate for any development of a special standard either for SMEs or for developing countries. Various parties, such as UNCTAD (see UNCTAD, 2000a; b), drew attention to the plight of both when faced with full IFRS and called upon the IASB to respond. The IASB, however, seemed less certain that any problem existed.

However, the issue of “Financial Reporting by Small Entities” was one that the IASB had inherited from its predecessor and therefore it was one of the items on the IASB’s potential agenda topics (IASplus, 2001). At its April 2001 board meeting the IASB discussed the list of potential agenda items but did not make formal decisions. When the issue of accounting for SMEs was discussed, Walton reported that “Reactions amongst Board members were quite divided, although the subject was not rejected out of hand, as had happened when it came up to the old Board in June 2000” (Walton, 2001: 12).

On 31 July 2001, the IASB announced a list of nine projects on its initial agenda after having extensive consultations with the “Standards Advisory Council, national accounting standard setters, regulators, and other interested parties”(IASB, 2001: 1, Press Release). In that announcement the IASB also identified 16 topics that may be studied by other national standard setters. “Accounting by Small and Medium Entities and in Emerging Economies” was one of those topics and this proposed item questioned: whether there [was] a need for special guidance to clarify financial requirements in the context of financial reports used in emerging economies or for certain types of enterprises, for example, for small enterprises or for privately-held enterprises (IASB, 2001: 8, Press Release).

At this stage, it was clear that the IASB could not proceed with this proposed item, but that it would review any proposals generated from outside. It should also be noted that the initially proposed item—accounting for SMEs—had been extended to include emerging economies.

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Developments in Europe meant that financial reporting requirements for entities other than capital market participants became perceived as a problem. In 2001, the European Union proposed a regulation to require application of IFRS by all listed companies for their consolidated financial reports from 2005. Although this would apply only to listed companies, it affected other companies within the Eurozone because the proposal included: a Member State option to allow or require the use of IAS/IFRS also for the individual accounts and/or for other classes of companies. A number of Member States are expected to take up these options and then there will be an immediate impact on medium and even small-sized companies (MIASBPC, 2001: 26).

UNCTAD considered interests beyond the Eurozone. In 2001, UNCTAD reported developing countries’ desperate need for assistance, commenting also that UNCTAD’s ISAR group was developing some initial guidelines to assist developing countries (UNCTAD, 2001a: paras 9, 10 and 34). UNCTAD called for attention from: the International Accounting Standards Board and other relevant international bodies such as the International Monetary Fund, the Bank of International Settlements and the World Bank [to] the fact that accounting by SMEs is an urgent issue for economic and social development for developed and developing countries alike (UNCTAD, 2001a: para 9-10).

Publicly, the IASB adopted a non-committal stance, Sir David Tweedie, the IASB chairman reported in the IASCF’s first annual report published in December 2001, that the IASB was “considering whether to commission a project” on requirements for use “in emerging economies or by non-listed enterprises” (IASCF, 2001: 9).

Soon the World Bank and IFAC joined those calling attention to the perceived problems. Whereas previously, the World Bank had advocated strongly for a single set of financial reporting standards (Walton, 1998), it changed its position in light of findings from its ROSC program. From early 2000 the World Bank and the IMF commenced on a ROSC program to assess for each country, “the comparability of national accounting and auditing standards with International Accounting Standards (IAS) … the degree to which corporate entities comply with established accounting … standards … [and] to assist” with the country’s plans “to improve its financial reporting regime” (World Bank, 2004b: 2). Between 2001 and 2003, the World Bank conducted this program in 14 developing countries and found that the reporting requirements were unduly complicated for SME reporting needs; and that application of the international standards was not necessarily appropriate for all types of

73 entity (World Bank, 2001a; b; 2002a; b; c; d; e; f; 2003a; b; c; d; e; f).7 The World Bank’s recommendation in most of these countries was to establish simpler reporting requirements for SMEs. For example, the ROSC report for Kenya in 2001 highlighted the need to:

revise the Accountants Act, the Companies Act, and related regulations to achieve a legal and regulatory framework under which the preparers of financial statements (corporate entities), auditors, and regulators will be required to play appropriate roles in ensuring high- quality financial reporting. Take appropriate legal and institutional steps to differentiate between the financial reporting requirements for listed companies and financial institutions and those for small and medium enterprises (SMEs). Make IASs legally mandatory for large enterprises and financial institutions, and establish simplified reporting requirements for SMEs (World Bank, 2001a: 11).

Similarly, IFAC called for simpler financial reporting requirements for SMEs.

The IASB was focused on preparing its accounting standards for adoption in countries that hitherto had set their own standards and a matter of crucial importance for international acceptance of these standards was that these IASB standards be perceived as high quality. Although a growing chorus called attention to the perceived problems facing SMEs and developing countries, it was felt within the IASB that if it was forced to cope with these standards, the perceived quality of the full standards could be undermined: The reason for opposing it was basically a brand issue. They [the IASB] didn’t want the brand damaged. (Peter Walton, interview, 27 November 2008, telephone).

5.3 Policy Stream

Various policy communities within the policy stream may generate various proposals or alternatives that may be used to address a problem (Kingdon, 1984). The IASB’s role as the global accounting standard-setter meant that it occupied the pre-eminent position in this policy stream. Initially, the IASB proposed no solution and seemed to accept that countries would develop their own individual regimes to accommodate SMEs. But the IASB planned to review its decision not to act if other policy bodies proposed policy solutions for wider application.

The only policy community seriously contemplating such a development for wider application was UNCTAD’s ISAR group (UNCTAD, 2001a). ISAR’s members, however, were

7 The countries were Bangladesh, Bulgaria, Egypt, Jamaica, Kenya, Lebanon, Lithuania, Macedonia, Mauritius, Philippines, Poland, Romania, South Africa and Ukraine.

74 divided, some preferring that the IASB act instead of ISAR, and calling for IASB cooperation (see UNCTAD, 2001a: paras 9, 10; 2001b: 7; 2002: 13). The IASB was cautioned about this initiative and urged to undertake the project itself, or at least to control it closely (see MIASBPC, 2001: 26). The IASB continued to list the topic as a potential agenda item and anticipated that, if it were to act, it would maintain “measurement and recognition criteria” and reduce disclosure requirements (IASCF, 2001: 9).

By 2003, ISAR had devised a three-tier reporting guidelines. The three-tiers of reporting were:

• Level I (Full IAS). Entities that issue public securities, banks and financial institutions, and entities in which there is a significant public interest would comply completely with IAS. • Level II (Abridged IAS). Larger SMEs would use an abridged IAS version that technical-level preparers could apply. • Level III (Simple Accruals) Smaller entities and new entrants would apply a basic accruals system, using a simple chart of accounts and standard financial statements formats (UNCTAD, 2003). Level II of the reporting was called Accounting and Financial Reporting Guidelines for Small and Medium Sized Enterprises (known as SMEGA) and it was considered to be useful for SME reporting.

Although ISAR promoted SMEGA guidelines as simple, understandable and user friendly, at its meeting in 2003, ISAR’s committee remained divided (UNCTAD, 2003). Some members thought the IASB had little or no experience of SMEs and wanted the IASB to endorse the SMEGA guidelines (Jarvis et al., 2008: 118; Peter Walton, interview, 27 November 2008, telephone), while others acknowledged the need for and usefulness of the SMEGA guidelines, but preferred an IASB-created standard for SMEs (Jarvis et al., 2008). Regardless of whether SMEGA was accepted in the wider policy community, Jarvis et al. (2008: 119) argued that the existence of an alternative framework for SMEs “gave weight to the argument that a single set of accounting rules to cover all business was not appropriate and helped overturn something that had been an accepted wisdom for decades”.

Other policy communities seemed more intent on prompting the IASB to act than on developing guidelines themselves. Both IFAC and EFRAG called on the IASB to act and threatened to act if the IASB would not (Robert Garnet, interview, 5 November 2008,

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Geneva; Richard Martin, interview, 6 November 2008, Geneva; Jim Leisenring, interview, 9 November 2008, Paris; Nelson Carvalho, interview 14 December 2008, telephone): The International Federation of Accountants at a certain point in time gave signs that it might take the project by itself if the IASB did not engage….there was some expression of interest by IFAC to engage in preparing the document (Nelson Carvalho, interview, 14 December 2008, telephone).

The IASB did not want other groups to develop the SME standard. This was because as the chairman of the IASB explained, if they left the SME standard to be developed by UNCTAD, then it was highly likely that UNCTAD guidelines would be divorced from the IFRS (David Tweedie, interview, 13 November 2008, London).

By this time, due to pressure from other groups, the IASB was contemplating its own policy solution (see Jarvis et al., 2008). At the IASB’s meeting with the National Standard Setters (NSS) in January 2002, participants of the NSS group reported the various approaches used in their respective countries to provide some form of relief to SMEs. The UK for example, had developed Financial Reporting Standards for Small Entities (FRSSE) and Australia had devised a reporting entity concept (Fleming, 2002b). At that meeting, others pointed out to the IASB that developing countries, unlike the developed countries, lack the infrastructure to develop their own differential reporting arrangements (Fleming, 2002b; IASplus, 2002).

In June 2002, the IASB initiated an “active research project on accounting and financial reporting by SMEs and emerging and transitional economies” (Fleming, 2002a: 15). When the IASB initiates a research project it may either work on the project itself or delegate the project to be executed by partner and other national-setters (IASCF, 2002). Evidently, the intent was that when “appropriate issues have been identified and possible solutions to those issues have been developed to a sufficient degree, the Board will bring the research topics on to its standard setting agenda when resources allow” (IASCF, 2002: 10).

The IASB appointed Colin Fleming, former program manager for the emerging economies project with IASC in 1998, to manage the project on Accounting and Financial Reporting by SMEs and Emerging Economies and Transitional Economies. The aim of this project was to determine whether the “burden of compliance with international accounting standards can be reduced for small and medium-sized entities … the project will [also] investigate the

76 challenges to using international standards faced by entities in emerging and transition economies” (IASCF, 2002: 10).

To assist the program manager with this research project an 18 member advisory panel was formed in the third quarter of 2002 from “representatives of the national standard-setters of Canada, New Zealand and the United Kingdom; practitioners from Hong Kong, Sri Lanka and the Caribbean; representatives of central or regional governments; multilateral lending agencies and others” (IASCF, 2002: 10). The role of the advisory panel initially was to examine the “characteristics of small and medium sized entities, the users of their financial statements and their accounting and financial reporting needs” (IASCF, 2002: 10). The members of the advisory panel are given in Table 5.1.

Table 5.1 Members of the advisory panel Member Organisation Yoseph Asmelash UNCTAD David Cairns Academic and Consultant, UK Paul Chan Paul Chan & Co., HK Ndung’u Gathinji Eastern Central and Southern African Federation of Accountants Larissa Gorbatova Center for Capital Market Development, Russia Robin Jarvis Association of Chartered Certified Accountants, UK Ki-woo Lee Korea Accounting Institute Mikael Lindroos European Commission Internal Market Directorate General Ian Mackintosh Chairman, Accounting Standards Board, UK Reyaz Milhular KPMG Ford Rhodes Thornton & Co., Dubai Colin Notley Mitchell Notley & Associates, NZ Gerhard Prachner PricewaterhouseCoopers, Austria David Raggay IFRS Trainers, Trinidad Fabienne Renaud-Aidan Conseil national de la ComptabiliyA©, France Tony Seah SQ Morison, Malaysia Isobel Sharp Deloitte & Touche, UK Frank Timmins Grant Thornton, South Africa Ying Wei China Accounting Standards Committee, People’s Republic of China Source: (IFAC, 2005 http://press.ifac.org/news/2005/04/ifac-welcomes-the-expansion-of-the-iasb- small-and-medium-entities-advisory-panel accessed 23 March 2011).

At the IASB’s meeting with its NSS group in 2002, the chairman, Sir David Tweedie, reported that the IASB would: consider issuing, as a first step, literature that would help draw the companies subject to the discussion ultimately into IFRS, as opposed to developing literature that would have a basis of accounting different from the IFRS literature. Particular consideration would be needed about disclosure and the cost/benefit balance of the requirements (IASplus, 2002).

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At this stage, it appears that although the project was titled Accounting and Financial Reporting by SMEs and Emerging Economies and Transitional Economies, the IASB had redefined the problem and decided to focus primarily on SMEs and developing countries would be considered as a secondary matter: The IASB is likely to concentrate on accounting and reporting by small and medium-sized entities as a priority, but may ask its staff and members of the advisory panel with experience in emerging economies to highlight those issues that are specific to emerging economies and need to be addressed by the IASB (Fleming, 2002a: 15, emphasis added).

The advisory panel, which had its first meeting in April 2003, also seemed to focus mainly on SMEs, as issues discussed at that meeting included “(a) whether to add special standards for SMEs to existing IAS and IFRS or to publish a separate comprehensive IFRS for SMEs; (b) which disclosures might be simplified or eliminated for SMEs; and (c) whether differential recognition and measurement standards are appropriate” (IASplus, 2003).

By June 2003, the project was titled Financial Reporting by Small and Medium-sized Entities (IASB, 2003a: 18, Insight), which made it official that the project now focused on SMEs, and that developing countries had been subsumed within this project. The chairman of the IASB explained that some people wanted the IASB to do the SME project, while some wanted the IASB to do the emerging economies project but the IASB thought that one project would be useful for both (David Tweedie, interview, November, 2008, London). He said that “ ... emerging economies, have small companies. Almost all of [emerging economies] companies are small so if you do [a standard] for the small companies, it automatically fits the emerging economies, so you don’t have to do anything special…” (David Tweedie, interview, 13 November 2008, London). From this point onwards, the project is referred to in this thesis as the ‘SME project’ instead of its working title, which changed several times as is explained in chapter seven.

The IASB in its meeting with SAC in June 2003, briefly discussed progress on the SME project and the project manager, Colin Fleming, presented the “proposal to develop a ‘route map’ to the standard” (IASB, 2003a: 18, Insight). Many council members agreed “with the proposed approach—especially the development of the route map—and with the decision of the IASB not to compromise recognition and measurement” (IASB, 2003a: 18,

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Insight). At this stage, it appears that the staff had developed some basic ideas of the proposed policy proposal, although what was reported lacked detail.

5.4 Politics Stream

The politics stream considers both the mood in the environment and the conditions, noting that a change in conditions or structure may make viable policy proposals that had not previously been viable. Events within the policy community can provide a powerful impetus to escalate or block the entrance of a project onto the policy maker’s agenda (Kingdon, 1984).

Outside the IASB, opinion was building that the IASB should accommodate SMEs, and perhaps to a lesser extent that it should also consider developing countries. Within the IASB, the idea that it might add the SME project to its active agenda was contentious amongst both board and senior staff (Nobes, 2010). The board members that opposed the board were described as “particularly the North Americans” (Paul Pacter, interview, 14 November 2008, London).

Opponents to the project argued that the constitution of the IASCF sought a single set of financial reporting standards and therefore that the IASB had no mandate to pursue a project that would produce a different set of standards for SMEs. This seemed to block the SME project from being added to the IASB’s agenda. To overcome that opposition the vice chairman of the IASB reported that he and the chairman: went to the trustees and said we have this dilemma - enough board members oppose it and they could block it but most board members, the majority of board members feel we should do it….the trustees in fact amended the constitution to take away that issue that only one single set was allowed by the constitution (Tom Jones, interview, 25 November 2008, telephone).

The IASCF reviews its constitution five yearly, and commenced this process in 2003 by issuing for public comment Identifying Issues for International Accounting Standards Committee Foundation: An Invitation to Comment (IASCF, 2003b). The first question in this document asked about SMEs “Should there be a specific objective to address the special challenges facing small and medium-sized entities (SMEs)?” (IASCF, 2003b: 4). The IASCF’s second public consultation document, Review of the Constitution: Proposal to Change added the possibility that the IASB might also consider emerging economies (IASCF, 2004).

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This time the trustees revised the first question as following “to promote the use and rigorous application of those standards, taking account of, as appropriate, the special needs of small and medium-sized entities and emerging economies” (IASCF, 2004: para 19, bold in original). The revised constitution was not promulgated until 2005, but from 2003 the knowledge that the constitutional review was likely to result in changes to the IASB’s objectives to encompass SMEs and emerging economies effectively overcame this obstacle to adding the project to its active agenda (IASCF, 2005a).

On 1 July 2003, IASB chairman, Sir David Tweedie changed the staffing structure for the SME project by creating a new staff position at the IASB, Director of the SME Standard, that reported directly to Tweedie. Paul Pacter, long known as “Mr Fix” for his earlier work with the IASC on other contentious projects, including financial instruments, agriculture and extractive industries, and “his ability to navigate politically contentious areas, and emerge with a result” was appointed to this new position (Christodoulou, 2011): Paul Pacter was appointed, not as a normal member of staff. He directly reports to David Tweedie because a normal member of staff would go through the technical director and so on and David did not want Paul Pacter to be side-tracked into other duties or to have barriers put in his way. So Paul just reports directly to David without the normal mechanisms, to protect Paul from other board members as it were and from the technical staff (Chris Nobes, interview, 12 November 2008, London).

Pacter himself also reported that he encountered opposition from at least two of the IASB’s senior staff: I had internal opposition but I must say that David Tweedie as chairman and Tom Jones as vice chairman have been the two strongest supporters of this project throughout. They have more vision; they see the potential for doing good (Paul Pacter, interview, 14 November 2008, London)

The chairman of the IASB explained the benefits of appointing Pacter to this position:

he’s great and he writes very quickly, he’s a clear thinker. If he hadn't done it, I think we’d be about a year or two behind, to be honest, because it’s difficult to put staff on to something that’s as specialised as that, especially if some of them can only stay two or three years and move out. That always causes a problem (David Tweedie, interview, 13 November 2008, London).

From this review of the politics stream, it is apparent that the mood outside the IASB increasingly favoured the IASB embarking on a project to address accounting requirements for SMEs and developing countries. Overcoming division and resistance within the IASB required significant change: first, the constitutional change to formally include SMEs and

80 developing countries within the IASB’s remit. This meant board members could no longer vote against the project because it was outside the IASB’s mandate. Secondly, the establishment of a very senior position reporting directly to the IASB chairman reduced or removed internal impediments and facilitated the recruitment and continuity of a very experienced director. There is little doubt that these structural changes helped to make viable a project that had not previously been viable.

5.5 Merging the Streams

Kingdon (1984) presented the three streams (problem, policy and politics) as capable of being developed independently of each other and observed that the likelihood of agenda entrance is increased when these three streams come together. Although such convergence may occur without specific management to achieve it, a policy entrepreneur may facilitate this process by attaching “solutions to problems, proposals to political momentum, and political events to policy problems” (Kingdon, 1984: 191). There seems little doubt that such entrepreneurial activity was necessary in the case of the SME project.

Arguably, Sir David Tweedie, the chairman of the IASB, became the policy entrepreneur for the purpose of agenda entrance. Although the IASB was clearly reluctant to act, the mood in the political environment seemed to leave it with little choice. Only Tweedie, with the support of his vice chairman, had the power to remove the impediments to agenda entrance, first by obtaining the constitutional change, and secondly by establishing the special senior staff position reporting directly to Tweedie to shepherd the project through to completion.

The IASB’s dominance of the policy environment gave it the ability to delay acceptance of this project, but as external pressure built, the IASB protected its position by indicating its likely policy solution if it were to act. That policy solution seemed intended to preserve full IFRS and to minimise any divergence from it. Initially the policy solution was reported as maintaining “measurement and recognition criteria” and reducing disclosure requirements (IASCF, 2001: 9). In January 2002 it was described by Sir David Tweedie as providing a means to “draw the companies … ultimately into IFRS, as opposed to … a basis of accounting different from IFRS” but with particular attention to “disclosure and the cost/benefit balance” (IASplus, 2002).

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The IASB’s dominance also allowed it to step in and pre-empt the policy solution (SMEGA) proposed by UNCTAD’s ISAR, which had long been perceived by the IASC as a rival (Martinez-Diaz, 2005). This action helped to prevent any other group from being perceived as having an accounting standard setting role. The internal division within ISAR would have assisted in this respect. Although other bodies, such as IFAC, did threaten to develop their own generic policy solution, their threats seemed intended to prompt the IASB into action rather than reflecting any serious intent on their own part.

There were two stages to agenda entrance, the first being entry onto the IASB’s research agenda in 2002, and the second stage being entry onto the IASB’s active standard setting agenda in 2003. Tweedie was instrumental at both stages. While the anticipated change to the IASB’s mandate may, initially, have seemed sufficient to proceed, evidence suggests the level of resistance within the IASB meant that more was required.

For the first stage, there was a policy, albeit lacking detail, that supposedly would solve the problem for SMEs and that carried with it the added benefit (from the IASB’s perspective) of drawing companies into IFRS. The mood of the external environment favoured the IASB acting and Tweedie achieved the convergence by arranging for the IASB’s mandate to encompass IFRS for SMEs.

During the short research stage (just one year) there were further policy decisions. When placed on the research agenda the matters to be decided included: (1) how to define SMEs; (2) who are the users of SME financial reports, and what are their information needs; (3) what kind of standard should be developed; and (4) whether SMEs and emerging and transition economies should be two separate projects (Fleming, 2002a). Although when placed on the research agenda there was clear reference to developing countries as well as to SMEs, and the need to decide whether one project could deal with both SMEs and developing countries, or whether two projects, one on SMEs and the other on developing countries would be necessary. From what followed while on the research agenda it appears that the project focused on SMEs. Although emerging economies were mentioned as if the one project would deal with both, that seemed likely only if a particular aspect of the policy solution was suitable for both SMEs and developing economies. As reported by the then project manager:

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The IASB is likely to concentrate on accounting and reporting by small and medium-sized entities as a priority, but may ask its staff and members of the advisory panel with experience in emerging economies to highlight those issues that are specific to emerging economies and need to be addressed by the IASB (Fleming, 2002a: 15, emphasis added).

The anticipated project solution, therefore, was expected to: not only help non-listed companies to stay within the scope of IASB standards by applying a cost-benefit test to their financial reporting, but would also enable those seeking a public listing to make the change to IFRSs without undue cost or effort. Lessons learned from this phase of the project might lead the Board to seek ways of making international standards more accessible to entities in emerging or transition economies, which simply do not have the infrastructure to implement the full weight of international standards, possibly through greater use of implementation guidance and educational material (IASCF, 2002: 10, emphasis added).

Entrance onto the IASB’s active standard setting agenda occurred in July 2003, shortly after the establishment of the new senior staff position reporting to Sir David Tweedie and the recruitment of Paul Pacter (IStaR, 2003a, July). Again Tweedie’s power as IASB chairman and his role as policy entrepreneur seem to have been essential to agenda entrance. By this time the policy solution had been developed a little further, and increasingly seemed concentrated on SMEs. At the same time, perhaps as a result of the need to appease IASB members opposed to the project, the policy solution seemed focused on minimising divergence from IFRS, and transition to IFRS. Such a focus is not necessarily consistent with the interests of users of SME financial statements. Perhaps this was the art of the possible as Tweedie, the policy entrepreneur, pulled the problem and policy streams together to manoeuvre the project onto the IASB’s active agenda and created a powerful staff position reporting directly to him to increase the project’s chances of staying on the agenda.

Jarvis et al. (2008) reported that the emergence of SMEGA, developed by UNCTAD’s ISAR, may have influenced the IASB to take up the SME project. Had the IASB not taken up the SME project the SMEGA guidelines could have become the authoritative document: It is difficult to assess what impact the UN guidelines had on the IASB, the World Bank and other players in accounting regulation. The very existence of the guidelines was probably a powerful incentive for the IASB to take up the subject, since if they waved it away, they risked the UN guidelines becoming the authoritative document and the initiative would be difficult to regain (Jarvis et al., 2008: 119).

Exactly how the project got onto the IASB’s active agenda is not entirely clear. Entry onto the active agenda normally requires a simple majority vote by the board (IASCF, 2006: 15),

83 but it is not clear that such a vote was held. Pacter, the director of the SME project commented further about this project reaching the active agenda: I must tell you that on this SME project I have never found an IASB update where they voted to add this to the agenda. They just started discussing it …. This is a very funny one. They sort of inherited the project from the old board. It was already partly done but to my knowledge I’m not aware of an actual vote where they went around the table and raised add this to the agenda or no. But if they did it was before my time (Paul Pacter, interview, 14 November 2008, London).

The project history as described on the IASB’s website states that the “project was carried forward from the former IASC agenda. IASB deliberations began in July 2003” (IASB, 2011). Geoff Whittington, however, explained that voting may have been done at the IASB’s administrative meeting that is held prior to the IASB’s board meeting (Geoff Whittington, interview, 9 November 2011, telephone).

With Pacter’s appointment, his prior “Mr Fix” experience came to the fore. Once a project is on the active agenda, achieving a policy outcome becomes the responsibility of less visible participants—the hidden cluster in Kingdon’s terms. At this stage, the hidden cluster comprised Paul Pacter and an 18 member advisory panel. Kingdon argued that some participants are part of both the hidden and visible cluster. In his role as the director of the SME project, Paul Pacter undertook a policy entrepreneurial role in addition to management of the SME project that made him highly visible. At his first IASB meeting in July 2003, he promoted the SME project to the IASB as having two main goals: First, to reduce the burden on SME and non listed companies based on their reporting circumstances. That could be done by making the standards more user friendly (a packaging approach) or by reducing the number of disclosures. The second goal was to pre-empt other standard setters from going their own way on the subject (IStaR, 2003a, July: 31-32).

The IASB was aware that not undertaking the project meant other groups such as UNCTAD may step in to produce an SME standard; the prospect that this might occur was presented as a potential threat to the IASB. Did the IASB want “to have a competitive product or … was [the IASB] happy to leave the project to others” (IStaR, 2003a, July: 31). Pacter cautioned the IASB about the consequences if the IASB were not to proceed (IStaR, 2003a, July): Paul Pacter said it was not proposing that the IASB should become involved in statutory reporting but it was important to address the issue[SME project] because many countries in Europe are developing statutory GAAP that are based on IASs. There was a danger, he said, that that could result in 25 versions of ‘IAS lite’. The question was whether the IASB Board wished to produce a single version of IAS lite. (IStaR, 2003b, September: 37).

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Subsequently, the director of the SME project conducted a survey of the world’s national accounting standard-setters in preparation for the World’s Standard Setters (WSS) meeting in September 2003. The world’s standard setters refer to the standard setters of the more developed countries of the world (Stevenson, 2010). Although there are 209 countries in the world of which 60 are developed and 149 are developing countries (World Bank, 2008), the IASB refers to only 40 countries as the world’s national standard setters. Information was not available about which countries make up the world’s standard setters. Attempts to obtain the full list of WSS from the IASB were unsuccessful and consequently only some of those may be identified (Pacter, 2004).8 Of the 40, 29 members plus EFRAG responded to the survey (see Table 5.2). According to the director of the SME project, these 29 countries plus EFRAG “represent a large cross-section of the global economy” (Pacter, 2004: 118).

The two main objectives of this survey of the WSS were to: • Learn what is already being done in your country to reduce the financial reporting burden on SMEs. • Seek your views on what the IASB should do. (Paul Pacter, pers. comm., 17 November 2008; WSS slides: 15)

The specific survey questions were:

1. Which companies in your country have a legal obligation to prepare GAAP financial statements? 2. Does your country now have a separate set of national GAAP for SMEs? 3. Does your primary GAAP now have disclosure and presentation differences for SMEs? 4. Does your primary GAAP now have recognition and measurement differences for SMEs? 5. Should the IASB provide disclosure and presentation differences for SMEs? 6. Should the IASB provide recognition and measurement differences for SMEs? 7. If the IASB does decide to develop SME GAAP, how should the standards for SMEs be published? 8. How should the standards for SMEs be labelled in the basis of presentation note and in the auditor’s report? (Pacter, 2004: 119).

8 The IASB was emailed on 30/05/2011 and 14/06/2011 but did not provide the requested information.

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Table 5.2 List of countries that responded to survey

Australia Iran Poland Canada Italy Russia China Japan Singapore Denmark Korea South Africa EFRAG Malaysia Spain France Moldova Sri Lanka Germany Netherlands Sweden Hong Kong New Zealand Thailand Hungary Norway UK Indonesia Pakistan US

Source: (Pacter, 2004: 118).

At the September 2003 meeting of WSS, Pacter’s first WSS meeting in his role as director of the SME project, he referred to the SME project as “more political than technical”, reporting “sharp divisions within the IASB staff leadership and also within the Board regarding whether there should even be a separate set of IASB SME-GAAP. I’d rather be spending my time drafting the SME standards. But agreeing on the approach seems to be harder than writing the standards.” (Paul Pacter, 2003, pers. comm., 17 November 2008: WSS slide 5).

Pacter reported to the WSS the “unanimous agreement” at the IASB meeting of July 2003, that the “basic intention of the SME project would be to reduce the burden of disclosure and to preserve the recognition and measurement principles of the IFRSs, unless, with Board approval, a case can be made on cost-benefit grounds for some simplification of IFRS standards” (Paul Pacter, 2003, pers. comm., 17 November 2008: WSS slide 8). He also reported the results of his survey of the WSS countries which showed that of the 30 responses to the survey, statutory GAAP reporting was imposed in 20 countries for all companies; in eight countries for all companies above a certain size; and in two countries for listed companies only (Pacter, 2004: 119). The survey also revealed that although there was no separate SME GAAP in 18 countries, 15 of these 18 countries provided “SME exemptions in their basic GAAP” (Pacter, 2004: 119). Five of the 18 countries “were developing separate SME GAAP” and a further five of the 18 countries had “de facto” SME GAAP because [of] national laws (Pacter, 2004: 119). The complete survey results are shown in Appendix 1.

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Then, using highly decorated powerpoint slides, Pacter demonstrated his entrepreneurial skills by introducing what he referred to as “the exciting game of seize or cede … the game that’s got the international accounting world thinking!” (Paul Pacter, pers. comm., 17 November 2008: WSS slides 29-30). He organised group discussions among the WSS representatives attending the meeting, by presenting each of seven discussion topics under this heading of “seize or cede” (see Table 5.3 for the complete list of questions).

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Table 5.3: “Seize or Cede” questions asked to the WSS participants Seize or cede: Question 1

• Should IASB: o Focus its standards towards entities that participate in public capital markets? . And CEDE responsibility for developing SME GAAP to others (s). o Set standards for SMEs as well as for entities that participate in public capital markets? . SEIZE the responsibility. Seize or cede: Question 2

• Will the same set of standards serve SMEs and entities that participate in public capital markets? “Same set” can include a few disclosure and presentation differences for SMEs. o Yes. o No. Seize or cede: Question 3

• If you answered Q2 yes, what steps should IASB take to get IFRS required for SMEs? • If you answered Q2 no, which GAAP should be required for statutory reporting by SMEs? o IASB develop separate global SME GAAP. o Another body develop global SME GAAP, perhaps with IASB assistance. o Each country develops its own national SME GAAP. Seize or cede: Question 4

• If IASB were to develop SME GAAP, is differential disclosure and presentation (no recognition or measurement differences) sufficient to reduce the financial reporting burden on SMEs? o Yes. o No. Seize or cede: Question 5

• Which disclosure and presentation simplifications should the IASB consider seriously? And why? o The printed questionnaire has a list of about 25 possibilities. o These are taken from actual practices of survey respondents. Seize or cede: Question 6

• Which recognition and measurement simplifications should the IASB consider seriously? And why? o The printed questionnaire has a list of about 25 possibilities. o These are taken from actual practices of survey respondents. Seize or cede: Question 7

• Should the individual differences or simplifications for SMEs be individually optional or mandatory as a complete “all or nothing” package? o Individually optional. o Complete package-all or nothing.

Source: (Paul Pacter, pers. comm., 17 November 2008: WSS Slides 32-40). This is a reproduction of power point presentation used at the WSS meeting.

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Although topics two to six related to developing the pre-determined policy solution, the first question and the last two slides highlight Pacter’s policy entrepreneurial role (the content of these is reproduced in Figure 5. 1— Figure 5. 3).

Figure 5. 1 Seize or cede game (first question)

Figure 5. 2 Seize or cede game (2nd last Figure 5. 3 Seize or cede game (last slide) slide)

Source: (Paul Pacter, pers. comm., 17 November 2008: WSS slides 32, 39 and 40.) This is a reproduction of three slides from the power point presentation used at the WSS meeting.

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Perhaps not surprisingly, the tentative views obtained from the breakout sessions were that the IASB should be developing accounting standards for SMEs. The tentative results from this game were: 1. The IASB should develop accounting standards appropriate for SMEs. 2. IASB should describe characteristics of SMEs but not define them quantitatively (national responsibility). 3. Start by extracting principles from IFRSs. 4. Modifications based on needs of users of SME financial statements. 5. Disclosure and presentation modifications are likely to be justified based on user needs. 6. Rebuttable presumption of no recognition and measurement modifications. Can only be overcome based on user needs and cost/benefit analysis. 7. If IASB SME GAAP does not address an issue, full IFRS would be a mandatory fallback. 8. Publish IASB SME GAAP in a separate printed volume. 9. Decide in future how to label IASB SME GAAP. (Paul Pacter, pers. comm., 17 November 2008: WSS slides 41-42).

Such an outcome would likely have helped Pacter to present to the IASB’s board meetings perceptions that even if the IASB was divided, there was wider agreement that the project should proceed.

The IASB’s expectations for developing the policy solution were that the project should proceed by extracting from all existing IFRS and Interpretations the basic principles, which would include the ‘black letter’ principles of IASB standards, plus key elements of the IFRS framework. At the time, the thinking was that IFRS could be tailored to SME needs by extracting and publishing the principles without the guidance for relatively uncommon circumstances, by restructuring standards, and by providing disclosure and simplified presentation. The recognition and measurement principles of IFRS were to be preserved and tools such as model financial statements and a disclosure checklist devised (IASB, 2003b: 11, Update). The IASB’s chairman clarified that “the Board’s aim was to produce a subset of its standards and not a second set” (IStaR, 2003a, July: 33).

In his report to the IASC Foundation the IASB chairman reported that while there was a European requirement for listed companies to comply with IFRS for their consolidated financial reports, there were approximately five million companies in Europe of which only 9,000 would be required to follow IFRS. He further reported that “no developed economy … [required its] … little companies to follow a reporting regime as rigorous as IFRS” (IASCF, 2003a: 8). The chairman argued that “Something less rigorous than IFRSs is needed. But it needs to be built on the same concepts as IFRSs, allow easy transition to full IFRS for those

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SMEs that prosper, and be focused on meeting the needs of users of SME’s financial reports.” (IASCF, 2003a: 8).

The IASB, in deciding whether to add the SME project to its agenda, carried out the first four steps (a)—(d) of the IASB’s due process. It had undertaken a review of all the issues associated with the SME topic; undertook a study of national accounting requirements; consulted the SAC on whether it should add the SME project onto its agenda; and had formed an advisory group to assist the program manager with the project.

5.6 Summary and Conclusion

This chapter applied Kingdon’s (1984) three streams of analysis—problem, policy and politics—to examine how and why the SME project entered the IASB’s active agenda and the likely policy direction to be adopted. The IASB had initially inherited the issue on accounting for SMEs from its predecessor, but as the IASB discussed this issue within its other forums, including SAC and NSS, to decide whether to add this on its agenda, the issue on accounting for SMEs by July 2001 was extended to include developing countries.

Analysis in this chapter showed that the participants in the problem stream, such as the World Bank and UNCTAD provided feedback to the IASB that there was demand for a simplified set of standards for SMEs. Having previously argued for one set of accounting standards, the World Bank’s ROSC reporting program revealed that one set of accounting standards did not work well for all entities and that there was a need for a simplified set of standards. The World Bank’s finding showed that reporting requirements in the 14 countries reviewed were unduly complex for SME reporting needs, and that many SMEs did not have the capacity to apply the international accounting standards. Similarly, the study by UNCTAD had concluded that SMEs lacked the skills and infrastructure to apply the IFRS. Equally, the report concluded that developing countries needed a simplified set of standards because the reporting requirements in most developing countries were imported without consideration of the local environment.

The policy stream comprised several policy communities, including EFRAG, IFAC, UNCTAD and IASB. Of these policy communities, UNCTAD was the only policy community that had developed a policy—its SMEGA guidelines were developed for SMEs that were larger than

91 micro entities. For these SMEs simplified IFRS were proposed. EFRAG and IFAC also indicated they would develop the SME standard if the IASB did not commit to the SME project, although they did not seem to have a policy solution. The IASB was aware that other policy communities could step into the standard setting domain that the IASB regarded as its own if it did not commit to the SME project. In June 2002, the IASB added the SME project to its research agenda, and appointed a program manager—Colin Fleming—and formed an 18 member advisory panel to assist with the project. Before adding the project onto its research agenda, it seemed that the IASB had identified its intended policy proposal if it were to act, which was to minimise divergence from full IFRS. At this stage it seemed that the IASB had redefined the problem to focus primarily on SMEs, and developing countries were subsumed in this project. The chairman of the IASB explained SMEs and developing countries had similar problems so if the IASB addressed SMEs’ problems then it also addressed developing countries problems and there would be no need to do anything special for developing countries.

The politics stream revealed that the growing demand for a simplified set of standards for SMEs and developing countries imposed pressure on the IASB to act. There was the possibility that if the IASB did not commit to the demand for a simplified set of standards, the SMEGA would have become the authoritative SME guidelines. The IASB’s policy community remained divided and the board members who opposed the project argued that the project was not within the IASB’s constitutional mandate. There was also the possibility that the senior staff opposed to the project could have blocked or sidetracked the project if it was added onto the IASB’s agenda. The IASB was in a difficult position as there were pressures from outside for the IASB to produce a simplified set of standard; on the other hand there was division with the board that resisted developing such a standard.

Sir David Tweedie, the chairman of the IASB acted as the policy entrepreneur. In July 2003, he used his entrepreneurial skills to converge the three streams and place the SME project onto the IASB’s active agenda. Using his powers as the chairman of the IASB, he had requested a change in the constitution to remove the possibility of having only one set of standards. He also created a new senior position—the director of the SME project—who reported directly to Tweedie, whereas normally a program manager is appointed that works under the supervision of the director of research. These changes removed the

92 obstacles placed by those who opposed the project and this allowed the project to be added to the IASB’s agenda. In adding a project onto its active agenda the IASB had undertaken steps (a)—(d) of its due process.

After the SME project was added onto the IASB’s agenda, the project was passed to the hidden cluster for detailed policy formulation. At this early stage, the hidden cluster comprised the director of the SME project and an 18 member advisory panel. Sir David Tweedie also passed the policy entrepreneurial role to the director of the SME project. Paul Pacter’s entrepreneurial role as director of the SME project made him highly visible in the public domain. Immediately, Paul Pacter embarked on the journey of building support for the SME project in the wider policy community. For example, he used the game of ‘seize or cede’ at the WSS meeting in September 2003 to build support of the IASB’s pre-determined policy proposal.

The next two chapters follow the remaining steps of the IASB’s due process steps (e)—(k) to examine how the IASB proceeded with the detailed policy formulation of the SME standard, and then interprets these developments by applying Kingdon’s three streams of problem, policy and politics to analyse the findings.

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Chapter Six Due Process (1)

6.1 Introduction

Chapter five examined how and why the SME project was added onto the IASB’s active agenda. It discussed steps (a) to (d) of the IASB’s due process. Chapter five showed that the IASB had defined the problem to focus primarily on SMEs and developing countries were subsumed in this project. The chairman of the IASB argued that SMEs and developing countries had similar problems, and that if the IASB addressed SMEs then it would not have to do anything for developing countries because one set of simplified standards would benefit both groups. It also showed that by the time the project was added onto the IASB’s active agenda, the board had identified its intended policy response, which was to minimise divergence from full IFRS. This chapter and chapter seven set out the process involved in developing this standard using the IASB’s due process, and then, within each chapter, Kingdon’s three streams of problem, policy and politics are applied to understand the development of the SME standard.

Hidden pressures may be influential in shaping the outcome for a standard, but these pressures may not be visible from the information placed in the public domain. For that reason the nature of the standard setting process has been described as taking place within a “black box” (Hodges and Mellett, 2008). It is, therefore, important to go beyond the evidence in the public domain to better understand the standard setting activity. Chapter five showed that the task of detailed standard formulation had been passed to the hidden cluster of technical expertise formed to carry out detailed policy development. This hidden cluster comprised Paul Pacter, the director of the SME project, and an 18 member advisory panel.

This chapter concentrates on step (e) of the IASB’s due process “[p]ublishing for public comment a discussion document”(IASCF, 2006: 30) and an additional step undertaken to ascertain the recognition and measurement simplifications needed in the SME standard. This chapter begins in September 2003 with the development of the discussion paper for the SME standard and concludes with the IASB’s decisions on the recognition and measurement simplifications in December 2005.

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This chapter is organised as follows. Sections 6.2—6.5 set out the events that occurred as part of the IASB’s due process and the additional step relating to the recognition and measurement simplifications. Section 6.2 covers the development of the discussion document and section 6.3 addresses the publication of the discussion document and the responses received to that document. Section 6.4 then outlines how the IASB proceeded with the SME project after receiving the responses to the discussion document. Section 6.5 explains the additional step that the IASB took to ascertain what recognition and measurement simplifications should be provided in the proposed SME standard, that is, a staff questionnaire. It comments on responses received to the staff questionnaire and the other activities undertaken to proceed with recognition and measurement simplification. This section also comments on the IASB’s decisions on the recognition and measurement simplifications sought in the proposed SME standard. Whereas sections 6.2—6.5 provide the historical narrative, section 6.6 provides the theoretical analyses of these events drawing on Kingdon’s three streams of problem, policy and politics. Finally section 6.7 provides the summary of and conclusion to the chapter.

6.2 Development of the Discussion Document

The IASB’s discussion document Preliminary Views on Accounting Standards for Small and Medium-sized Entities was prepared during the period from September 2003 to March 2004. In developing this document five key decisions had to be made:

1. what is meant by an SME; 2. what would be an appropriate title for the standard; 3. whether the SME standard should be based on full IFRS; 4. whether the SME standard should be based on the IASB’s conceptual framework; and 5. on which users of SME financial statements should the project focus.

The IASB’s chairman Sir David Tweedie, identified defining SMEs as one of the biggest challenges for the IASB (David Tweedie, interview 13 November 2008, London). The director of the SME project explained that all the board members had different views and that what is small in one country is big in another. This made it difficult to develop an SME

95 definition that would work at the international level (Paul Pacter, interview, 14 November 2008, London).

Size or stock listing criteria had been used in those individual countries that developed their own standard to identify the entities that could use differential reporting. The problem with this approach was that it would be difficult to identify size criteria that could be applied internationally. For that reason the IASB did not use financial measures of size or stock listing to determine who could use the SME standard (IStaR, 2003b, September). Instead, the IASB decided to rely on a principle of ‘no public accountability’ to identify which entities would qualify to use the SME standard (IASB, 2003c, Update). Initially, the IASB decided that an entity would be publicly accountable and therefore should observe full IFRS if:

• there is a high degree of outside interest in the entity, from investors or other stakeholders; • the entity may have a social responsibility because of the nature of its operations; and • the substantial majority of stakeholders depend on external financial reporting, as they have no other way of obtaining financial information about the entity (IASB, 2003c: 10, Update).

At this stage, the board agreed that presumptive indicators of public accountability would exist if an entity meets any one of the following criteria:

(a) It has filed, or it is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market. (b) It holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities brokerage, pension fund, mutual fund, or investment banking entity. (c) It is a public utility or similar entity that provides an essential public service. (d) It is of economic significance in the jurisdiction in which it is domiciled. (e) One or more of its owners has expressed objection to the entity’s decision to use SME standards rather than full IFRSs (all owners, including those not otherwise entitled to vote, having been informed of that decision) (IASB, 2003c: 10-11, Update).

However, in March 2004 the board removed economic significance (item d) from the presumptive indicators because it had not adequately described this concept and it did not want to use a number or figure for indicators of the economic significance (IStaR, 2004a, April). This means that the presumptive indicators now contained items (a), (b), (c) and (e).

One month later, Mary Barth suggested that the board should reinstate economic significance. This was because there was a view amongst the board members that confining

96 the presumptive indicators to the remaining four indicated the standard was not for SMEs but was instead for much larger entities. For that reason the board re-instated the economic significance indicator but this time decided to base it on turnover, assets and employees, and degree of market dominance (IStaR, 2004a, April). This meant, at this stage, the presumptive indicators went back to five indicators, with (d) revised.

The board further narrowed the presumptive indicators by removing item (e) “one or more of its owners has expressed objection to the entity’s decision to use SME standards rather than full IFRS ...” (IASB, 2003c: 11, Update). There is nothing to suggest that the decision to remove item (e) was discussed at the IASB’s board meeting between February and June 2004, but it seemed that this may have been dropped out as part of the redrafting process. With item (e) removed, four presumptive indicators of public accountability remained: (a) it has filed, or it is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; (b) it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund or investment banking entity; (c ) it is a public utility or similar entity that provides an essential public service; or (d) it is economically significant in its home country on the basis of criteria such as total assets, total income, number of employees, degree of market dominance, and nature and extent of external borrowings (IASB, 2004a: 5-6, DP). These four indicators suggested that the IASB continued to focus on some groups of entities that were not SMEs, but much larger entities. These indicators went into the discussion document.

The board’s difficulty in identifying the group for which it was developing the SME standard meant that it was also difficult to determine an appropriate title for the standard (IStaR, 2003b, September). Although a standard for SMEs was used as a shorthand to describe the project (IStaR, 2003a, July), as the project evolved it became apparent that the standard was not for SMEs (IASB, 2003c, Update). The board asked the staff for a term other than SMEs to describe the class of entities for which the standard was being developed (IASB, 2003c, Update). The director of the SME project reported that the advisory panel preferred to retain the SME title, arguing that SME is a well-understood and well-known term (IStaR, 2004c, February). Most board members agreed, except for Mary Barth who suggested

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‘entities with no public accountability’ as an alternative title. In February 2004, the board voted 13 to one in favour of retaining the SME title (IStaR, 2004c, February: 31).

Whether the standard for SMEs should be based on IFRS or whether it should be devised without basing it on IFRS, implied a choice between a top down approach in which changes are made to the existing standard, as appropriate for SMEs, or a bottom up approach, in which the standard is developed with little regard to the pre-existing standards. The chairman of the IASB explained that if the board chose the second approach (bottom up), it would be difficult for growing entities to transfer to full IFRS (David Tweedie, interview, 13 November 2008, London). For that reason, the board had already decided to use the top down approach (IStaR, 2003a, July).

With the IASB’s conceptual framework geared towards the financial reporting needs of financial market investors, the suitability of applying this framework to the development of the SME standard was not apparent. One board member (Gilbert Gelard) argued that the users of the financial reports of listed companies and SMEs were not the same and using the same conceptual framework would not be helpful for SMEs (IStaR, 2003b, September).

The director of the SME project proposed that the IASB “…extract the principles from the Framework and then assess whether any of those principles would lead to inconsistencies for users of SME accounts” (IStaR, 2004c, February: 30). The board agreed to this in February 2004 (IStaR, 2004c, February). As the director of the SME project began to extract the principles some board members viewed this as an effort to create a separate framework for SMEs (IStaR, 2004e, June). They argued that the framework was already a relatively short document and if the principles were to be extracted then that should be done for all rather than just for SMEs (IStaR, 2004e, June). In June 2004, Gilbert Gelard pointed out that having decided earlier to use the IASB’s conceptual framework, the IASB was now in effect producing a separate framework for the SME standard (IStaR, 2004e, June).

The chairman of the IASB proposed that simplifications in the SME standard would be based on user needs (David Tweedie, interview, 13 November 2008, London), but the identity of the users and their needs remained unclear. The discussion on the conceptual

98 framework as it applied to SMEs highlighted the need to identify the users of the SME financial statements that the board intended to serve (IStaR, 2003b, September). One board member, Tricia O’Malley, identified creditors and shareholders as the users of SME financial statements. Lenders were seen to be in a contractual relationship where they could demand the information that was needed (IStaR, 2003b, September).

The director of the SME project formed a small group known as an informal user panel of SME financial statements to provide comments during the drafting process (IASB, 2003d, Update). According to the director of the SME project, this informal user panel could be approached on an informal, non-voting basis during the course of the project. With the formation of the informal user panel the pool of technical expertise to develop the SME standard expanded from two sets of people to three:

• the director of the SME project; • an advisory panel formed to provide feedback and comments on the SME project; and • an informal panel of users to provide comments about the users’ perspective during the drafting process of the SME project.

The members of the user panel are shown in Figure 6. 1.9 The board discussed this user panel at its February 2004 board meeting.

9The details of its members were not made available in the observer notes for the February 2004 board meeting. A list of members of the informal user panel was obtained from the director of the SMEs presentation at the Association of Chartered Certified Accountants (ACCA) Symposium in February 2004.

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Figure 6. 1 Informal user panel

(Source: www.accaglobal.com/powerpoint/ifrs_pacter.ppt?session Accessed 23 March 2011). Five board members (Jim Leisenring, Warren McGregor, Hans-Georg Bruns, Mary Barth and Geoff Whittington) commented that the informal user panel contained six securities analysts (who mainly deal with listed companies), was Euro-centric, and had too many representatives from Europe and Asia (IStaR, 2004c, February). Suggestions were made to include five or six banks that regularly dealt with SMEs, to include auditors, and representatives from the employee and preparer sides, as well as representatives from South America and Africa. One board member also questioned why the World Bank (one of the largest single users of IFRS financial statements) was not represented on the user panel (IStaR, 2004c, February: 31). The board members seemed to think that the panel members dealt predominantly with large entities and therefore were not appropriate to comment on the SME standard. The director of the SME project was to discuss the matters raised by the board members about the user panel with the advisory committee (IStaR, 2004c, February: 31).10

The IASB’s decision to develop the SME standard based on full IFRS meant that the SME project would proceed by extracting the basic principles from all existing IFRS. Using such an approach raised two technical questions. The first question was how an accounting issue affecting an SME could be resolved if not specifically addressed by the SME standard. Most of the board’s preference was that when an accounting issue affecting an SME could be

10It is appears that the “advisory committee” referred to here relates to the advisory panel. There is no information to indicate whether or not after discussion with the advisory committee the panel members were changed.

100 resolved, the entities should refer to the full IFRS for guidance. This was known as “mandatory fallback” to full IFRS (IStaR, 2003b, September: 38). Following from this was whether mandatory fallback to full IFRS should require reference to the whole standard or whether instead it should apply merely on an issue-by-issue basis. The board decided that mandatory fallback to full IFRS should apply on an issue-by-issue basis (IASB, 2004b, Update).

The second question was whether an entity applying the SME standard should be allowed to opt for a different treatment that is permitted in an IFRS but is not in the related SME standard (IASB, 2004a, DP; IStaR, 2004a, April). This was known as “optional reversion to full IFRS” (IStaR, 2004a, April: 9). One of those opposed to this, Mary Barth, argued that allowing an optional reversion to full IFRS would create an infinite choice (IStaR, 2004a, April) and make comparability of financial statements more difficult. The board voted to retain optional reversion in the SME standard (IStaR, 2004a, April). Following from this was discussion as to whether an SME could opt to revert on a principle-by-principle basis or on a standard-by-standard basis. This generated some debate. One board member (Jim Leisenring) argued that if the board did not stay with the standard-by-standard approach “an enormous amount of application guidance” would be necessary (IStaR, 2004f, May: 5). Jim Leisenring further argued that if standard-by standard is not used, people could choose to recognise deferred tax assets but not deferred tax liabilities (IStaR, 2004f, May). Another board member (Geoff Whittington) suggested that the board should not allow too much flexibility and the SME standard should be designed to fit the companies it was aimed at (IStaR, 2004f, May). The board voted 8 to 5 to pursue the standard by standard basis (IStaR, 2004a, April).

These decisions (mandatory fallback to full IFRS and the optional reversion to full IFRS) meant that the SME standard would not be a stand-alone document because those preparing financial statements for SMEs would need to refer to both the SME standard and the full IFRS in order to prepare the financial statements. This seemed likely to increase rather than to reduce the financial reporting burden on some SMEs.

To sum up, in developing the SME standard the IASB decided the SME standard would be based on the same conceptual framework as full IFRS; that the standard would be

101 developed from full IFRS with minimal changes (top down approach); and that because it could not define SMEs, it would apply a narrowed concept of public accountability to identify who could use the SME standard. The board used a standard for SMEs as shorthand for the title because it was a widely understood term, but it was becoming apparent as the project evolved that the standard was not for SMEs. The IASB also decided to require a mandatory fallback to full IFRS when it was not clear how an accounting issue affecting an SME could be resolved and to allow optional reversion on a standard-by-standard basis to allow an entity to opt for a treatment that is permitted in an IFRS but is not in the related SME standard. These decisions were consistent with the IASB’s intended policy response determined before the project was added to the IASB’s agenda—to minimise divergence from full IFRS.

6.3 Publication of the Discussion Document

The IASB’s 45 page discussion paper, Preliminary Views on Accounting Standards for Small and Medium-sized Entities, issued on 24 June 2004 (IASB, 2004a, DP), set out the IASB’s proposed approach to developing the SME standard. This discussion paper was published only in English. While the IASB’s due process, “normally allows a period of 120 days for comment on a discussion paper” (IASCF, 2008b: 10), the IASB allowed only a 90 day comment period for the SME discussion paper, requiring responses by 24 September 2004.

The discussion paper sought comments on the IASB’s proposed approach. It set out nine issues, which were used to formulate nine questions in the discussion paper. Each question in the discussion paper had one, three or five sub-questions. The nine issues are shown in Table 6.1, while a complete list (i.e. with subparts) is in Appendix 2, Table A2.1. It seemed that because the IASB worked with the assumption that SMEs and developing countries had similar problems, it considered that there was no need to ask any question about developing countries in the discussion paper.

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Table 6.1 Issues in the discussion paper Preliminary Views on Accounting Standards for Small and Medium-sized Entities Issues in the Discussion Paper 1. Should the International Accounting Standards Board (IASB) develop special financial reporting standards for SMEs? 2. What should be the objectives of a set of financial reporting standards for SMEs? 3. For which entities would IASB Standards for SMEs be intended? 4. If IASB Standards for SMEs do not address a particular accounting recognition or measurement issue confronting an entity, how should that entity resolve the issue? 5. May an entity using IASB Standards for SMEs elect to follow a treatment permitted in an IFRS that differs from the treatment in the related IASB Standard for SMEs? 6. How should the board approach the development of IASB Standards for SMEs? To what extent should the foundation of SME standards be the concepts and principles and related mandatory guidance in IFRSs? 7. If IASB Standards for SMEs are built on the concepts and principles and related mandatory guidance in full IFRSs, what should be the basis for modifying those concepts and principles for SMEs? 8. In what format should IASB Standards for SMEs be published? 9. Are there any other matters related to how the Board should approach its project to develop standards for SMEs that you would like to bring to the Board’s attention? Source: reproduced based on the discussion paper (IASB, 2004a, DP).

Of the nine issues in the discussion paper, six related to the proposed approach to develop the SME standard. These were issues two to seven in Table 6.1 and they are discussed next in the same order as given in the table.

Issue two in the discussion paper related to the proposed objectives of a set of financial reporting standards for SMEs. The IASB proposed five objectives for the SME standard:

(a) provide high quality, understandable and enforceable accounting standards suitable for SMEs globally; (b) focus on meeting the needs of users of SME financial statements; (c) be based on the same conceptual framework as IFRSs; (d) reduce the financial reporting burden on SMEs that want to use global standards (e) allow easy transition to full IFRSs for those SMEs that become publicly accountable or choose to switch to full IFRSs.

Objective (a) is consistent with the overall objective of the IASB as set out in its Constitution and in the Preface. Objectives (b) and (d) are based on the two primary reasons for undertaking the SME project—to reduce the burden on financial statement preparers and to meet the needs of financial statement users. Objectives (c) and (e) reflect the Board’s intention that IASB Standards for SMEs should be a modified version of full IFRSs rather than a body of standards developed independently of full IFRSs (IASB, 2004a: para 16-17, DP).

The IASB did not seek comment on which of the five should be the objective of the SME standard. Rather it seemed to suggest that all five objectives could be met despite apparent tension among them. For example, the IASB intended to provide easy transition to full IFRS,

103 while at the same time, reducing the financial reporting burden on SMEs. It is not clear how both objectives would be achieved at the same time. Respondents were asked to comment on whether the given objectives were appropriate and, if not, how they should be modified.

Issue three related to which entities an SME standard is intended as there is no universally accepted definition of what is an SME. The IASB proposed that it would not define an SME but rather that it would leave that decision to the national jurisdictions. Neither would the IASB provide size criteria for the SMEs. Instead it described the characteristics of the entities likely to apply the SME standard. In its preliminary views the IASB used the concept of publicly accountable entities to identify the entities that could use the SME standard: Preliminary view 3.1 No size test.

The Board should describe the characteristics of the entities for which IASB Standards for SMEs are intended. Those characteristics should not prescribe quantitative ‘size tests’. National jurisdictions should determine whether all entities that meet those characteristics, or only some, should be required or permitted to use IASB Standards for SMEs. The Board has tentatively concluded that because its Standards are used in more than 100 countries around the world, it is not feasible to develop a quantified size test that would be applicable and long-lasting in all of those countries. This is consistent with the Board’s general principles-based approach to standard setting.

Preliminary view 3.2 Public accountability principle.

Public accountability is the overriding characteristic that distinguishes SMEs from other entities. Full IFRSs, and not IASB Standards for SMEs, are appropriate for an entity that has public accountability. An entity has public accountability if:

(a) there is a high degree of outside interest in the entity from non-management investors or other stakeholders, and those stakeholders depend primarily on external financial reporting as their only means of obtaining financial information about the entity; or (b) the entity has an essential public service responsibility because of the nature of its operations. Preliminary view 3.3 Presumptive indicators of public accountability.

A business entity would be regarded as having public accountability, and therefore should follow full IFRSs, if it meets any of the following criteria:

(a) it has filed, or it is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; (b) it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund or investment banking entity; (c ) it is a public utility or similar entity that provides an essential public service; or

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(d) it is economically significant in its home country on the basis of criteria such as total assets, total income, number of employees, degree of market dominance, and nature and extent of external borrowings.

Preliminary view 3.5 Scope: all entities that do not have public accountability. The Board intends to include all entities that do not have public accountability as potential adopters of IASB Standards for SMEs (IASB, 2004a: 5-6, DP).

Issue four in the discussion paper related to when the SME standard does not address a particular accounting or recognition issue and how an entity should deal with that. The IASB proposed in such circumstances the entity would be: … required to look to that IFRS to resolve that particular issue only. The entity would continue to use IASB Standards for SMEs for the remainder of its financial reporting. Each IASB Standard for SMEs should explicitly mention the required fallback to IFRSs. The Board favours this approach for the reasons of comparability and consistency with the hierarchy and the IASB Framework ... (IASB, 2004a: para 46-47, DP).

Issue five related to whether an entity using the SME standard could elect to follow a treatment permitted in an IFRS that differs from the treatment in the related IASB Standard for SMEs. An entity using the SME standard could elect to “follow a treatment permitted in an IFRS that differs from the treatment in the related [SME] standard” when: (a) A disclosure is either eliminated or simplified in the IASB Standard for SMEs. An SME wishes to make the disclosure required by the IFRS, while otherwise continuing to use IAS Standards for SMEs. (b) A measurement standard in an IFRS is simplified in the IASB Standard for SMEs. An SME wishes to make the measurement using the standard in the IFRS, while otherwise continuing to use IASB Standard for SMEs. (c) An IASB Standard for SMEs provides an explicit exemption for SMEs from a recognition or measurement principle in an IFRS. An SME wishes to follow the recognition or measurement principle in the IFRS, while otherwise continuing to use IASB Standards for SMEs. (d) An IFRS gives an entity a choice between two recognition or measurement options. The related IASB Standard for SMEs includes only one of those choices but does not prohibit the other. An SME wishes to use the option in the IFRS that is not included in the IASB Standard for SMEs, while otherwise continuing to use IASB Standards for SMEs (IASB, 2004a: para 29-31, DP).

The discussion paper further explained that the IASB considered three alternatives when deciding on the best way forward on optional reversion to IFRS: to allow an SME to revert to an IFRS on a principle-by-principle basis; to allow an SME to revert to an IFRS on a standard-by-standard basis; and to require an SME to elect to apply either the complete set of SME standards or the complete set of IFRS (IASB, 2004a: para 51, DP). The IASB had tentatively concluded that reversion to IFRS must be on a standard-by-standard basis (IASB,

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2004a: para 57, DP). It was however open to “considering a middle ground between allowing reversion to an IFRS only in its entirely and allowing reversion on an unrestricted principle-by-principle basis” (IASB, 2004a: para 59, DP).

Issue six related to how the board should approach the development of the SME standard. The two alternatives considered by the IASB were whether: (a) IASB Standards for SMEs should be developed by starting with full IFRSs and modifying them as appropriate. (b) IASB standards for SMEs should be developed as a separate body of standards independent of full IFRSs (IASB, 2004a: para 34, DP).

The discussion paper proposed that the IASB would follow alternative (a) because: …the needs of users of financial statements of SMEs are similar in most ways to the needs of users of financial statements of publicly accountable entities, the Board concluded that IFRSs are the logical starting point for developing a set of IASB Standards for SMEs. The differences between alternatives (a) and (b) are a matter of degree, because even in following alternative (b) due regard would have to be given to existing IFRSs. Otherwise, the resulting standards would not meet the objectives of building on the same conceptual framework, meeting user needs and allowing easy transition to full IFRSs. Approach (b) is likely to result in more differences in wording and structure of IASB Standards for SMEs than approach (a), possibly making transition to full IFRSs more difficult (IASB, 2004a: para 63, DP).

Issue seven sought feedback on what should be the basis for modifying the concepts and principles for SMEs when the SME standard is “built on the concepts and principles and related mandatory guidance in full IFRS” (IASB, 2004a: para 64, DP). However, in the discussion paper, the IASB proposed that there should be no modification to the recognition and measurement criteria in the full IFRS because: … economic benefits inherent in assets do not depend on who owns them, and outflows of economic benefits inherent in liabilities do not depend on who owes them. Yet, recognition principles in IAS Standards for SMEs different from recognition principles in IFRSs would mean, in substance, different definitions of assets and liabilities (and related income and expenses) for SMEs. What is an asset for one entity would not be an asset for a different entity. The Board finds such a result troublesome and illogical. For that reason, preliminary view 7.3 creates a rebuttable presumption of no recognition difference (IASB, 2004a: para 82, DP).

During the 90 day comment period after the discussion paper was issued in June 2004, the board continued its discussions on four issues that had not been resolved: the scope of the

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SME standard; the conceptual framework for the SME standard; who were the users of the SME financial statements; and an appropriate title for the standard.

It remained unclear for which entities the SME standard was being developed. Two board members (Warren McGregor and Jan Engstrom) argued that it was not really an SME project because it was “not for the bottom 80% of the entities” (IStaR, 2004g, October: 14). Another board member (Geoff Whittington) added that there was a demand for something simpler than the board’s proposal and he believed that the board “should go for a proper SME standard” (IStaR, 2004g, October: 14). He reported having “faced a barrage of hostility” at an IFAC meeting where it had been argued that the IASB should be dealing with micro entities in the SME project (IStaR, 2005a, February: 4).

With the board unclear on for which entities the standard was intended, it should be no surprise that it also struggled to find a suitable title. Following the comments that the IASB was focusing on Non-publicly Accountable Entities (NPAEs) and not SMEs (IASB, 2005a, Update), the board changed the title of the project from IFRS for SMEs to IFRS for Non- publicly Accountable Entities in January 2005 (IASB, 2005a, Update).

It was also not clear whether the IASB’s conceptual framework was suitable for devising a standard for SMEs. The board was reluctant to have a separate framework for SMEs and the director of the SME project continued to extract principles for SMEs from the IASB framework (IStaR, 2004c, February; 2004d, July). The draft extract was presented to the board in July 2004, but perceived as intending to change the IASB’s framework or to create a different framework (IASB, 2004b, Update; IStaR, 2004d, July). Some board members argued that tinkering with the framework could create an expectation of change and the board decided to put this issue aside for the time being (IASB, 2004b, Update; IStaR, 2004d, July). The issue was raised again at the IASB’s December 2004 board meeting, which voted 12 to 2 in favour of one framework for all entities (IStaR, 2004b, December).

The IASB had decided that simplifications to the SME standard would be made based on “user needs and cost-benefit considerations” (IASB, 2004c: 5, Update; 2005c), but the board did not identify the users of SME financial statements and their needs (IStaR, 2004b, December). One board member (Tricia O’Malley) suggested that the board should firstly

107 identify the users of SME financial statements (IStaR, 2004g, October). It was suggested that the description of the users and their needs could be found in the framework but the chairman of the IASB clarified that users of SME standards were governments, auditors and bankers (IStaR, 2004g, October). The board seemed to assume that the users of SMEs and listed companies had similar needs, as reflected in the framework (IStaR, 2004b, December) and in the discussion paper see (IASB, 2004a: para 63, DP).

6.3.1 Responses to the Discussion Document

The IASB received 120 submissions from 40 countries in response to the discussion paper. Of these, 21 submissions came from 15 developing countries, and 77 submissions from 24 developed countries, with the largest number of submissions coming from the UK (19 responses) and European bodies (12 responses). The number and distribution of responses is summarised in Table 6.2, while Appendix 2, Table A2.2 contains a list of the respondents.

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Table 6.2 Analysis of the submissions to the discussion paper by country No. of No. of submissions Submissions Developed Countries Developing Countries Australia 8 Argentina 2 Austria 1 Brazil 1 Belgium 4 Bulgaria 1 Canada 2 Colombia 2 Denmark 1 Costa Rica 1 Finland 1 India 1 France 2 Korea 1 Germany 12 Malawi 1 Greece 1 Malaysia 2 Hong Kong 1 Mexico 1 Israel 1 Mozambique 2 Italy 4 Pakistan 1 Japan 3 Russia 1 Malta 1 South Africa 3 Netherlands 2 Zambia 1 New Zealand 4 Submissions from developing 21 countries Norway 1 Submissions from Global 7 /International Organisations Portugal 1 Submissions from European Bodies 13 Singapore 1 Submission from unknown location 2 Spain 1 Sweden 3 Total submissions received 120 Switzerland 2 UK 19 US 1 Submissions from 77 developed countries Source: Based on submissions received on the Discussion paper.

Table 6.3 shows the questions in the discussion paper (column 1) and the staff summary of the responses to the discussion paper. This summary is obtained from the IStaR report for December 2004 and not the IASB’s observer notes because the observer notes for December 2004 were no longer publicly available.11 For that reason the staff summary given in column 2 of Table 6.3 shows how the director of the SME project presented the

11 Attempts made to obtain the observer notes for December 2004 that contained the staff summary of the responses to the discussion paper was unsuccessful. The IASB was emailed on 28/10/11 but there was no response.

109 responses to the discussion paper to the board.12 This is followed by the analysis of the responses conducted as part of this study in column 2 of Table 6.3 and this provides detailed analysis of how many respondents commented on a particular question and how many respondents raised various issues in relation to that question in the discussion paper.

It was evident from the responses to the discussion paper that there was overall support for the IASB’s approach to the discussion paper. Respondents supported the use of the top down approach (question 6) and supported describing the characteristics of the entities for which the SME standard was intended (question 3a). Most respondents did not support the IASB’s presumption of not simplifying the recognition and measurement criteria in the proposed SME standard (question 7c). These respondents argued that the recognition and measurement criteria should be simplified in the proposed SME standard to reduce the reporting burden for SMEs.

The IASB said it was developing the SME standard for both SMEs and developing economies (IASB, 2007d: 1, Insight), but the discussion paper asked no questions about developing countries and the staff summary (see Table 6.3) did not report comments about developing countries. Of the 120 responses to the discussion paper, 14 contained additional comments about developing countries. Six of these responses were from developing countries: Africa, Brazil, Malawi, Malaysia, Mozambique and Pakistan, and the other eight were from Australia (2), IFAC, UNCTAD’s ISAR, the UK (3) plus one IASB advisory panel member on SMEs. In summary these comments highlighted issues of accessibility, comprehensibility, language barriers and the applicability of the international accounting standards to developing countries. Two respondents (CPA Australia, and the Brazilian respondent) proposed that the SME standard would provide developing countries a transitional path to full IFRS. Full detailed analysis of the additional comments made about developing countries is provided in Appendix 2, Table A2.3.

12 This summary is thought to be highly condensed as the board would have been provided with a more detailed analysis of the responses.

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Table 6.3 Summary of the responses to the discussion paper Questions in the Discussion paper Summary of the responses Question 1a. Do you agree that full IFRSs should be Staff summary considered suitable for all entities? If not, why not? 2/3 of respondents had disagreed that full IFRS should be considered suitable for all entities Analysis for this study Of the 96 respondents who commented; -39 agreed full IFRS should be suitable for all entities -55 did not agree that full IFRS should be suitable for all entities - views of the two respondents were not clear. Question 1b. Do you agree that the Board should Staff summary develop a separate set of financial reporting 10% of respondents had said that they did not want to see a standards suitable for SMEs? If not, why not? separate set of standards for SMEs. No-one, however felt that it was not the IASB’s role to set the standards. Analysis for this study -Of the 108 respondents who commented; -81 argued IASB should develop a separate set of standards for SMEs -12 did not agree that there should be a separate set of standards - views of the five respondents were not clear. Question 2. Are the objectives of IASB Standards for Staff summary SMEs as set out in preliminary view 2 appropriate The only sign of disagreement was with the objective that the and, if not, how should they be modified? standards should be built around the same conceptual framework as full IFRS. Analysis for this study Of the 96 respondents who commented; -82 agreed with the objectives for SME standard -11 did not agree with the objectives of the SME standard - views of the three respondents were not clear. Question 3a. Do you agree that the Board should Staff summary describe the characteristics of the entities for which There was general agreement with the Board’s approach and people it intends the standards but that those were able to interpret the four presumptive indicators clearly. There characteristics should not prescribe quantitative ‘size were some negative comments about the overarching principles tests’? If not, why not, and how would an that the indicators were derived from. appropriate size test be developed? Analysis for this study Of the 97 respondents who commented: -81 agreed that the Board should describe the characteristics of entities for which it intends the standards but that those characteristics should not prescribe a quantitative size test. -16 did not agree that the board should describe the characteristics of entities for which it intends the standards but that those characteristics should not prescribe a quantitative size test. Question 3b. Do you agree that the Board should Staff Summary develop standards that would be suitable for all Same as staff summary given above in question 3a. entities that do not have public accountability and Analysis for this study should not focus only on some entities that do not Of the 99 respondents who commented: have public accountability, such as only the relatively -68 agreed but 21 had reservations that the board should develop larger ones or only the relatively smaller ones? If not, standards for all entities that do not have public accountability. why not? -25 did not agree that the board should develop standards for all entities that do not have public accountability. - views of the six respondents were not clear. Question 3c. Do the two principles in preliminary Staff Summary view 3.2, combined with the presumptive indicators Same as staff summary given above in question 3a of ‘public accountability’ in preliminary view 3.3, Analysis for this study provide a workable definition and appropriate Of the 95 respondents who commented: guidance for applying the concept of ‘public -66 agreed (but 34 had reservations) about the two principles in accountability’? If not, how would you change them? preliminary view 3.2, combined with the presumptive indicators of ‘public accountability’ in preliminary view 3.3, provide a workable definition and appropriate guidance for applying the concept of public accountability.

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Questions in the Discussion paper Summary of the responses -25 did not agree that the two principles in preliminary view 3.2 combined with presumptive indicators of public accountability in preliminary view 3.3 provide a workable definition and appropriate guidance for applying the concept of public accountability. - views of the six respondents were not clear. Question 6. Do you agree that development of IASB Staff summary Standards for SMEs should start by extracting the Most respondents had agreed to the ‘top-down’ approach to fundamental concepts from the Framework and the development of SME standard. There was little support for the principles and related mandatory guidance from notion of starting from scratch. IFRSs (including Interpretations), and then making Analysis for this study modifications deemed appropriate? If not, what Of the 93 respondents who commented: approach would you follow? -80 agreed that the board should develop the SME standard by starting from full IFRS -13 did not agree that the board should develop SME standard by starting from full IFRS. Question 7a. Do you agree that any modifications for Staff Summary SMEs to the concepts or principles in full IFRSs must A number of respondents had suggested that the justifications for be on the basis of the identified needs of users of modifications should refer to user needs and cost–benefit analysis SME financial statements or cost-benefit analyses? If rather than users needs or cost- benefit analysis. not, what alternative bases for modifications would Analysis for this study you propose, and why? And if so, do you have Of the 92 respondents who commented: suggestions about how the Board might analyse the -82 agreed that the justifications for modifications should refer to costs and benefits of IFRSs in an SME context? user needs and cost-benefit analysis rather than user needs or cost- benefit analysis. -9 did not agree that justifications for modifications should refer to user needs and cost-benefit analysis rather than user needs or cost- benefit analysis. - view of the one respondent was not clear. Question 7b. Do you agree that it is likely that Staff summary disclosure and presentation modifications will be Question 7b and 7c elicited the most disagreement. In particular, justified on the basis of user needs and cost-benefit many respondents felt that the Board was prejudging the analyses and that the disclosure modifications could recognition and measurement issue and asked the board to keep an increase or decrease the current level of disclosure open mind. for SMEs? If not, why not? Question 7c. Do you agree that, in developing Staff summary standards for SMEs, the Board should presume that Question 7b and 7c elicited the most disagreement. In particular, no modification would be made to the recognition or many respondents felt that the Board was prejudging the measurement principles in IFRSs, though that recognition and measurement issue and asked the board to keep an presumption could be overcome on the basis of user open mind. needs and a cost-benefit analysis? If not, why not? Analysis for this study Of the 93 respondents who commented: -40 agreed (but 16 had reservations) that board should presume no modification to the recognition and measurement principles in IFRS. -53 did not agree that the board should presume no modification to the recognition and measurement principles in IFRS. Question 8a. Do you agree that IASB Standards for These covered mainly procedural issues. SMEs should be published in a separate printed Majority of respondents agreed with question 8a while the views of volume? If you favour including them in separate the respondents were divided on question 8b (IASplus, 2004). sections of each IFRS (including Interpretations) or some other approach, please explain why. Question 8b. Do you agree that IASB Standards for SMEs should be organised by IAS/IFRS number rather than in topical sequence? If you favour topical sequence or some other approach, please explain why. Source: reproduced from (IStaR, 2004b, December: 15-17).

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6.4 Proceeding with the SME Project

The board was divided over the SME project, and it struggled to discuss the project constructively (IStaR, 2003a, July; 2003b, September; 2004d, July; 2004b, December; 2004g, October). According to one board member (Geoff Whittington) “half of the Board did not want to do this [SME project] at all, and the other half wanted to do a proper SME standard” (IStaR, 2004g, October: 14). Repeatedly the vice chairman of the IASB reminded the board of the need to work together on this project (IStaR, 2003a, July; 2003b, September; 2004b, December; 2004g, October), and that “dozens of people out there were just waiting for the board to fail so that they could do the job themselves” (IStaR, 2004g, October: 14).

To discuss the way forward for the SME project, Sir David Tweedie formed a sub-committee of six IASB board members in October 2004. The members of this sub-committee were Gilbert Gelard, Tricia O’Malley, Jan Engstrom, Jim Leisenring, Bob Garnett and Geoff Whittington and it was chaired by Tom Jones, the vice-chairman of the IASB (Paul Pacter, pers. comm., 12 March 2011).13 With the formation of this sub-committee of the board, the pool of technical expertise to develop the SME standard was expanded to four sets of people:

• the director of the SME project; • the advisory panel; • the informal panel of users; and • the sub-committee of the board members. The director of the SME project explained the role of the sub-committee:

The role of all of our internal groups of Board Advisers [sub-committee] is to serve as a sounding board for the project manager -- to provide guidance on how to proceed on contentious issues. The Board Advisers on a project do not debate technical issues and never vote or take positions as a body. Their role is to advise the project manager on ways to bring the contentious issues to the Board and, thereby, move the project forward (Paul Pacter, pers. comm., 12 March 2011).

This board sub-committee met in November 2004 to discuss how to make progress with the SME project considering the submissions made to the discussion paper. It identified six

13 According to the IASplus website Jan Engstrom was not part of this sub-committee of the board and there were five members of the sub-committee of the board.

113 issues for discussion at the IASB board meeting: the IASB should make clear its full commitment to the project; it should not define narrowly the entities that should use the SME standard; the board should be open minded to differences in measurement and recognition disclosure; there should be two sets of standards IFRS and IFRS for SMEs; there should be a prohibition on picking and choosing between the two sets of standards; and the advisory group should be broadened to include more users and preparers (IStaR, 2004b, December).

Before presenting these six issues to the IASB’s December board meeting in 2004, Tom Jones, the chairman of the sub-committee (and vice-chairman of the IASB) reminded the board that: … he would like the discussion and decisions made today to cut out much of the redrafting that has continued as a feature of the project. He felt that the Board had shown some ambivalence towards the project in the past. He said that he had seven issues for the Board and if it made decisions now and chose not to redebate them in future, a lot of time could be saved. He added that the Board often gave Mr. Pacter conflicting advice on this project because there were such diverse views, and that confuses and frustrates the outside world (IStaR, 2004b, December: 17).

Mr Jones then presented the board with the six (not seven) issues. The board developed terms of reference for proceeding with the SME project. For completeness, these terms of reference are reproduced in full (IASB, 2005e: 12, Insight). • IASB Standards for SMEs should focus on financial reporting by those non-publicly accountable entities that have external users of their financial statements (i.e. users other than primarily owner-managers). Jurisdictions could, of course, choose to permit or require them for all SMEs, including very small ones. • The IASB should not develop detailed guidelines on which entities should or should not be eligible to use the IASB Standards for SMEs. That is a matter to be decided by national jurisdictions. • The IASB agreed that the Framework for the Preparation and Presentation of Financial Statements should apply to all entities. However, the IASB should consider recognition and measurement simplifications for SMEs, as well as disclosure and presentation simplifications-based only on user needs and cost- benefit considerations as provided for in the Framework. There should be no preconceived objections to such changes. • If a recognition or measurement issue is addressed in an IFRS, but not in SME Standards, the entity should be required to apply that IFRS to the issue. This ‘mandatory fallback’ should be implemented by including IFRSs at the top of the accounting policy hierarchy in the SME equivalent of paragraph 11 of IAS 8 Accounting Policies Changes in Accounting Estimates and Errors. • An entity following IASB Standards for SMEs should follow those standards in their entirety and should not have a choice of reverting to IFRSs on a standard-by- standard or principle-by- principle basis.

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• If an entity follows IASB Standards for SMEs, the basis of presentation note and the auditor’s report should make that clear so that the user understands that full IFRSs are not being followed. • When published in printed form, IASB SME standards should be organised topically • The composition of the Advisory Group should be broadened to include more preparers and users of SME financial statements. • Staff should develop a project plan that includes round-table-table meetings with preparers and users of SME financial statements.

Subsequent steps in proceeding with the SME project were based on these terms of reference.

The IASB expanded the advisory panel by adding 15 new members in April 2005 (IASplus, 2005c), “to include more preparers and users of the SME financial statements as well as others with particular SME expertise” (IASB, 2005g, Insight: 6) and renamed the advisory panel as a working group. The new members of the working group are shown in Table 6.4. The working group was chaired by Tom Jones (the vice-chairman of the IASB).

Table 6.4 New members to the working group Member Organisation Jean-Pierre Boucquet Adjunct-Director Accounting, Dexia Bank, Belgium Enrique Ortega Carballo Spanish Accounting and Auditing Institute, Spain Mark Ellis Chief Financial Officer, Michael C Fina Companies, US Hugo van den Ende PricerwaterhouseCoopers, the Netherlands Dr Christophe Ernst Ministry of Justice, Germany Dany Girard Executive Director, Caisse Populaire Desjardins d’Arvida/Kenogami, Canada Mitsuru Komiyama Managing Partner, Komiyama & Co., Japan Mr Pascal Labet Director of Economic Affaires, CGPME, France Johnny Mao Head of Credit and Special Assets, the Bank of East Asia, Limited, Hong Kong Arthur V Neis Vice President, Treasurer/CFO, LCS Holdings, Inc, US Jan Christian Nielsen Danish Agency for Company Law, Ministry of Business and Economy, Denmark Mike Pacitti Director, 3i plc, UK Dr Richard Roberts SME Research Director and Chief Economist, UK Banking, Barclays Bank Leonardo Rodriguez Professor Emeritus, Florida International University, US and President, Interamercian Accounting Association Dr Oliver Roth Chief Executive Officer, LempHirz GmbH & Co. KG, Germany Source: (IASB, 2005g: 6, Insight).

After the addition of these 15 new members the working group consisted of 33 members and this further expanded the participants in the pool of technical expertise to develop the SME standard that consisted of four sets of people:

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• the director of the SME project, • the working group—33 members, • the informal user panel—eight members, and • the sub-committee of the board—six members. Both the working group and the sub-committee of the board in the hidden cluster were chaired by Tom Jones (vice-chairman of the IASB).

6.5 Providing Recognition and Measurement Simplifications

The IASB’s intention at the start of this project in July 2003 was to preserve its IFRS recognition and measurement criteria in the SME standard (IASB, 2003b, Update; IStaR, 2003a, July)(see chapter five). By January 2005, however, the IASB’s terms of reference for the project had changed to reflect the board’s decision that it “should consider recognition and measurement simplifications for SMEs as well as disclosure and presentation simplifications” (IASB, 2005e: 12, Insight). The IASB decided that a staff questionnaire would be prepared by its staff to identify issues in the recognition and measurement principles. The board would hold a public round-table meeting with preparers and users of SME financial statements that year to discuss the recognition and measurement principles raised in the staff questionnaire (IASB, 2005i, SQ). To participate in the round-table meetings, participants were asked to respond to the staff questionnaire and to indicate their interest in taking part in the discussion (IASB, 2005i, SQ).

The Staff Questionnaire on Recognition and Measurement Simplification was issued for public comment in April 2005, with a comment deadline of 31 May 2005 (IASB, 2005i, SQ), which was later extended to 30 June 2005 (IASplus, 2005a).14 The two questions in the staff questionnaire were: Question 1: What are the areas for possible simplification of recognition and measurement principles for SMEs? In responding, please indicate:

• The specific accounting recognition or measurement problem for an SME under IFRSs; • The specific transactions or events that create the recognition or measurement problem for an SME under IFRS; • Why it is a problem; and • How that problem might be solved.

14 The title of the project was changed from ‘IFRS for NPAEs’ to ‘IFRS for SMEs’ before the staff questionnaire was released.

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Question 2: From your experience, please indicate which topics addressed in IFRS might be omitted from SME standards because they are unlikely to occur in an SME context. If they occur, the standards would require the SME to determine its appropriate accounting policy by looking to the applicable IFRSs (IASB, 2005i: 5-6, SQ).

The questionnaire also provided a list of possible topics “intended to stimulate responses and ... not proposed as a comprehensive or definitive list” (IASB, 2005i: 7, SQ). The list of topics thought likely to cause recognition and measurement problems for SMEs for question one is reproduced in Table 6.5.

Table 6.5 List of topics for question 1 that may cause recognition and measurement problems for SMEs Standard Suggested list of topics IAS 2 Measuring the cost of inventories under IAS 2 IAS Use of the percentage of completion method for contracts under IAS 11 and for 11/18 service revenue under IAS 18. IAS 12 Deferred income tax accounting under IAS 12. IAS 17 Lease accounting under IAS 17. IAS 19 Measurement of defined benefit pension or other post-employment benefit liabilities under IAS 19. IAS 27 Consolidation of subsidiaries under IAS 27. IAS 31 The equity method of accounting for investments in associates under IAS 28 and investments in joint ventures under IAS 31. IAS 36 Impairment approach to goodwill and intangibles for indefinite life assets under IAS 36. IAS 36 Impairment of property, plant, and equipment under IAS 36. IAS 37 Recognition and measurement of provisions and contingent liabilities under IAS 37. IAS 38 Capitalisation of intangibles development costs incurred after commercial viability has been determined under IAS 38. IAS 39 Use of the effective interest method under IAS 39. IAS 39 Fair value measurements under IAS 39. IAS 39 Accounting for foreign currency forward contracts under IAS 39. IAS 39 Derecognition and/or hedge accounting provisions of IAS 39. IAS 41 The fair value method of accounting for biological assets and agricultural produce at point of harvest under IAS 41. IFRS 2 Measurement of share-based payments under IFRS 2. Other(s) – please elaborate: Source: reproduced from the staff questionnaire: (IASB, 2005i: 8-9, SQ).

The list of topics thought possibly not relevant to SMEs for question two is reproduced in Table 6.6.

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Table 6.6 List of topics for question 2 that may not be relevant for SMEs Standard Suggested topics IFRS 2 SMEs generally do not enter into share-based payment transactions. The SME equivalent of IFRS 2 should simply refer back to IFRS 2. IFRS 3 SMEs seldom enter into business combinations. The SME equivalent of IFRS 3 should simply refer back to IFRS 3. IFRS 4 Because companies that issue insurance contracts hold assets in a fiduciary capacity, they have public accountability. IASB standards for SMEs would not be intended for them. Therefore, an SME version of IFRS 4 is not needed. IAS 11 Combining and Segmenting Construction Contracts IAS 12 Temporary differences arising from investments in subsidiaries, branches, associates, and interests in joint ventures IAS 16 Revaluation model for property, plant, and equipment IAS 17 Sale and leaseback transactions IAS 19 Defined benefit employee benefit programmes IAS 23 Capitalisation model for borrowing costs IAS 26 Because retirement benefit plans hold assets in a fiduciary capacity, they have public accountability. IASB standards for SMEs would not be intended for them. Therefore, an SME version of IFRS 26 is not needed. IAS 27 SMEs generally do not have subsidiaries. The SME equivalent of IAS 27 should simply refer back to IAS 27. IAS 30 The entities to which IAS 30 applies are, by definition, entities with public accountability and, therefore, IFRSs apply to such entities. IAS 32 Split accounting for compound financial instruments IAS 36 Because SMEs generally do not enter into business combinations, the material on impairment of goodwill in IAS 36 could be omitted from the SME standard on impairment of assets. IAS 38 Revaluation model for intangibles IAS 39 Derecognition IAS 39 Hedge Accounting Source: reproduced from the staff questionnaire: (IASB, 2005i: 10-11, SQ).

The staff questionnaire was sent to the 120 respondents to the discussion paper, as well as to the SAC and the working group. It was also publicly available so that others who missed out during the discussion paper consultation period could respond to the questionnaire (IASB, 2005i, SQ).

6.5.1 Responses Relating to Staff Questionnaire on Recognition and Measurement Simplifications

The IASB received 101 submissions from 40 countries in response to the staff questionnaire on the recognition and measurement simplifications. Of these, 20 submissions came from 14 developing countries, and 60 submissions from 25 developed countries, with the largest number of submissions coming from the European bodies (11 responses) and the global and international organisation (9 responses). The number and distribution of responses is

118 summarised in Table 6.7 and a full list of the respondents appears in Appendix 3, Table A3.1.

Table 6.7 Analysis of the submissions to the staff questionnaire on recognition and measurement simplification by country No. of submissions No. of Submissions Developed Countries Developing Countries Australia 3 Argentina 1 Austria 2 Brazil 1 Belgium 2 Cameroon 1 Brussels 1 China 1 Canada 1 India 2 Czech republic 1 Kenya 1 Denmark 3 Korea 1 Finland 1 Kyrgyz republic 1 France 4 Malaysia 3 Germany 8 Mexico 1 Hong Kong 1 Pakistan 1 Ireland 1 Russia 1 Israel 1 South Africa4 Italy 3 Uruguay 1 Japan 3 Netherlands 2 Submissions from 20 developing countries New Zealand 4 Submissions from Global/ 9 International Organisations Norway 1 Submissions from 11 European Bodies Portugal 1 Submission from unknown 1 location Singapore 1 Spain 2 Total submissions 101 received Sweden 2 Switzerland 1 UK 6 US 5 Submissions from 60 developed countries Source: (Based on submissions received on the staff questionnaire on recognition and measurement).

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The respondents commented on all the standards that were suggested as possible topics that may cause recognition and measurement problems for SMEs (Table 6.5) and topics that may not be relevant for SMEs ( Table 6.6), plus a further 12 standards.15

The main concerns of respondents seemed to be that, where possible, simpler recognition and measurement criteria should be provided in the SME standard. The five topics or standards that received the most comments seeking deletion from the SME standard because they were deemed to be not relevant for SMEs were:

• IFRS 4 Insurance Contracts (37 respondents) • IAS 26 Retirement benefit plans (30 respondents) • IAS 30 Disclosures for Banks and Similar Financial Institutes (30 respondents) • IFRS 2 Share based payments (23 respondents) • IAS 39 Financial Instruments: Recognition and Measurement-Hedge accounting and de-recognition (20 respondents) The complete list of topics for deletion, as suggested by the respondents to the staff questionnaire, is in Appendix 3, Table A3.2.

As a means of understanding the recognition and measurement decisions made by the IASB, four sample standards have been selected for closer analysis: IAS 16 Property, Plant and Equipment; IAS 17 Leases; IAS 36 Impairment of Assets; and IAS 41 Agriculture. Submissions made by the respondents about these four standards are discussed in section 6.7. These will assist in understanding the issues raised relating to both mandatory (IAS 41) and optional reversion to full IFRS (IAS 16) as well as how the IASB addressed the issues raised.

Staff analysed the issues raised in response to the staff questionnaire on the recognition and measurement simplifications and prepared a summary of the issues raised for the board’s attention (this is discussed in section 6.6). This summary did not acknowledge respondents’ comments about developing countries (IASB, 2005h, observer notes). Of the 101 responses to the staff questionnaire, eight provided additional comments about

15 IAS 1 Presentation of Financial Statement; IAS 7 Statement of Cash Flows; IAS 10 Events After the Balance Sheet Date; IAS14 Segment Reporting; IAS 21 Accounting for the Effects of Change in Foreign Currency; IAS 24 Related Party Disclosures; IAS 28 Investment in Associates; IAS 29 Financial reporting in Hyperinflationary Economies; IAS 33 Earnings per Share; IAS 40 Investment Property; IFRS 5 Non-current Assets Held for Sale and Discontinued operations; and IFRS 6 Exploration for an Evaluation of Mineral Resources.

120 developing countries. Three of these respondents were from developing countries: China, Kenya and Malaysia, while the other five respondents were from developed countries and international bodies: the US and the Chartered Financial Analyst (CFA) Institute, IFAC, UNCTAD and CAPA. One respondent highlighted that in many developing countries full IFRS was required for all entities, but many entities did not have the capacity to cope with such complex standards. Seven respondents argued that the recognition and measurement requirements arising from fair value accounting were complex and burdensome because developing countries lacked active markets, expertise and resources. Full detailed analysis of the additional comments made about developing countries is provided in Appendix 3, Table A3.3.

6.5.2 Other Activities to Proceed with Recognition and Measurement Simplifications

Between July and October 2005, three other activities were undertaken before the board discussed the recognition and measurement simplifications to be made in the proposed SME standard. These were: an educational session for the board; a WSS meeting; and public round-tables.

Staff held an educational session for the board in July 2005 to help the board understand how banks make lending decisions to various categories of SMEs, and how disclosure and measurement simplifications are made in the UK’s Financial Reporting Standards for Smaller Entities (IASB, 2005f, Update; IStaR, 2005b, July). 16 The director of the SME project invited two outsiders to talk at this educational session: Richard Roberts of Barclays Bank and Isobel Sharp of the UK’s Accounting Standards Board.

Richard Roberts, the chief economist and SME research director at Barclay’s Bank explained to the board his bank’s lending decision criteria for various categories of SMEs (IASB, 2005f, Update; IStaR, 2005b, July). The bank relied mainly on the balance sheet and income statement, which were both particularly useful in the credit sanctioning process. Lenders were also satisfied by the structure and content of the income statement and the balance

16 The IASB’s due process provides scope for the staff to “conduct open educational and informational sessions. Individuals or organisations with interests or expertise in a particular project may be invited to provide background briefings to the IASB and to respond to questions” (IASCF, 2008b: 19).

121 sheet (IASplus, 2005b). Mr Roberts informed the board that lenders generally did not use the cash flow statements provided by their clients because they themselves derived the cash flow statements from the income statement and balance sheet provided by their clients (IASplus, 2005b).

Mr Roberts reported that “it was common for the loan agreement to include a requirement for access to management information, usually on a quarterly or six-monthly basis” and that management reports were used mainly for monitoring purposes and that Barclay’s did not use much of the non-financial information (IStaR, 2005b, July: 24). This was not necessarily the case in other countries, one board member (Jim Leisenring) commenting that “in US if the bank asked for extra accounting information, the client changed banks” (IStaR, 2005b, July: 24).

Isobel Sharp, the chairman of the UK Accounting Standards Board (ASB)’s Committee that dealt with FRSSE, explained the criteria used by the ASB to make disclosure, presentation, and recognition and measurement simplifications in FRSSE (IASB, 2005f, Update; IStaR, 2005b, July). She explained to the board that FRSSE was “based on objectives for financial statements that primarily focus on stewardship of the entity's management” (IASplus, 2005b; IStaR, 2005b, July). The criteria used to determine which entities qualify to use the FRSSE were based on: 1) turnover £5.6m; 2) balance sheet total £2.8m; and 3) average number of 50 employees (IStaR, 2005b). An entity had to fall below two of the three criteria to qualify to use FRSSE. The board was advised that those criteria had not been problematic (IASplus, 2005b).

Isobel Sharp advised the board that the only area where the FRSSE was more detailed than UK GAAP was in relation to related party disclosures (IASplus, 2005b). Some standards, such as share based payment and financial instruments, were examples of a few standards that were not included in FRSSE (IStaR, 2005b, July). Where the FRSSE contained no guidance for particular issues, preparers were to do the following:

• first, the financial statements must give a true and fair view; • accounting policies and estimation techniques must be consistent with the requirements of the FRSSE and of company's legislation. Where a choice is permitted, "an entity shall select the policies and techniques most appropriate to its particular circumstances for the purpose

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of giving a true and fair view, taking account of the objectives of relevance, reliability, comparability and understandability;" • paragraph 2.5 of the FRSSE then acts as a 'catch all' by requiring "where there is doubt whether applying provisions of the FRSSE would be sufficient to give a true and fair view, adequate explanation shall be given in the notes to the accounts of the transaction or arrangement concerned and the treatment adopted (IASplus, 2005b).

Comments or questions raised during the presentation included those from three board members (Tricia O’Malley, Jim Leisenring and Warren McGregor) who expressed their concern on the FRSSE’s objectives for stewardship. These board members argued that financial statements should be “forward looking”, rather than focus on stewardship and that they should provide information with predictive value (IASplus, 2005b; IStaR, 2005b, July: 27) . Financial statements that are forward looking and provide predictive value are primarily beneficial for participants of the world’s capital markets and such financial statements seem likely to be of little benefit to SMEs and the users of SME financial reports.

Support of the approximately 40 world’s standard setters was important to ensure that countries would adopt the SME standard when it was finalised. It was therefore important to keep them engaged and involved in this standard setting process. In September 2005, the IASB hosted the world’s standard setters meeting where it discussed the responses to the staff questionnaire on the recognition and measurement simplifications. According to the IASB Insight, “After discussing ... a range of possible simplifications, the representatives of NSSs gave their views on which simplifications the IASB should consider, and why” (IASB, 2005g: 11, Insight). Further details about the discussion at that meeting are not publicly available and attempts made to obtain it from the IASB were unsuccessful.17

The board held a public round-table meeting in London on 13-14 October 2005, which discussed a broad range of possible recognition and measurement simplifications (IASB, 2005b, Insight). Forty-three organisations were selected to take in the round-tables and these were “preparers and users of the financial statements of SMEs” (IASB, 2007a: BC 9, BC for ED). The organisations selected had indicated their interest to take part in the public round-tables in their response to the staff questionnaire (IASB, 2005i, SQ). Areas that received the most attention at the round-table meeting were:

17 The IASB was emailed on 30/05/11. Responses from the IASB did not provide the requested information (14/06/11).

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• IAS 12 Income Taxes: deferred income taxes • IAS 16 Property, Plant and Equipment: some aspects of property, plant, and equipment including the revaluation model, components [depreciation], and residual value • IAS 17 Leases: lease classification and measurement • IAS 19 Employee Benefits: defined benefit programmes including statutory long-service obligations • IAS 27 Consolidation and Separate Financial Statements: consolidation • IAS 32 Financial Instruments: Presentation: debt and equity classification • IAS 36 Impairment of Assets and IFRS 3 Business Combinations: goodwill impairment and intangibles recognition • IAS 36 Impairment of Assets: indicators of impairment of property, plant and equipment; value in use calculation; and cash generating units • IAS 39 Financial Instruments: Recognition and Measurement: fair value measurements in general, hedging, and derecognition • IAS 41 Agriculture: fair value model for biological assets and agriculture produce • IFRS 2 Share-based Payment: measurement of share-based payment (IASB, 2005b: 10, Insight).

The WSS’ meeting and the public round-tables provided some insights into the sorts of recognition and measurement simplifications that were needed in the proposed SME standard. Following these discussions, the board planned to begin deliberation of the issues in November 2005 (IASB, 2005b: Insight).

6.5.3 IASB’s Decisions on Recognition and Measurement Simplifications

For the November 2005 board meeting, the staff prepared a set of recommendations to the board for recognition and measurement simplifications in the SME standard. This set of recommendations, according to the director of the SME project, was based on the outcome of a series of meetings and responses: the working group’s recommendations; responses to the April 2005 Staff Questionnaire; views expressed at the WSS meeting in September 2005; and views expressed by the participants in the October 2005 round-table meetings (IASB, 2005h, Observer Notes). Four sample standards have been selected for closer analysis to understand the recognition and measurement simplifications under consideration: IAS 16 Property, Plant and Equipment; IAS 17 Leases; IAS 36 Impairment of Assets and IAS 41 Agriculture.

Detailed analysis of each of the four sample standards is provided in Appendix 3, where Table A3.4 deals with IAS 16 Property, Plant and Equipment; Table A3.5 with IAS 17 Leases; Table A3.6 with IAS 36 Impairment of Assets; and Table A3.7 with IAS 41 Agriculture. These

124 tables have been compiled as follows. The first column ‘IAS requirement in April 2005’ provides the relevant IAS requirements in April 2005 from full IFRS. The second column ‘Responses to staff questionnaire’ covers the staff summary of the responses to the staff questionnaire, as well as a summary of the analysis undertaken for this study. This analysis provides additional details about the responses and identifies the respondents raising those matters. The third and fourth columns cover the staff summary of the comments of the working group members and the views expressed at the round-tables. The fifth column provides the staff recommendation to the board and the sixth and last column shows the board’s decision. The purpose of this tabulation is to follow systematically the formal input to the IASB’s decision-making process and to help to identify whether and to what extent any changes resulted from these processes.

IAS 16 Property Plant and Equipment

The staff questionnaire had not identified IAS 16 Property Plant and Equipment as likely to cause recognition and measurement problems for SMEs (see Table 6.5). Application of the revaluation model, however, was identified as a topic that may not be relevant for SMEs (see Table 6.6).

Respondents to the staff questionnaire identified some aspects of IAS 16 requiring simplifications, these including the option to revalue property, plant and equipment, the component depreciation requirement, and the annual review of residual value and useful life (see column 2 of Appendix 3, Table A3.4). The staff summary that presented these issues to the board did not acknowledge or consider developing countries’ issues.

IAS 16 requires that “an entity shall choose either the cost model ... or the revaluation model ... as its accounting policy and shall apply that policy to an entire class of property plant and equipment” (IAS 16: para 29) (see column 1 of Table A3.4). The guidance to apply the cost model provided in IAS 16: para 30 and the guidance to use the revaluation model was provided in IAS 16: para 31-42. Of the 36 respondents who commented on the revaluation model, 23 proposed that the option to revalue property, plant and equipment be deleted from the proposed SME standard (see column 2 of Table A3.4). The staff summary reported that a small percentage of the respondents to the staff questionnaire, the majority of the working group members plus participants at the round-tables argued

125 that the option to revalue property, plant and equipment should be deleted because it was a burdensome and costly option for SMEs (IASB, 2005h, Observer Notes) (see columns 3-4 of Appendix 3,Table A3.4).18 Staff recommended that the revaluation option for property, plant and equipment should be deleted from the proposed standard (IASB, 2005h, Observer Notes) (see column 5 of Table A3.4), but the board decided to retain the option to revalue property, plant and equipment in the SME standard by providing an optional cross- reference to IAS 16 (IASB, 2005d: Update) (see column 6 of Table A3.4). This did not change anything because the option to revalue property, plant and equipment would still be available in the SME standard, as an optional fall back. An entity seeking to revalue property, plant and equipment would have to refer to IAS 16 para 31-42 and para 77 for guidance.19

IAS 16 par 43 requires that “each part of an item of property plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately” (see column 1 of Table A3.4). All nine respondents who commented on this issue argued that the use of a component approach for property, plant and equipment was costly for SMEs (see column 2 of Table A3.4). The staff summary reported that a small percentage of the respondents to the staff questionnaire and several participants at the round-tables argued that component depreciation was burdensome for SMEs (IASB, 2005h, Observer Notes)(see columns 2 and 4 of Table A3.4). The working group, however, saw no need to simplify the component depreciation requirement (IASB, 2005h, Observer Notes) (see column 3 of Table A3.4). Staff recommended that the IAS 16 in the SME standard should not refer to component depreciation (see column 5 of Table A3.4). The board decided that the SME standard would not refer to component depreciation, but would include the guidance from IAS 16 para 44-47 (IASB, 2005d, Update)(see column 6 of Table A3.4). This guidance explains how to apply component depreciation without using the term component depreciation. This suggests that the principles of component depreciation would be retained and further details of guidance from the full IFRS would be included in

18 It seemed that the staff summary referred to the percentage in terms of the total number of respondents (26/101=22%). 19 This referral to full IFRS was only for seeking guidance on the specific matter (Geoff Whittington, interview, 9 November 2011, telephone).

126 the SME standard, which, however, does not provide any relief in calculating component depreciation.

IAS 16 para 51 requires that the residual value and the useful life of an asset should be reviewed annually (see column 1 of Appendix 3, Table A3.4). Of the six respondents who commented on the annual review of useful life and residual value of property, plant and equipment, five argued that the review was complex while one proposed that the annual review of useful life and residual value is time consuming, complex and costly for SMEs (see columns 2 of Table A3.4). The staff summary reported that a small number of the respondents to the staff questionnaire argued that the annual requirement to assess the residual value and useful life of an asset is a costly exercise for SMEs (IASB, 2005h, Observer Notes) (see column 2 of Table A3.4). The working group members saw no need for simplification of this requirement and according to the staff summary the participants at the round-tables did not discuss this matter (IASB, 2005h, Observer Notes) (see columns 3- 4 of Table A3.4). Staff recommended that no major simplification was required (see column 5 of Table A3.4). The board decided that no simplification would be provided and that the residual value and useful lives of property, plant and equipment would be reviewed annually (IASB, 2005d, Update) (see column 6 of Table A3.4).

To sum up, the board did not make any substantial changes to the recognition and measurement criteria in IAS 16 in the proposed SME standard. The option to revalue property, plant and equipment was retained by an optional cross-reference to full IFRS and the requirements of component depreciation were retained but with additional application guidance in the proposed SME standard. The board retained the requirement to annually assess the residual value and useful life of property, plant and equipment. It was also apparent that neither the staff summary presented to the board nor the discussion of the three issues (option to revalue property, plant and equipment, component depreciation and annual assessment of residual value and useful life) raised concerns about developing countries. Developing countries received no consideration even though the proposed SME standard was said to benefit developing countries as well as SMEs.

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IAS 17 Leases

The staff questionnaire had asked whether IAS 17 Leases was likely to cause recognition and measurement problems for SMEs (see Table 6.5), and suggested sale and lease back transactions as a topic that may not be relevant for SMEs and might, therefore, be omitted from the proposed SME standard (see Table 6.6).

Of the 51 respondents who commented on this standard, nine proposed that all leases should be treated as operating leases, 13 argued that finance lease calculations should be simplified, six proposed that the lease liability should be measured at the present value of the minimum lease payments, 11 argued that sale and lease back transactions should not be included in the proposed SME standard (see column 2 of Appendix 3, Table A3.5). The observer notes of the IASB board meeting in November 2005 are no longer publicly available, therefore the staff summary of the responses to the staff questionnaire, reported views of the working group members, and participants at the round-tables, and staff recommendation to the board on these issues are not known (see columns 2-5 of Table A3.5). 20 At its November 2005 meeting, the board rejected the idea that all leases should be treated as operating leases but asked the staff to report back to the board after further analysis (IASB, 2005c, Update) (see column 6 of Table A3.5). The IASB’s newsletters for November and December 2006 mentioned only that all leases should not be treated as operating leases, thus retaining the distinction between operating and finance leases. The board did seem willing to discuss other options after further staff analysis.

IAS 36 Impairment of Assets

The staff questionnaire had identified IAS 36 Impairment of Assets as potentially likely to cause recognition and measurement problems for SMEs (see Table 6.5), and impairment of goodwill as possibly irrelevant for SMEs (see Table 6.6).

Of the 64 respondents who commented on this topic, 47 argued that annual impairment testing of goodwill was complex for SMEs, 26 proposed that amortisation of goodwill should be allowed either over a 10 or 20 year period, 13 proposed simplification of the impairment requirement in relation to property, plant and equipment, and six argued that

20 Attempts made to obtain this document from the IASB were unsuccessful. The IASB was emailed on 21/08/11 and 28/10/11 and there was no response from the IASB.

128 the requirements for impairment of property, plant and equipment should not be applicable for SMEs (see column 2 of Appendix 3, Table A3.6). The observer notes for the IASB board meeting in November 2005 are no longer publicly available, therefore the staff summary of the responses to the staff questionnaire, and reported views of the working group members and participants at the round-tables are not known (see columns 2-5 of Table A3.6). Neither are the staff recommendations known. The board retained the requirement to test goodwill for impairment but agreed that an indicator approach for recognising impairment of goodwill, should be investigated as a replacement of the annual impairment calculation (IASB, 2005c, Update) (see column 6 of Table A3.6).

It is not clear whether the staff sought the board’s decisions on the impairment testing of property, plant and equipment. The IASB’s newsletters for November and December 2005 did not report any decisions relating to that matter. To sum up, the board intended to retain the requirement to impairment test goodwill, but to insert an indicator requirement to trigger impairment testing rather than requiring it annually. In other words determination of recoverable amount would not be required unless it were decided that indicators of impairment exist (IAS 36: para 12). This change would have eased the impairment testing of goodwill for SMEs to some extent.

IAS 41 Agriculture

The staff questionnaire had identified for IAS 41 Agriculture that the fair value method for accounting for biological assets and agricultural produce at point of harvest might cause recognition and measurement problems for SMEs (see Table 6.5). Of the 62 respondents who commented on this topic, 35 argued that application of the fair value method to biological assets was complex for SMEs and 28 proposed the cost method as an alternative to fair value (see column 2 of Appendix 3, Table A3.7). The staff summary reported that by a four-to-one margin the respondents argued that the application of the fair value method of accounting for biological assets and agricultural produce could cause problems for SMEs (IASB, 2005h, Observer Notes) (see column 2 of Table A3.7). It also reported that the working group members proposed that biological assets should be measured at fair value only when the market price or fair value is readily available (IASB, 2005h, Observer Notes)(see column 3 of Table A3.7), and that some participants at the round-tables had reported that SMEs struggled to use fair value measurements in agriculture and sought the

129 cost method (see column 4 of Table A3.7). Staff recommended that it was unnecessary to simplify the major principles on IAS 41 (IASB, 2005h, Observer Notes) (see column 5 of Table A3.7).

The board decided to provide no simplification to the principles in IAS 41 (IASB, 2005d, Update) (see column 6 of Table A3.7). Those in developing countries may have benefited had the standard on agriculture been simplified, because as respondents argued, many developing countries do not have the market and the capacity to use fair value accounting (see Appendix 3, Table A3.3).

To sum up, the board did not intend to make any changes to the fair value method for accounting for biological assets and agricultural produce at point of harvest in IAS 41 Agriculture, despite the acknowledgement in the staff questionnaire that the use of the fair value method for biological produce and agricultural assets might cause recognition and measurement problems for SMEs.

In summary, a closer analysis of the four sample standards shows that the IASB made some modifications that barely changed the initial requirement and still required complex calculations. For example, in IAS 16, the IASB retained the principles of component depreciation but provided some additional guidance for applying that requirement; and retained the option to revalue property, plant and equipment in the proposed SME standard by making it an optional cross-reference to full IFRS. This meant that the guidance to apply the revaluation model was now available from IAS 16 in full IFRS. The board also made no changes to the annual assessment of the residual value and useful life of property, plant and equipment requirement in IAS 16. In IAS 36, the board retained the impairment testing requirement for goodwill by replacing annual impairment testing with an indicator approach to impairment testing. Also the board retained the distinction between the operating and finance lease classification in IAS 17 and retained the fair value method to measure the agricultural produce and biological assets in IAS 41.

The staff summary of analysis of the responses to the staff questionnaire did not acknowledge issues of concern to developing countries. The board intended the proposed SME standard would benefit developing countries, but in discussing the recognition and

130 measurement simplifications for the selected four standards, in particular IAS 41 Agriculture, the board did not consider developing countries’ issues and their level of expertise to deal with complex measurements such as fair value accounting.

6.6 Analysis Using Kingdon’s Three Streams of Problem, Policy and Politics

Sections 6.2 to 6.5 set out the events that occurred during step (e)—publishing the discussion document—and an additional step undertaken to ascertain recognition and measurement simplifications for the proposed SME standard. This section applies Kingdon’s three streams of problem, policy and politics to analyse the events set out in sections 6.2 to 6.5.

Chapter five showed that the influential interest groups seeking simplified standards for SMEs included the World Bank and UNCTAD. Various policy communities, such as EFRAG and IFAC, threatened to develop an SME standard if the IASB did not commit. UNCTAD had developed its SMEGA guidelines, and there was the possibility that if the IASB did not commit to the SME project then the SMEGA guidelines would have become authoritative for SMEs. Therefore the IASB contemplated developing its own SME standard to pre-empt alternative developments. Before the SME project had gained entrance onto the IASB’s agenda, the IASB announced its policy intentions were to minimise divergence from full IFRS if it had to take on this project.

The politics stream showed that, despite the demand for an SME standard and the pressure on the IASB to act, the IASB’s policy community was divided. Those board members opposed to the project argued that it was outside the IASB’s mandate, and there was also the possibility that senior staff of the IASB could block the project if placed on the IASB’s active agenda. To overcome this, the chairman of the IASB, Sir David Tweedie, requested a change in its constitution and restructured the staffing of the IASB to create a new senior position—director of the SME project—reporting directly to Tweedie. The three streams converged when Tweedie placed the SME project onto the IASB’s active agenda in July 2003.

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According to Kingdon, once an item is added onto the decision maker’s agenda, the detailed policy formulation is passed to the policy community’s hidden cluster (Kingdon, 1984). When the SME project was added onto the IASB’s agenda in July 2003, the SME project was passed to Paul Pacter the director of the SME project for detailed policy formulation. At this stage the hidden cluster comprised the director of the SME project— Paul Pacter—and an 18 member advisory panel. The visible cluster comprised 14 IASB board members.

The next step of the analysis applies Kingdon’s three streams approach to the events covered in sections 6.2 to 6.5. Section 6.6.1 analyses the development of the SME standard within the policy stream, and this is followed by analysis of the politics stream (section 6.6.2) before concluding with discussion of the problem stream (section 6.6.3).

6.6.1 Policy Stream

In the period September 2003 to December 2005 the hidden cluster involved in detailed policy formulation grew to include other participants. Thirteen new members were added to the advisory panel, which then was renamed as the working group (IASplus, 2005c); and two other groups were formed—an informal user panel of eight members, and a sub- committee of the board comprising six members (IASB, 2003d, Update; Paul Pacter, pers. comm., 17 November 2011). Both the working group and the sub-committee of the board were chaired by Tom Jones (the vice-chairman of the IASB). It seemed that the hidden cluster kept increasing, possibly in an effort to overcome criticisms that users should be consulted in developing the SME standard, and to try to reduce the division within the IASB’s policy community.

Some participants in the IASB’s policy community were active in both the hidden and the visible clusters. For example, the director of the SME project (hidden cluster) conducted a massive outreach program that increased his visibility in the wider policy community. He presented progress on the SME project at the IASB’s board meeting. He also made presentations at the WSS meetings that made him visible in the public domain. Seven board members (visible cluster) (the vice-chairman of the IASB, Gilbert Gelard, Tricia O’Malley, Jan Engstrom, Jim Leisenring, Robert Garnett and Geoff Whittington) were part of the sub- committee of the board that was not visible. Although formation of such a sub-committee

132 of the board is a normal feature of the IASB’s standard setting process (Geoff Whittington, interview, 9 November 2011, telephone), the sub-committee of the board and its discussion are barely visible in the public domain. For example, the director of the SME project commented that it was unusual for the formation of this sub-committee to be noted at the IASB’s public board meeting (Paul Pacter, pers. comm., 12 March 2011). Similarly the meeting that discusses administrative matters relating to projects on the IASB’s agenda, and which precedes the IASB’s board meeting, is seldom visible in the public domain (Geoff Whittington, interview, 9 November 2011, telephone).

Kingdon (1984) argued that the staff within the hidden cluster carry out most of the work in developing the technical aspects of the policy (Kingdon, 1984). Paul Pacter was the key staff member involved in developing the technical aspects of the SME standard. With the assistance of the working group members he facilitated the development of the discussion paper and the staff questionnaire for board discussion, which were then refined following the board’s comments and feedback.

The close involvement of staff in the policy formulation process suggests that they can influence the alternatives from which the policy makers make a choice but “cannot control the choice set entirely” (Kingdon, 1984: 45). Staff, for example, identify what issues are to be discussed at the board meeting and therefore have some control over what gets the board’s attention. At the start of the SME project the IASB’s assumption was that the SME project would also assist developing countries. However, in developing the discussion paper and the staff questionnaire the staff did not include any question relating to developing countries. 21 Evidence in this chapter also showed that, in analysing the responses to the discussion paper and the staff questionnaire that was presented to the board, the staff ignored comments about developing countries. The issues raised about developing countries were combined with the overall issues and not presented to the board as issues facing developing countries that required attention in developing the standard.

21 It is however, not known whether it was Paul Pacter’s decision to not include any question about developing countries in the discussion paper and the staff questionnaire or whether the board also did not want any special consideration of developing countries.

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Kingdon (1984) observed that the policy communities may be either fragmented or tightly knit and the extent of this fragmentation or closeness affects policy making. Chapter five showed that the board was divided even on the issue of adding the SME project onto its agenda. The division within the IASB’s policy community seemed to be most intense at the early stages in developing the SME project (IStaR, 2003b, September; 2004g, October; 2004b, December). For example Geoff Whittington noted “half of the Board did not want to do this [SME project] at all, and the other half wanted to do a proper SME standard” (IStaR, 2004g, October: 14). According to Kingdon a fragmented policy community leads to division and opposition in the process of policy formulation. This was apparent with the SME project even at this early stage. For example, the IASB’s fragmented policy community often gave conflicting advice to the director of the SME project and debated several issues many times making it difficult for the project to move forward (IStaR, 2004b, December). The division within the board also made it difficult for the board to agree on the fundamental aspects of developing this standard, such as the definition of an SME, for which group of entities the SME standard was developed, and the title of the standard.

Policy communities produce a short list of policy proposals from which “a few prominent alternatives” may rise “to the top” for the policy maker’s consideration (Kingdon, 1984: 147). The two alternatives identified by the IASB to deal with the SME project were: to create a conceptual framework especially for SMEs and then to develop a standard; or to start from full IFRS and make minimal changes to modify them for SMEs (IStaR, 2003a, July; 2003b, September). The IASB pursued the second option, which became known as the top down approach, because the board wanted to minimise divergence from full IFRS (IStaR, 2003a, July) (David Tweedie, interview, 13 November 2008, London). This was also the approach that the IASB was familiar with, given its expertise in developing full IFRS for the world’s capital market participants. Therefore it was easier for the board to start with full IFRS and modify them for SMEs. The chairman of the IASB promoted this effort to minimise divergence from full IFRS as facilitating easier transition to full IFRS in future (David Tweedie, interview 13 November 2008, London). As Kingdon noted (1984: 87) “policy makers consider the alternatives from which they will choose, they repair to ideas and approaches with which they are already familiar”.

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The decisions that the IASB made between September 2003 and December 2005 showed that the board’s determined pursuit of the objective of facilitating easier transition to full IFRS seemed likely to increase rather than to reduce the reporting burden on SMEs. The discussion paper identified five objectives for the SME standard but stated that reducing the reporting burden for SMEs was a primary objective. In developing the discussion paper, however, it became apparent that those preparing financial reports for SMEs would need to know both sets of financial reporting requirements—the full IFRS and the SME standard. For example, evidence in this chapter showed that the board decided that when it was not clear how an accounting issue affecting SMEs could be resolved within the SME standard, entities were referred to full IFRS for guidance, known as mandatory fallback (IStaR, 2003b, September: 38).

The IASB’s determination to minimise divergence from full IFRS meant that the board made only minimal changes to the recognition and measurement simplifications identified in responses to the staff questionnaire and the public round-table discussions. The IASB’s reluctance to allow divergence from full IFRS seemed to suggest at this early stage of the project that the eventual standard for SMEs would be for entities larger than SMEs. The IASB’s expertise in developing standards for the world’s capital market participants meant it was much easier for the board to develop a standard for large and sophisticated entities rather than the smaller entities. Closer analysis of the sample four standards—IAS 16 Property Plant and Equipment; IAS 17 Leases; IAS 36 Impairment Assets; and IAS 41 Agriculture—revealed that although wordings were changed from full IFRS at times, the substance of the requirements either did not change or changed only minimally. For example, in IAS 16, in relation to component depreciation, the board retained the basic principles of component depreciation by rewriting that requirement, but without using the term component depreciation and by including additional guidance (IASB, 2005d, Update). In other words SMEs still had to comply with component depreciation requirements. In IAS 17 the board retained the distinction between the operating and finance lease classification and rejected requests to classify all leases as operating (IASB, 2005c, Update). In IAS 36 the board retained the impairment testing for goodwill requirement but replaced the requirement to annually test for impairment with an indicator approach (IASB, 2005c, Update). In IAS 41, the IASB rejected the cost model as an optional accounting policy choice for SMEs to measure agricultural produce, but made the use of the cost model less

135 restrictive when fair value was not readily available (IASB, 2005d, Update). This was a particular issue in developing countries where a fair value for agricultural produce may be difficult to obtain.

Focusing on meeting the needs of users of SME financial statements was also a primary objective of developing the SME standard (see IASB, 2004a: para 16-17, DP). The IASB’s working assumption in developing the discussion paper and the staff questionnaire seemed to be that users of SMEs’ financial reports and of listed companies’ financial reports had similar needs to those reflected in the framework that relate to financial market participants (IStaR, 2004b, December). By using such assumption to develop the SME standard, it was easier for the board to minimise divergence from full IFRS. Some board members questioned whether the needs of the users of SMEs’ financial statements and listed entities’ financial statements were the same. The staff did form an informal user panel to provide comments from a user’s perspective but the panel was made up of users that predominantly dealt with large entities (see Figure 6. 1) (IStaR, 2004c, February).

For a policy proposal to survive Kingdon (1984) argued that it must be technically feasible, acceptable to the values of the policy community and it must have a reasonable cost so that it is acceptable to the policy maker. Kingdon further suggested that not all policy makers may have the same values and there can be some disagreements, especially if the policy proposal “doesn’t really represent any mainstream thinking” (Kingdon, 1984: 140). Evidence in this chapter showed that the project on SMEs was technically feasible for the IASB because it was based on full IFRS. Clearly, not all board members had the same values. The SME project overturned the mainstream thinking that there should be only one set of standards for all entities, and there was clearly division within the board but rather than letting other groups develop a standard for SMEs it seemed that it was a better option for the IASB that it produced this standard by minimising divergence from full IFRS.

Kingdon (1984) argued that before any new idea is accepted, it is important to build consensus for that idea so that people in the wider policy community get used to it and the likelihood of acceptance of that idea is increased. The IASB had embarked on the process of building support for its SME project since the project was added onto the IASB’s active agenda (see chapter five). This was particularly important for the IASB for two reasons.

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Firstly, the IASB’s approach to develop the SME standard focused on minimising divergence from full IFRS, which was not in the expectation of the wider policy community. Secondly, unlike the other national standard setters, the IASB does not have the mandate to enforce adoption of its standards (IStaR, 2003a). Therefore by building consensus it would have increased the probability that its eventual SME standard would be accepted.

This process of consensus building may be facilitated by a policy entrepreneur who attempts to influence and convince both the policy community and the wider public. The policy entrepreneur may facilitate this by processes such as writing papers, holding meetings, and meeting “endlessly with important and not-so-important people” (Kingdon, 1984: 214). Once the project was on the IASB’s agenda, the policy entrepreneurial role passed from Sir David Tweedie to Paul Pacter, newly appointed as the director of the SME project that reported directly to the chairman (see chapter five).

Before starting discussions of the proposals, policy entrepreneurs push their ideas in many different forums in an attempt to ‘soften up’ the wider policy community (Kingdon, 1984: 134). Chapter five showed that Paul Pacter had already started the process of building consensus with the WSS. Between September 2003 and December 2005 Paul Pacter carried out many outreach programs “with the objectives of encouraging SMEs and smaller auditing firms to become familiar with the IASB and the SME project” (IASB, 2009e: 2, Fact Sheet). Evidence in this chapter also showed that Paul Pacter facilitated the meeting of the WSS meeting that sought comments on the responses to the staff questionnaire on recognition and measurement simplification.

The discussion paper issued in June 2004 set out the IASB’s proposed approach to develop the SME standard and it sought agreement or disagreement to its approach (IASB, 2004a, DP). It seemed that the IASB used the discussion paper to disseminate its proposed approach in the wider policy community so that people could slowly get used to the IASB’s approach to the standard for SMEs.

It was also important to build support and acceptance for the SME project within the IASB’s divided policy community to ensure that it got the required votes to pass the eventual standard. The staff held an educational session in July 2005 to help the board members

137 understand how the banks made lending decisions to various categories of SMEs and how disclosure and measurement simplifications were made in the UK’s FRSSE (IASB, 2005f, Update; IStaR, 2005b, July). It would be difficult to assess the impact of the educational session in ‘softening up’ the opposing board members, but it might be perceived as a step towards reducing the board member opposition to this project.

6.6.2 Politics Stream

Once the project is on the policy maker’s agenda, some policy makers within the policy community, who oppose developing policy, may try to impede the enactment of the policy (Kingdon, 1984) using delaying or blocking tactics. Once the SME project was on the IASB’s agenda, the opposing board members did try to impede development of the SME standard. Opposing board members’ negativity towards the SME project made it difficult for the board to make progress. For example, the vice-chairman of the IASB reminded the board to stop re-debating the project and pointed out that the board’s “conflicting advice” seemed to confuse and frustrate “the outside word” (IStaR, 2004b, December: 17).

To reduce the board opposition that made progress on the SME project so difficult, Sir David Tweedie formed a sub-committee of the board in November 2004 (Paul Pacter, pers. comm., 12 March 2011). The director of the SME project regarded this sub-committee’s role as advisory, and particularly to “advise the project manager on ways to bring the contentious issues to the Board and, thereby, move the project forward” (Paul Pacter, pers. comm., 12 March 2011). This implies the staff reports to the board may present contentious issues in ways that do not provoke board members’ opposition. In other words members of the hidden cluster “sense what will fly in the committee when it comes to voting” (Kingdon, 1984: 45) and write the reports to the board accordingly.

Policy makers can also sense the mood of those in the wider policy community “from various communications that come to them, including mail, visits ... newspaper coverage and conversation with constituents” (Kingdon, 1984: 170). The IASB was becoming aware that outside of its own policy community the proposed SME standard was perceived as complex for SMEs. For example, the submissions in response to the staff questionnaire and the discussions at the public round-tables held in October 2005 showed that the proposed

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SME standard was complex and further simplification of the recognition and measurement criteria was sought.

This concern about the complexity of the proposed SME standard also increased the likelihood that other organised forces, such as interest groups and other policy communities, would try to influence the outcome of the policy once it is on the policy maker’s agenda (Kingdon, 1984). UNCTAD was one such group that viewed the IASB’s approach as inappropriate for SMEs. At the ISAR’s 23rd session in 2006 it was decided that the third-tier reporting guidelines for micro entities should be updated and refined (UNCTAD, 2008). The IASB’s approach was also not well received in Europe where EFRAG began development of its own SME standard (Geoff Whittington, interview, 9 November 2011, telephone). It might be perceived that UNCTAD and EFRAG wanted to exert pressure on the IASB by deciding to continue work on its third-tier reporting guidelines or developing SME standard. It could also be possible that EFRAG wanted to develop its own standard for SMEs. The IASB was aware that “dozens of people out there were just waiting for the Board to fail so that they could do the job themselves” (IStaR, 2004g, October: 14; 2004b, December). However, the board did not want other groups to develop their own standard for SMEs.

Consensus is generally built within the politics stream by a “bargaining process” (Kingdon, 1984: 167) where the policy makers negotiate amongst themselves as well as with other policy communities to reach an acceptable solution for the policy. In addition to dealing with potentially competing outside organised groups, building this political support within the IASB was also essential to reduce board opposition, to ensure the board was working together to move the project forward, and to ensure the project got the required votes to pass the eventual standard. One of the ways of achieving consensus within the IASB seemed to be to remind the board that others could step in.

6.6.3 Problem Stream

How a problem is defined is important because it affects how it might be addressed by the policy makers (Kingdon, 1984). As the IASB embarked on the SME project it redefined the standard setting problem to pursue minimising divergence from full IFRS. The discussion paper identified five objectives for developing the SME standard (see IASB, 2004a: para 16-

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17, DP). Of those five objectives, focusing on meeting the needs of SME financial statements (objective b) and reducing the reporting burden for SMEs objective (b) were the two primary objectives. Evidence in this chapter showed that the IASB ignored those two primary objectives and instead focused on achieving easier transition to full IFRS objective (e) because it allowed the IASB to pursue minimal divergence from full IFRS. With such redefinition of the problem it meant that the IASB was not focusing on smaller entities. Instead it focused on larger entities that seemed to have some similar characteristics to the large and sophisticated entities for which the IASB has expertise in developing standards. By redefining the problem within their standard setting expertise it was now easier for the board to deal with developing the SME standard.

By redefining the problem and pursuing minimal divergence from full IFRS it was apparent even at the early stage of the project that the SME standard was not focused on smaller entities. For example, in developing the discussion paper the IASB used the concept of public accountability to define who can use the SME standard. This raised concerns amongst the board members that the eventual standard was not aimed at SMEs but rather at a much higher level (IStaR, 2004a, April; 2004g, October).

Evidently, the IASB’s effort to minimise divergence from full IFRS also meant that the standard under development was unlikely to be appropriate for SMEs. This raised questions about the title of the standard and it was apparent that the board could not agree on a title that adequately described the scope of the standard (IStaR, 2003b, September). For example, even at this early stage of the SME project, the IASB had used three titles. First it was titled IFRS for SMEs, then changed to IFRS for Non-publicly Accountable Entities in January 2005 (IASB, 2005a, Update) and then two months later changed back to IFRS for SMEs.

With the re-definition of the problem, developing countries were assumed to have similar problems as SMEs. However, there seemed to be no specific consideration or even acknowledgment of matters relating to developing countries (Paul Pacter, interview 14 November 2008, London; David Cairns, interview 13 November 2008, London; and Kenneth Sullivan, 13 November 2008, London). The explanation given was that there was a lack of clarity around the problems facing developing countries (Paul Pacter, interview 14

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November 2008, London; David Cairns, interview 13 November 2008, London and Chris Nobes, interview 12 November 2008, London). There is nothing to suggest there was any interest in clarifying the nature of these problems in the discussion paper (see Appendix 2, Table A2.1) and the staff questionnaire did not have any question seeking feedback about developing countries. Further, when respondents to the discussion paper and staff questionnaire commented on developing countries, these comments were not acknowledged in the staff summary presented to the IASB. Also, when discussing simplifications for the SME standard, the board did not consider developing countries’ needs or circumstances in making those simplifications (Paul Pacter, interview, 14 November 2008, London; Peter Walton, interview, 27 November 2008, telephone).

6.7 Summary and Conclusion

This chapter discussed step (e) of the IASB’s due process and an additional step undertaken to ascertain the recognition and measurement simplifications for the proposed SME standard that was also intended to assist developing countries. Evidence in this chapter showed that the IASB’s policy community remained divided over the SME project even after the SME project was added onto the IASB’s agenda. This division made it difficult for the board to agree on the approach to develop the SME standard.

Within the IASB’s policy community, the hidden cluster grew to include four sets of people: the director of the SME project; an informal user panel (eight members); a sub-committee of the board (six members); and a working group (33 members). A normal feature of the standard setting process is that the hidden cluster (i.e staff and others) will sift the information providing only summarised information to the board because there is an enormous amount of information received in developing any standard and the board members cannot possibly read all those documents. This means that the board receives second hand information in most cases. It also means that the staff (project manager or director) have the ability to control the issues that make it to the board’s attention.

The IASB’s intended policy response developed before the project was added to its agenda, was to minimise divergence from full IFRS. The discussion paper identified two primary objectives for developing the SME standard, which were to focus on meeting the user needs of the SMEs and to reduce the reporting burden for SMEs. Amongst the secondary

141 objectives was to facilitate transition to full IFRS. This chapter showed that the IASB increasingly focused on this secondary objective to facilitate easier transition to full IFRS as this could be easily translated to minimise divergence from full IFRS. This proposed policy intent was explained in the discussion paper that the SME standard would be developed from full IFRS and modified as necessary for SMEs.

Consistent with the IASB’s intended policy response to minimise divergence from full IFRS, the board resisted changes to recognition and measurement simplifications and made minimal changes to full IFRS. The case of the selected four sample standards—IAS 16 Property Plant and Equipment , IAS 17 Leases, IAS 36 Impairment Assets and IAS 41 Agriculture—showed that the board resisted making changes. The board retained the major principles and did not simplify the recognition and measurement criteria in the case of the sample four standards.

Arguably, with the discussion paper, the IASB sought to build consensus for the IASB’s proposed policy solution. Paul Pacter, the policy entrepreneur, further facilitated consensus building by educating small firms and practitioners about the IASB and its SME project. Through facilitating such consensus building the IASB was able to reach out to the wider policy community, ultimately building support for this project. Consensus also needed to be built within the IASB, hence the educational session held to educate the board about banks’ lending decisions and the measurement simplifications in FRSSE.

Analysis of the politics stream revealed that within the IASB’s policy community those opposed to the project tried to impede the development of the SME project to slow the development and eventual promulgation of the SME standard. The chairman of the IASB developed a sub-committee of the board. The formation of this sub-committee was a normal feature of the standard setting process that formed part of the hidden cluster. According to the director of the SME project, this sub-committee advised him on how to present contentious issues that would not provoke board opposition as a means of moving the project forward.

Outside the IASB, the view was developing that the proposed SME standard was too complex for SMEs. Other policy communities, such as UNCTAD and EFRAG, started to

142 develop their own SME initiatives. The IASB was aware of these efforts and it continued its own effort to build support within the IASB to ensure that the IASB’s project moved forward, as well as to build support to get the required votes to pass the eventual standard.

Analysis of the problem stream showed the IASB continued to work with its redefined problem that assumed that SMEs and developing countries had similar problems and there was no need to do anything special for developing countries. For that reason it seemed that neither the discussion paper, nor the staff questionnaire had any questions about developing countries. Further, when respondents commented about developing countries in responses to the discussion paper and the staff questionnaire these comments were not acknowledged as issues facing developing countries but rather as part of the overall issues.

The IASB focused on its secondary objective to facilitate easier transition to full IFRS thus allowing the IASB to minimise divergence from full IFRS. This focus on transition to full IFRS meant that the board struggled to clarify for whom it was developing the proposed standard. The board was aware that its approach would not necessarily result in a standard for SMEs. It also seemed that the eventual standard would not necessarily result in a standard that would benefit developing countries. For that reason, the board struggled to find an appropriate title for the standard and even at this early stage the IASB had changed the title from IFRS for SMEs to IFRS for Non-publicly Accountable Entities, and then back to IFRS for SMEs. The next chapter will proceed with the discussion of the remaining steps (f to k) of the due process and then apply Kingdon’s three streams of analysis—problem, policy and politics—to understand the development.

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Chapter Seven Due Process (2)

7.1 Introduction

The IASB’s SME project sought to minimise divergence from full IFRS. In this process the IASB seemed to increasingly focus on one of its secondary objectives, to facilitate easier transition to full IFRS in developing the SME standard. Chapter six discussed step (e) of the IASB’s due process, publishing the discussion document, and the recognition and measurement simplifications for the proposed SME standard. The IASB continued to work with its assumption that developing countries and SMEs had similar problems and if it solved SMEs’ problems then the problems of developing countries would also be solved. The IASB was aware that the approach it was taking to develop the standard would not necessarily result in a standard for SMEs. It was also apparent that the eventual standard proposed would not also result in a standard for developing countries. By December 2005, the hidden cluster had comprised four sets of people: the director of the SME project; a working group (33 members); an informal user panel (eight members); and a sub- committee of the board (six members). Both the working group and the sub-committee of the board within the hidden cluster were chaired by Tom Jones (the vice-chairman of the IASB).

This chapter begins in January 2006 with the development of the exposure draft for the SME standard and concludes with the issue of the eventual standard in July 2009. It examines the remaining steps (f) to (k) of the IASB’s due process:

(f) publishing for public comment an exposure draft approved by at least nine votes of the IASB, including any dissenting opinions held by IASB members;* (g) publishing within an exposure draft a basis for conclusions; (h) consideration of all comments received within the comment period on discussion documents and exposure drafts;* (i) consideration of the desirability of holding a public hearing and of the desirability of conducting field tests and, if considered desirable, holding such hearings and conducting such tests; (j) approval of a standard by at least nine votes of the iasb and inclusion in the published standard of any dissenting opinions;* and (k) publishing within a standard a basis for conclusion, explaining, amongst other things, the steps in the IASB’s due process and how the IASB dealt with public comments on the exposure draft (IASCF, 2006: 30-31). (The steps that are required under the terms of the IASC Foundation Constitution are indicated by an asterisk*).

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The purpose of this chapter is to understand how the due process proceeded and the changes made in the development of the eventual standard. This chapter is organised as follows. Sections 7.2—7.8 set out the remaining steps of the IASB’s due process. Section 7.2 covers the development of the exposure draft and section 7.3 addresses the publication of the exposure draft. Section 7.4 covers the field test of the exposure draft and the responses received to the field test. Section 7.5 then outlines the responses received to the exposure draft and section 7.6 covers the further developments that took place in finalising the eventual SME standard. Section 7.7 addresses the release of the final standard—IFRS for SMEs, and section 7.8 covers the IASB’s decisions on the recognition and measurement simplifications for the sample four sections selected for closer analysis in this study. Whereas sections 7.2—7.8 provide the historical narrative, section 7.9 provides the theoretical analyses of these events, drawing on Kingdon’s three streams of problem, policy and politics. Finally section 7.10 provides the summary and conclusion of the chapter.

7.2 Development of the Exposure Draft

The IASB’s due process states that “the development of an exposure draft begins with the IASB considering issues on the basis of staff research and recommendations, as well as comments received on any discussion paper, and suggestions made by the SAC, working groups and accounting standard-setters and arising from public education sessions” (IASCF, 2006: 11).

By January 2006, the director of the SME project had composed a preliminary staff draft of the exposure draft. This was based on the board’s deliberation on the matters raised in the discussion paper, the staff questionnaire, public round-tables and views expressed at the WSS meeting. The staff draft of the exposure draft was organised into sections each of which related to a particular financial reporting standard (IStaR, 2006b, January). At this stage, some standards were yet to be incorporated, financial instruments and income tax being such two examples (IStaR, 2006b, January).

The board met in January 2006 to receive “some preliminary information on a nearly complete first draft of an exposure draft” (IASplus, 2006b). At this meeting, Tom Jones, the vice-chairman of the IASB, issued a reminder that “this was a very important project for the Board and was clearly very urgent” (IStaR, 2006b, January: 17). He, as well as, Han Georg

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Bruns and Geoff Whittington thought that the staff draft of the exposure draft was still too complicated and that further simplifications of the recognition and measurement requirements were needed (IStaR, 2006b, January). Jim Leisenring, who consistently opposed the SME project, argued that standard setting issues could not be resolved “by setting a quota for exemptions” (IStaR, 2006b, January: 17).

The director of the SME project reported at the IASB’s February 2006 meeting that the working group met on 30 and 31st January 2006 to discuss the preliminary staff draft (IStaR, 2006a, February). He reported that the working group proposed “84 suggestions to the Board including some overall observations” (IStaR, 2006a, February: 19).22 The director of the SME project also explained that he had received “five letters from different groups, including the ten European members of the Working Group, another from EFRAG, a Consortium of African standard-setters and a Caribbean group” (IStaR, 2006a, February: 19).23 Amongst the views he said were expressed were “that the staff draft included too much detail that was not relevant to SMEs …They also thought there was not enough relaxation of recognition and measurement rules” (IStaR, 2006a, February: 20).

Between February and June 2006 the board deliberated the issues raised by the working group. The key issues discussed were: whether the SME standard should be applicable to small listed entities; the size of entities the board had in mind in developing the SME standard; and how to make the SME standard a self-contained document. The board also discussed recognition and measurement simplifications for the SME standard.

Firstly, there was some debate over whether the SME standard should apply to small listed entities. Staff reported that the working group argued that the SME standard should be made available to small listed companies. The board rejected the working group’s recommendation to make the SME standard available to small listed entities (IStaR, 2006a, February). The board further noted that a jurisdiction that wants to allow small listed entities to apply the SME standard could do so, but it must state that the financial statements for those small listed entities conform to national GAAP and not to IFRS for SMEs (IASplus, 2006a).

22 This meeting was also attended by seven IASB board members. 23 It is not clear how they got the staff draft.

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Secondly, there were concerns that the IASB should clarify the size of entities it had in mind in developing the SME standard. The discussion paper had contained four presumptive indicators of public accountability: (a) it has filed, or it is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; (b) it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund or investment banking entity; (c ) it is a public utility or similar entity that provides an essential public service; or (d) it is economically significant in its home country on the basis of criteria such as total assets, total income, number of employees, degree of market dominance, and nature and extent of external borrowings (IASB, 2004a: 5-6, DP).

Staff reported the working group’s recommendation that items (c) and (d) of the presumptive indicators of public accountability be deleted; and to use size criteria of approximately 50 employees and €10 million annual revenue as a guide to the size of entities the IASB had in mind in developing the standard (IStaR, 2006a, February). According to the staff the working group’s rationale for deleting items (c) and (d) from the above list was: In the case of public utilities, it is hard to define “essential public service” and in many jurisdictions services commonly thought of as essential public services, such as refuse collection, internet access, and water distribution, are provided by very small local entities. In the case of economically significant entities, WG members believe that size alone does not make an entity publicly accountable. The public accountability principle should focus on financial accountability—which is what the indicators (a) and (b) do—and not political accountability (IASB, 2006f: 4, Observer Notes).

Staff agreed with the working group’s suggestion and recommended to the board to delete items (c) and (d). The board in May 2006 decided that items (c) and (d) would be deleted. This meant that the presumptive indicators of the public accountability concept were further narrowed to two indicators (a) and (b) and that is what went into the exposure draft. This narrowed definition of public accountability creates the possibility that other large entities that are not SMEs could also be eligible to use this standard.

Although the indicators of public accountability did not limit the size of entities that could be deemed not publicly accountable, the board did have some size criteria in mind. Staff

147 reported the working group’s suggestion that the IASB use approximately 50 employees and €10 million annual revenue as a guide when developing the exposure draft (IStaR, 2006a, February). The board was using an assumption of 50 employees but rejected the working board’s recommendation on annual revenue because it would be jurisdictional specific (IASB, 2006f, Observer Notes; IStaR, 2006a, February).

Thirdly, the board struggled to make the SME standard a self-contained document that contained all guidance relevant to SMEs within the standard. EFRAG was one of the strongest advocates for the IASB’s SME standard to be a stand-alone document (Stig Enevoldsen, interview, 9 December 2011, telephone). The staff draft of the exposure draft had proposed that when guidance on a particular accounting issue was not given within the SME standard, entities be referred to full IFRS for guidance. This became known as mandatory fallback to full IFRS. The director of the SME project reported the working group’s recommendation that the SME standard should have the mandatory fallback to full IFRS on only specific matters, but the board thought this would result in the SME standard being a big document (IASplus, 2006a; IStaR, 2006a, February). Some board members suggested that reference to full IFRS would not be necessary if SMEs “got the choices right in the SME standard” (IStaR, 2006a, February: 20). The board decided in February 2006 those standards in full IFRS that address transactions, events or conditions commonly encountered by SMEs should be included in the SME standard either directly or by a cross- reference to full IFRS. In cases where the SME standard does not specifically address a transaction, event or condition, an SME: …should be required to look to the requirements and guidance elsewhere in the IFRS for SMEs dealing with similar and related issues (that is, select an appropriate accounting policy ‘by analogy’). Failing that, the SME should be required to look to the requirements and guidance in IFRSs and Interpretations of IFRSs dealing with similar and related issues. In the Board’s view the absence of such a requirement would substantially increase the amount of material from full IFRSs that would have to be included in the IFRS for SMEs (IASB, 2006c: 3, Update). This did not address the issue of making the SME standard a self-contained document because entities were still referred to full IFRS for guidance.

In May 2006, the issue of making the SME standard self-contained was raised again. Staff acknowledged that it had been problematic for the board (IASB, 2006f, Observer Notes). In developing the exposure draft the staff reported attempts to limit the instances of cross-

148 reference to full IFRS by providing sufficient guidance within the SME standard. Staff had no further recommendation on this matter and asked whether the “board was satisfied with the treatment of the mandatory fallback as set out in 11.2 and 11.3?” (IASB, 2006f: 9, Observer Notes). Exactly what was proposed in 11.2 and 11.3 was not shown in the observer notes. The board decided that the SME standard would be a self-contained document, but that under some circumstances it would require some entities to look to full IFRS. These three circumstances were:

1. When IFRSs provide an accounting policy choice, the Board has concluded that SMEs should have the same options. The simpler option is included in the IFRS for SMEs. Entities wishing to use the other option or options are permitted to do so by cross- reference to the relevant IFRSs. [optional fallback] 2. The draft IFRS for SMEs omits some accounting topics that are addressed in other IFRSs, because the Board believes that the typical SME is not likely to encounter such transactions. However, the IFRS for SMEs has explicit cross-references requiring an SME that encounters such transactions to look to all or part of the relevant IFRS. [mandatory fallback] 3. The draft IFRS for SMEs states that if the IFRS for SMEs does not address a transaction, event or condition or provide an explicit cross-reference to another IFRS, an SME should select an accounting policy that results in relevant and reliable information. In making that judgement, an SME should consider, first, whether the appropriate accounting can be determined by analogising from the principles in the IFRS for SMEs. If those principles do not provide guidance, the SME should consult the full text of other IFRSs. This requirement to consult IFRSs is in the nature of a ‘safety net’ that the Board expects to be invoked only in limited circumstances (IASB, 2006b: 3, Update).

These decisions show that the SME standard would not be a self-contained document because entities were still referred to full IFRS. This was, in fact, increasing the reporting burden because SMEs had to know both full IFRS and SME standard.

The board also discussed recognition and measurement simplifications. At the IASB’s February 2006 meeting, the board deliberated on the working group’s recommendation on the specific sections in the staff draft.24 The staff summary of the working group

24 These included: Section 7 Cash Flow Statement; Section 10 Correction of Errors; Section 13 Investment in Associates; Section 14 Investment in Joint Ventures; Section 15 Investment Property; Section 16 Property, Plant and Equipment PPE; Section 18 Business combinations; goodwill and indefinite-life intangible assets that are separated from goodwill; Section 19 Leases; Section 20 Provisions; Section 22 Revenue; Section 23 Government Grants; Section 25 Share-based Payments; Section 26 Impairment of Non-Financial Assets; Section 27 Consolidation; Section 28 Income Tax; Section 36 Assets held for Sale; Section 37 Interim Financial Reporting; and issues related to equity- redeemable and puttable capital and combined financial statements classification of instruments as debt or equity (IASB, 2006g, Observer Notes).

149 recommendations was not publicly available because the IASB regard it as an internal document (IASB, 2006e, Observer Notes). For that reason details of the matters raised and recommendation for each of the sections in the staff draft of the exposure draft are not available. However, the IASB Updates for February 2006 reported the board’s decision on the specific sections that were discussed at the IASB’s February board meeting. In the case of the sample four sections selected for closer analysis in this study, the board made no changes in the following three sections: Section 16 Property, Plant and Equipment; Section 18 Business Combinations and Goodwill; and Section 19 Leases.25The board had not discussed Section 35 Specialised Industries at that board meeting.

At its June 2006 meeting, the IASB discussed Section 35 Specialised Industries that contains guidelines on agriculture, extractive industries and insurance. At this meeting, agriculture was discussed. The observer notes reported some commentators arguing that the cost model should be available as an option for valuing agricultural products. Staff recommended the proposed SME standard require “the fair value through P&L model, with the reliability exception, in the IFRS for SMEs, rather than adding a cost model” (IASB, 2006d: 14, Observer Notes). The board, however, decided that the “circumstances in which an SME would use the cost model should be less restrictive than those currently in IAS 41 Agriculture. An SME should use the cost model if fair value is not readily determinable” (IASB, 2006c: 2, Update).

In the period between July and October 2006, the board made further refinements and completed the remaining sections in the staff draft of the exposure draft. At the October 2006 meeting, the “Board directed the staff to prepare a pre-ballot draft” of the exposure draft and by early November 2006, the pre-ballot draft was to be sent to the board members for written comments (IASB, 2006a: 3, Update). At that October meeting, when the chairman of the IASB “asked whether the Board intended to approve publication of the ED”, 12 of the 14 board members indicated they would approve the exposure draft (IStaR, 2006c, October: 33). Of the two members who did not indicate their approval, Jim Leisenring intended to oppose it and Mary Barth did not vote because she required

25 The observer notes for May 2006 had used different section numbers. That is section 16 Property Plant and Equipment was referred to as section 17 and section 18 Business Combinations and Goodwill was referred to as section 19.

150 additional time to read through the document (IStaR, 2006c, October). Subsequently, publication of the exposure draft was approved by 13 of the 14 board members (IASB, 2007a: 47, BC of ED). 26

7.3 Release of the Exposure Draft

In February 2007, the IASB released for public comment its 254-page Exposure Draft of a Proposed IFRS for Small and Medium-Sized Entities (exposure draft), accompanied by a 48- page Basis for Conclusions. According to the chairman of the IASB the proposed IFRS would assist SMEs internationally and, in doing so, assist SMEs in developed and developing countries alike: The IASB’s goal has been to produce a standard for use by smaller and unlisted companies that offers the comparability of full IFRSs while reducing the burden on the preparing company. When completed, the SME standard will make the accounting requirements more accessible to smaller preparers in both developed and emerging markets (IASB, 2007d: 1, Insight).

The Staff Overview of the exposure draft released in April 2007 stated that the proposed standard would be “based on full International Financial Reporting Standards (IFRSs), developed primarily for listed companies” (IASB, 2007f: 3, Staff Overview of ED). In addition to assisting SMEs, the proposed standard would “provide emerging economies with an internationally recognised basis for financial reporting” (IASB, 2007f: 4, Staff Overview of ED). According to the IASB: By removing choices for accounting treatment, eliminating topics that are not generally relevant to SMEs and simplifying methods for recognition and measurement, the resulting draft standard reduces the volume of accounting guidance applicable to SMEs by more than 85 per cent when compared with the full IFRS (IASB, 2007d: 1, Insight).

Within the exposure draft, the standards were organised into 38 sections which mainly contained extractions of the full IFRS (see Table 7.1).

26Voting seems to have been by ballot outside the meeting process.

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Table 7.1 Topics in the exposure draft Section Title 1 Scope 2 Concepts and Pervasive Principles 3 Financial Statement Presentation 4 Balance Sheet 5 Income Statement 6 Statement of Changes in Equity and Statement of Income and Retained Earnings 7 Cash Flow Statement 8 Notes to the Financial Statements 9 Consolidation and Separate Financial Statements 10 Accounting Policies, Estimates and Errors 11 Financial Assets and Financial Liabilities 12 Inventories 13 Investments in Associates 14 Investments in Joint Ventures 15 Investment Property 16 Property, Plant and Equipment 17 Intangible Assets other than Goodwill 18 Business Combinations and Goodwill 19 Leases 20 Provisions and Contingencies 21 Equity 22 Revenue 23 Government Grants 24 Borrowing Costs 25 Share-based Payment 26 Impairment of Non-financial Assets 27 Employee Benefits 28 Income Taxes 29 Financial Reporting in Hyperinflationary Economies 30 Foreign Currency Translation 31 Segment Reporting 32 Events after the End of the Reporting Period 33 Related Party Disclosures 34 Earnings per Share 35 Specialised Industries 36 Discontinued Operations and Assets Held for Sale 37 Interim Financial Reporting 38 Transition to the IFRS for SMEs Source: (IASB, 2007b, ED).

The topics in the full IFRS that were omitted from the exposure draft but for which mandatory fallback to full IFRS was required were (IASB, 2007b, ED):

• hyperinflation (mandatory fallback to IAS 29); • equity-settled share-based payment (mandatory fallback to IFRS 2); • determining the fair value of agricultural assets (mandatory fallback to IAS 41); • interim financial reporting (mandatory fallback to IAS 34); • lessor accounting for finance leases (mandatory fallback to IAS 17); • earnings per share (mandatory fallback to IAS 33);

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• segment reporting (mandatory fallback to IFRS 8); and • insurance (this is not available for use by insurers).27

These were deemed to be not relevant to SMEs. Those SMEs encountering such matters were referred to full IFRS for guidance(IASB, 2007a, BC of ED). The exposure draft sought responses to 11 questions (see Table 7.2).

Table 7.2 Questions in the exposure draft Questions in the Exposure Draft

1. Stand-alone document With the objective of a stand-alone document in mind, are there additional transactions, other events or conditions that should be covered in the proposed standard to make it more self-contained? Conversely, is there guidance in the draft standard that should be removed because it is unlikely to be relevant to typical SMEs with about 50 employees? 2. Recognition and measurement simplification that the Board adopted Are there other recognition or measurement simplifications that the Board should consider? In responding, please indicate: a) the specific transactions, other events or conditions that create a specific recognition or measurement problem for SMEs under IFRSs; b) why it is a problem; and c)how that problem might be solved. 3. Recognition and measurement simplification that the Board considered but did not adopt Should the Board reconsider any of those and, if so, why? 4. Whether all accounting policy options in full IFRSs should be available to SMEs Do you agree with the Board’s conclusions on which options are the most appropriate for SMEs? If not, which one(s) would you change, and why? Should any of these options that would be available to SMEs by cross-reference to the full IFRSs be eliminated from the draft IFRS for SMEs and, if so, why? 5. Borrowing Costs Do you agree or disagree with the proposal to allow SMEs to choose either the expense model or the capitalisation model for borrowing costs, and why? 6. Topics not addressed in the proposed IFRS for SMEs Should any additional topics be omitted from the IFRS for SMEs and replaced by a cross-reference? If so, which ones and why? 7. General referral to full IFRSs Are the requirements in paragraphs 10.2-10.4, coupled with the explicit cross-references to particular IFRSs in specific circumstances, appropriate? Why or why not? 8. Adequacy of guidance Are there specific areas for which SMEs are likely to need additional guidance? What are they, and why? 9. Adequacy of disclosures Are there disclosures that are not proposed that the Board should require for SMEs? If so, which ones and why? Conversely, do you believe that any of the proposed disclosures should not be required for SMEs? If so, which ones and why? 10. Transition guidance Do you believe that the guidance is adequate? If not, how can it be improved? 11. Maintenance of the IFRS for SMEs Is this approach to maintaining the proposed IFRS for SMEs appropriate, or should it be modified? If so, how and why? Source: reproduced from the exposure draft (IASB, 2007b, ED).

27 Insurer holds funds in a fiduciary capacity therefore are publicly accountable and outside the scope of the proposed SME standard.

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The normal comment period for any project is 120 days but for a major project the IASB may allow a period of more than 120 days (IASCF, 2008b). The exposure draft and the accompanying basis for conclusions were issued in English, with responses due initially by 1 October 2007. This deadline was later extended to 30 November 2007, thus allowing some nine months for responses. Translated versions of both documents were issued subsequently to facilitate broader consultation, this becoming the first IASB exposure draft to be translated into a language other than English: a Spanish translation was issued in April 2007, French in May 2007, German in June 2007, and Romanian in September. A Polish translation of the exposure draft but not the basis for conclusions was also issued in September 2007 (IASB, 2007e, Project Update). While this may have assisted those in European countries, it seems unlikely to have assisted those in other parts of the world.

The pool of technical expertise to develop the SME standard or the hidden cluster in Kingdon’s terms was extended for the last time in July 2007, when a staff member, Michelle Fisher, was employed to assist the director of the SME project (Michelle Fisher, pers. comm., 17 June 2011). Around this time it also seemed that an additional five members were added to the working group. With this addition the hidden cluster comprised four sets of people: the director of the SME project, Paul Pacter and Ms Fisher; a working group (40 members); an informal user panel (eight members); and a sub-committee of the board (six members). Tom Jones (vice-chairman of the IASB) chaired both the working group and the sub-committee of the board.

7.4 Field Test

In the time between issuing the exposure draft and the closing date for responses, the IASB conducted field tests of the exposure draft. Step (i) of the IASB’s due process provides that a field test may be conducted if thought necessary (IASCF, 2008b). The IASB reports that it uses field tests to better understand how proposed standards could affect the entities for which the standard is intended (IASCF, 2008b). In June 2007, four months after it first published the exposure draft in English, and five months before responses were due, the staff issued a field test questionnaire for those trialling the exposure draft (IASB, 2008j, Observer Notes). The field test questionnaire was published in English, French and Spanish (IASB, 2007c, FT Questionnaire). The IASB’s Project Update reported that the field testing was intended to help the IASB to assess understandability, scope, burden, impact, users’

154 needs, accounting policy choices, micro entities (defined as those with fewer than ten employees), and developing country problems and adequacy of implementation guidance (IASB, 2007e, Project Update).

According to the field test questionnaire, the IASB sought to field test the proposal in a range of countries, and “especially encourage[d] entities in emerging and developing economies to field test the draft IFRS for SMEs” and submit their findings to the IASB by 30 November 2007, the same date as for the responses to the exposure draft (IASB, 2007c: 4, FT Questionnaire). For these field tests the IASB reportedly sought the participation of two groups of entities: “(1) entities with between 10 and 50 employees and (2) entities with fewer than 10 employees” (IASB, 2007c: 4, FT Questionnaire).

To identify potential field test participants and to help them apply the exposure draft, the IASB “worked with a number of organisations, including the International Federation of Accountants, national and regional professional accountancy bodies as well as accounting standard-setters and auditing firms”(IASB, 2007e: 25, Project Update).28 The field test questionnaire reported that the IASB also encouraged auditing firms to assist their clients with the field tests (IASB, 2007c, FT Questionnaire) and announced it would work with IFAC’s Small and Medium Practices (SMP) Committee, Developing Nations Committee, Transitional Auditors Committee, and Professional Accountants in Business Committee in field testing the draft IFRS for SMEs.

The responses to the field tests would be treated confidentially, although “a report summarising and explaining the findings, without individual company data, will be made publicly available” (IASB, 2007e: 25, Project Update). The field test companies were asked to provide: background information about the company, submit their most recent annual financial statements under their existing accounting framework, prepare financial statements in accordance with the proposed IFRS for SMEs for the same financial year (though without presenting comparative prior year information), and respond to a series of questions

28 The regional organisations and groupings the IASB reported it planned to work with included: Eastern, Central and Southern African Federation of Accountants (ECSAFA); InterAmerican Accounting Association (IAA); European Federation of Accountants (FEE) and other European organisations; CAPA; SAFA; EFRAG.

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designed to identify specific problems to field test company encountered in applying the draft IFRS for SMEs (IASB, 2007e: 25, Project Update).

The staff summary of the field test results was made publicly available and discussed at the IASB’s board meeting in April 2008 (IASB, 2008j, Observer Notes). The observer notes of this meeting contained the staff summary. The observer notes reported that 116 companies from 20 countries took part in the field test (IASB, 2008j, Observer Notes). Of the 20 countries, 11 were developing countries (Argentina, India, Kenya, Malawi, Malaysia, Nigeria, Poland, South Africa, South Korea, Tanzania, and Tunisia), and nine developed countries (Australia, Barbados, Denmark, France, Germany, Italy, Netherlands, United Kingdom, and United States). The observer notes do not say how many companies were from each country. The field test information was reported only on a regional basis as 56 companies from Europe, 36 from the Asia-Pacific region, 23 from Africa and three from America (IASB, 2008k, Observer Notes). 29 The IASB staff member, Ms Fisher, then advised the board that many of the entities that took part in the field test were small: Approximately 70% had 50 or fewer full time employees, including 35% with 10 or fewer employees. Around 60% had annual turnover of less than $5m and 35% had turnover of less than $1m (IStaR, 2008b, April: 16).

About 60 per cent of these entities were reported as having loans or overdrafts (IStaR, 2008b, April). According to the staff (Ms Fisher), from the responses to the field test, the impression was that the field test entities encountered few problems with the exposure draft: “about half of the field test entities listed no, or only one or two issues or problems” (IASB, 2008j: 5, Observer Notes). The most significant variable that did seem to cause the field test entities to have problems with the exposure draft was not size but where they were from (IStaR, 2008b, April: 16). For example, if the field test entities were from countries that were already using IFRS, these entities had little or no problems in using the exposure draft.

Ms Fisher acknowledged a limitation of the field test as being that not all participants provided all of the requested information. For example, some entities had prepared

29 These figures add up to 118 and not 115 companies. However, this is how it was presented in the IASB Agenda Paper 3. Also no further analysis is given about which American countries the field tests were conducted in, given that some countries in the region may be developing countries.

156 financial statements using the SME exposure draft, but due to confidentiality concerns had not supplied the financial statements to the staff (IStaR, 2008b, April).

In summary, field test participants were reported as viewing the use of fair value problematic and the disclosure requirements in the exposure draft as burdensome. They sought further simplifications to the exposure draft, arguing that the proposed standard would increase their costs. They also thought the SME standard should be a stand-alone document and that it should contain more guidance and examples (IASB, 2008j, Observer Notes).

7.5 Responses to Exposure Draft

The exposure draft prompted 161 submissions from 51 countries. One of these, 41 submissions came from 29 developing countries, and 101 submissions from 22 developed countries, with the largest number of submissions coming from the UK (21 responses) and Germany (17 responses). Approximately half of all submission (81 responses) came from Europe and the UK. The number and distribution of submissions is summarised in Table 7.3. Appendix 4, Table A4.1 contains a full list of the responses to the exposure draft.

The staff’s detailed analysis of the responses to the exposure draft was not publicly available. Therefore analysis of the responses to the exposure draft was undertaken as part of this study and the results are set out in Appendix 4, Table A4.2 to Table A4.5. A comparison of the staff summary of the responses to the exposure draft (that was available via the observer notes) and the analysis undertaken as part of this study (see Appendix 4, Table A4.5) reveals that the staff summary did not mention respondents’ comments about developing countries and the need for analysing further user needs, but apart from that it provided a reasonable reflection of the responses relating to SMEs.

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Table 7.3 Analysis of the submissions to the exposure draft by country No. of No. of submissions Submissions Developing Countries Developed Countries Argentina 1 Australia 7 Brazil 1 Austria 4 Cameroun 1 Barbados 1 China 1 Belgium 1 Colombia 2 Canada 5 Costa Rica 2 Denmark 2 Ecuador 1 Finland 2 El Salvador 1 France 9 Fiji 1 Germany 17 India 2 Hong Kong 2 Indonesia 1 Ireland 3 Iran 1 Israel 1 Jamaica 1 Italy 8 Kenya 2 Japan 1 Korea 3 Netherlands 3 Malawi 1 New Zealand 1 Malaysia 1 Norway 2 Mexico 1 Spain 3 Pakistan 2 Sweden 1 Philippine 1 UK 21 Poland 1 United Arab Emirates1 Russia 2 US 6 South Africa 5 Submissions from developed 101 countries Tanzania 1 Thailand 1 Submissions from Global 13 /International Organisations Tunisia 1 Submissions from European 5 Bodies Uruguay 1 Submission from unknown 1 location Venezuela 1 Zambia 1 Total submissions received 161 Submissions from 41 developing Countries Source: (Based on submissions received on the ED).

According to the staff summary, the key issues identified by respondents to the exposure draft were: whether there was a need for an SME standard at all; the need to clarify the entities that could use the SME standard; the need for an appropriate title for the SME

158 standard; whether the SME standard should be a stand-alone document; which accounting policy options should be retained in the SME standard; concern about the use of the fair value in the SME standard; and whether to revise the structure of the standard (IASB, 2008e, Observer Notes). At the more detailed level, respondents commented on all sections in the exposure draft except for: Section 7 Cash Flow Statement; Section 32 Events after the End of the Reporting Period; and Section 38 Transition to IFRS for SMEs (IASB, 2008g: Observer Notes). Their main concerns were that further simplifications were needed in most of the sections in the exposure draft (IASB, 2008g: Observer Notes). A closer analysis of the responses to the sample four sections—Section 16 Property Plant and Equipment, Section 18 Business Combinations and Goodwill; Section 19 Leases and Section 35 Specialised Industries—is provided in section 7.8.

One particular response from EFRAG requires attention here. EFRAG did provide its views on the 11 questions in the exposure draft (which have been incorporated in the discussion of the response to the exposure draft), but it also proposed an alternative structure to organise the standard to make the IASB’s SME standard more user-friendly (see Appendix 4, Box A4. 1). In brief, the alternative structure recommended was that the IASB (CL 161, ED: 4):

a) Reorganise the standard so that all the requirements for a topic are grouped together in a single sub-section.

b) Organise the sub-sections so that those with similar principles and guidance are grouped together, thus enabling a single set of over-arching principles and guidance to be applied to those sub-sections. (This would reduce repetition and therefore the length of the standard).

c) Replace the different measurement principles with an overarching principle (described in our detailed comments); thus retaining differences in principles only where essential and fully justifiable. (This would simplify the standard and its application).

d) Separate the principles from the application guidance. (This would enable the principles to be emphasised and better understood. It would also make it easier to provide more guidance where necessary).

According to the chairman of EFRAG at that time Stig Enevoldsen, Ms Francoise Flores, who at that time was the vice-chairman of EFRAG, and chaired the joint EFRAG and Federation of European Accountants (FEE) working group on IFRS for SMEs, was closely involved in developing this alternative structure (Stig Enevoldsen, interview, 9 December 2011, telephone). He explained that this alternative structure was developed mainly out of the French accounting system, and that a complete model standard was also developed to

159 show how the eventual SME standard would look if this alternative structure to develop the SME standard was followed (Stig Enevoldsen, interview, 9 December 2011, telephone). This alternative model SME standard was an internal document developed as part of EFRAG’s thought process and it was never published (Stig Enevoldsen, interview, 9 December 2011, telephone). This proposed alternative structure was used as a means to influence the IASB to provide further simplifications to its SME standard. Mr Enevoldsen discussed this proposed alternative structure and model standard during his regular meeting with the chairman of the IASB.

The chairman of the IASB seemed to view this differently. He viewed EFRAG as an adviser and not as a standard setter and he did not think EFRAG had the right to publish such a standard (David Tweedie, interview, 13 November 2008, London). He explained that:

when we had done an exposure draft, [EFRAG] came forward with another one and they were about to sort of publicise this and we said, hey, we’re not going to have two running, you withdraw that. Though we looked at it for ideas, but what we didn’t want was to say, oh, we’re not going to give you a submission, we’ll give you a complete alternative and then people will say, well, we vote for A or B and that isn't the way we operate. So we more or less said that that almost was EFRAG turning in from an adviser to a standard setter and we could all write completely new standards. Sir David Tweedie thought that the IASB’s proposed standard meant “…companies that grew could go into IFRS if they wish to, whereas the EFRAG one, we didn’t think it was quite the same way” (David Tweedie, interview, 13 November 2008, London).

The director of the SME project gave his version of what happened: …one member of EFRAG who chairs a joint working group, decided that she wanted to write her own SME standard. She wrote something…no due process, she and the chairman of EFRAG came to London, had a private meeting with David Tweedie and handed him this thing and said here’s an SME standard and David said well what do you think we should do with this? They said the board should consider this as a replacement instead of [the board’s SME standard] we immediately got three letters from the UK Accounting Standards Board, the French Accounting Standards Board and the German Accounting Standards Board said we don’t agree with this proposal at all and we don’t think the IASB should do anything with it (Paul Pacter, interview, 14 November 2008, London). It was, however, agreed that the director of the SME project would review the proposal and see what could be learned from it. The director of the SME project reported that he did get some ideas from EFRAG’s proposal, although he did not state what these ideas were. The director of the SME project voiced his “biggest concern about this proposal was it was very

160 loose and left a lot of flexibility and room for judgement about almost everything” (Paul Pacter, interview, 14 November 2008, London).

The vice chairman of the IASB viewed EFRAG’s proposed alternative structure and model standard as an effort to influence the IASB rather than to supplant the IASB’s role as a standard-setter: I suppose what they would have wanted is that we would have said, wow, yeah, this is much better than ours, we will use exactly that. But obviously, certain things that were in that – it was, by the way, shorter and simpler but it didn’t cover some of the things we felt had to be covered. It had an influence. I mean we didn’t ignore it. We reviewed it and it is like every other comment letter. It impacted to some extent, as did others. But I don’t think – frankly, if they had wanted to write their own standard instead, that wouldn’t have been the way to do it. They would have written the standard and published it and said okay guys in the Commission, now you choose between us and the IASB (Tom Jones, interview, 25 November 2008, telephone).

According to Geoff Whittington EFRAG’s proposal alternative structure was “much more for genuinely for small businesses” and got rid of a lot of the clutter and complications of international standards. This seemed to have been developed by focusing on SME user needs (Geoff Whittington, interview, 9 November 2011, telephone).

This seemed to be a controversial issue and there were different views about EFRAG’s proposed alternative structure and model standard. It seemed from evidence presented above that EFRAG had proposed an alternative structure to revise the SME standard but the IASB did not accept EFRAG’s suggestion. However, EFRAG’s alternative proposed structure did raise the fact that the IASB’s standard was still complex for SMEs and needed simplification. This may also be perceived as an effort by EFRAG to influence the IASB to make further simplifications in the IASB’s SME standard.

7.6 Further Developments

The IASB sought to minimise divergence from full IFRS when developing its IFRS for SME standard. This focus had caused the IASB some difficulties (see chapter six). It was not apparent which entities should be eligible to use the SME standard and what should be the title for the SME standard because the criteria for application did not necessarily relate to SMEs. Also, because of the effort to minimise divergence from full IFRS, questions arose as

161 to whether the SME standard should be a stand-alone document; and about the use of fair value measurements in the SME standard (IASB, 2008h, Observer Notes).

7.6.1 Entities for which the SME Standard was Developed

Although the project was called IFRS for SMEs, it used a concept of non-public accountability to describe the entities for which the standard was developed, and the IASB developed the standard by focusing on minimising divergence from full IFRS, which it rationalised as achieving transition to full IFRS (IASB, 2004a, DP). Of the 161 responses to the exposure draft, 29 commented on user needs. Some of these responses to the IASB argued that if the standard is intended for SMEs then it should focus on the needs of users of SME financial statements. These respondents argued that user needs should be further analysed to make appropriate changes in the SME standard; that the IASB should distinguish between the user needs of IFRS financial statements and the user needs of financial statements for SMEs; and that the IASB should consider the needs of the users of SMEs financial statements in developing the SME standard. EFRAG had emphasised in its responses to the IASB’s previous two consultative documents—the discussion paper and the staff questionnaire on the recognition and measurement—the need for: a thorough analysis of whether users of SMEs’ financial statements needed different—or less sophisticated-financial reporting than users in a listed entity environment…unfortunately this thorough analysis is missing (CL 161 ED: 26).

EFRAG had also recommended that the IASB further analyse the conclusions it had already reached regarding user needs to understand the implications of those conclusions on the recognition and measurement principles (CL 161: ED): …the IASB might be concerned that carrying out such an analysis would delay finalisation of the standard. However, we do not think that needs to be the case—the work could be done, perhaps through focused questionnaires to SME specific user groups, whilst working on other aspects of the standard. And in any case, the benefit that would be derived—a standard that better serves the needs of users—is worth the additional work (CL 161, ED: 3).

The staff analysis of the responses to the exposure draft did not acknowledge the comments about user needs. There is no evidence to suggest that the board carried out any further analysis of user needs after it had discussed the issues raised to the exposure draft in May 2008.

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Instead of considering user needs the IASB developed its concept of non-public accountability to determine which entities would be covered by the standard. In the exposure draft the IASB stated that “SMEs are entities that: (a) do not have public accountability; and (b) publish general purpose financial statements for external users” (IASB, 2007b: 14, emphasis in original, ED). It explained further that “An entity has public accountability if: (a) it has issued or is in the process of issuing debt or equity instruments in a public market; or (b) it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund or investment bank” (IASB, 2007b: 14, bold in original, ED).

Some respondents to the exposure draft had proposed that small listed entities should not be excluded from using the SME standard. In discussing the exposure draft comments, the working group was divided on the issue of whether small listed entities should be eligible to use the SME standard (IASB, 2008h, Observer Notes). Staff recommended to the board that small listed entities should use full IFRS and the SME standard was not applicable to such entities. At its May 2008 meeting, the IASB decided that small listed entities should use the full IFRS because the SME standard was not intended for these types of entities (IASB, 2008c, Update).

Some respondents to the exposure draft and some field test entities argued that entities that receive funds in a fiduciary capacity should not automatically be considered publicly accountable and excluded from applying the SME standard. The argument was that some entities do not hold funds in a primary fiduciary capacity (for example, real estate agents) and these entities should be allowed to apply the SME standard if they qualify otherwise (IASB, 2008h, Observer Notes). When discussing the exposure draft comments, the staff reported the working group’s proposal that entities “whose primary business is holding funds in a fiduciary capacity” should be publicly accountable and considered outside the scope of the SME standard (IASB, 2008h: 15, Observer Notes). Staff recommended to the board that entities holdings funds in a fiduciary capacity should be considered publicly accountable only if it is an entity’s primary business in which case it should use full IFRS. Staff also recommended that the term fiduciary capacity be explained clearly (IASB, 2008h, Observer Notes). At its May 2008 meeting, the IASB board decided that entities whose primary business is holding funds in a fiduciary capacity should use the full IFRS as the SME

163 standard was not intended for these types of entities (IASB, 2008c, Update). However those entities that hold funds in a fiduciary capacity as a sideline to their principal business could use the SME standard (IASB, 2008c, Update).

Micro entities did clearly fall within the criteria for application of the SME standard but the staff reported that respondents to the exposure draft and the field test entities thought that the proposed SME standard was too complicated for them and therefore not suitable (IASB, 2008h, Observer Notes). Some respondents to the exposure draft and the field test entities proposed that smaller entities should be provided special exemptions within the SME standard, while others recommended that a third-tier of reporting be developed (IASB, 2008h, Observer Notes). Staff reported that the working group argued that the proposed SME standard was suitable for micro entities. According to the staff the working group had not discussed the third-tier of reporting and providing special exemptions for micro entities (IASB, 2008h, Observer Notes). Staff recommended to the board that the SME standard was relevant for micro entities. Therefore entities at the smaller end of the SME spectrum should not be provided special exemption and a third-tier of reporting should not be developed (IASB, 2008h, Observer Notes). At its May 2008 meeting the IASB decided that the SME standard would be applicable to micro entities and that special exemptions for smaller entities would not be provided, and neither would a third-tier of reporting be considered (IASB, 2008c, Update).

The public accountability criteria used to determine application of the proposed standard applies to specific entities, but the proposed standard was also supposed to benefit developing countries (IASB, 2007d: 1, Insight). However, there seemed to be no specific consideration of developing countries. The exposure draft contained no specific reference to how the proposed SME standard would apply in developing countries, and neither did any of its questions refer to developing countries (IASB, 2007b, ED). Furthermore, the staff analysis of the responses to the exposure draft did not acknowledge respondents’ comments about developing countries. Of the 161 respondents to the exposure draft, 22 had provided additional comments on developing countries, even though there was no request for such comment. Five of the 22 respondents were from developing countries (Argentina, Fiji, Malaysia and South Africa (2)) and 13 were from developed countries, two from international accounting firms and two from international organisations. Some of

164 these respondents commented that developing countries faced language barriers and difficulty accessing IFRS; and that developing countries should be considered when developing the SME standard as should smaller entities within developing countries. Some pointed out that developing countries lack markets and lack expertise and resources. A full analysis of respondents’ comments about developing countries is provided in Appendix 4, Table A4.5.

In an interview the chairman and the vice chairman of the IASB said that the IASB did deal with developing countries in the SME standard. They believed that SMEs and developing countries have similar problems and that if they solved SMEs’ problems then developing countries’ problems would also be solved: … the way we look at it, emerging economies have small companies and we hit the small companies, we’d solve the problem for emerging economies (David Tweedie, interview, 13 November 2008, London).

The director of the SME project, however explained this differently: “I must be honest; we really have not focused on that [developing countries] in a while. That is, we have not focused on whether emerging economies have any special needs different from small companies” (Paul Pacter, interview, 14 November 2008, London). The director of the SME project said the focus was on SMEs because there was no awareness of what could be done differently for developing countries (Paul Pacter, interview, 14 November 2008, London). He further explained that there was no clear indication of issues facing developing countries that differed from those faced by SMEs. The only issue the director came across was the instance of a developing country wanting to use the IFRS for SMEs standard for listed companies, because it was argued that none of the listed companies had more than 100 employees (Paul Pacter, interview, 14 November 2008, London). He further argued that the board would certainly have considered issues unique to developing countries, if any had been identified. However, he outlined that it is something that the IASB may do in future, once the SME standard is finalised (Paul Pacter, interview, 14 November 2008, London).

David Cairns, a member of the working group (David Cairns, interview, 13 November 2008, London), and Kenneth Sullivan, the IMF representative to the SAC (Kenneth Sullivan, interview 13 November 2008, London), also explained that developing countries were not addressed in developing the SME standard. Three interviewees (Chris Nobes, David Cairns

165 and the director of the SME project) said that the problems facing developing countries were not clear.

7.6.2 Title of the Standard

Not surprisingly, the IASB struggled to find a title that aptly described the scope of the proposed standard. The project had commenced with the title IFRS for SMEs, then changed to IFRS for Non-publicly Accountable Entities and then went back to IFRS for SMEs, shortly before the staff questionnaire was released in April 2005 (IStaR, 2003a, July; IASB, 2005a, Update). The exposure draft was titled IFRS for SMEs (IASB, 2007b, ED).

The staff summary of responses to the exposure draft noted that some respondents to the exposure draft and the working group members had argued that the title (IFRS for SMEs) did not describe the scope of the standard. The IASB changed the title to IFRS for Private Entities in May 2008 (IASB, 2008c, Update), but some national jurisdictions and international development agencies, such as the IMF, did not support that title, because the term ‘private’ was “used ... in different sense[s]” in different jurisdictions (IStaR, 2009b, March: 25). In “exasperation”, in January 2009, the IASB chairman asked the national standard setters (NSS) to suggest an alternative title for the standard (IStaR, 2009b, March: 24). They proposed “IFRS for Non-publicly Accountable Entities” and at the IASB’s January 2009 meeting, the title was changed to IFRS for Non-publicly Accountable Entities. In March 2009, when it was apparent this title also would not work, the NSS suggested that the board revert to IFRS for SMEs (IStaR, 2009b, March). In the April 2009 board meeting, three months before the standard was promulgated, the IASB chairman declared that the standard would be titled IFRS for SMEs and that there would be no further discussion on the matter (IStaR, 2009a, April). The title did not describe the scope of the standard, but the IASB wanted a title that could be easily understood and gave a positive impression of the standard (IStaR, 2008c, May).

7.6.3 Stand-alone Document

A stand-alone document is one that is self contained without any cross-reference to full IFRS. Although the “proposed IFRS for SMEs is intended to be a stand-alone document” it still required or permitted entities to look to full IFRS and therefore it was not a stand-alone document (IASB, 2007a: BC 56, BC of ED). The exposure draft contained two types of cross-

166 references to full IFRS. The first was mandatory cross-reference to topics that were currently omitted from the exposure draft (IASB, 2008h, Observer Notes). The topics omitted from the exposure draft and therefore applicable by a mandatory cross-reference were:

a. Lessor accounting for finance leases – IAS 17 (Section 19) b. Equity-settled share-based payment – the computational details are in IFRS 2 (Section 25). c. Financial reporting in a hyperinflationary environment – IAS 29 (Section 29). d. Segment reporting – IFRS 8 (Section 31). e. Earnings per share – IAS 33 (Section 34) f. Determining the fair value of agricultural assets – IAS 41 (Section 35). g. Insurance contracts (insurers would not be eligible to use the proposed IFRS for SMEs (Section 35). h. Interim reporting – IAS 34 (Section 37) (IASB, 2008h: 7, Observer Notes).

According to the staff summary, most of the respondents to the exposure draft and the field test entities had proposed that the standard for SMEs should be a self-contained document, which meant that the mandatory cross-references to omitted topics should be removed and the topics simplified and incorporated within the SME standard (IASB, 2008h, Observer Notes). Staff reported that the working group, in discussing responses to the exposure draft, suggested that four topics (lessor accounting for finance leases, equity- settled share-based payment, hyperinflation and agriculture) should be simplified and reinstated in the SME standard, while the remaining four topics (segment reporting, earnings per share, insurance contracts and interim reporting) should be deleted from the SME standard (IASB, 2008h, Observer Notes). Staff concurred with the working group’s suggestion and made similar recommendation to the board (IASB, 2008h, Observer Notes). In May 2008, the board agreed to reinstate the four topics (lessor accounting for finance leases, equity-settled share-based payment, hyperinflation and agriculture) and omitted the remaining topics (segment reporting, earnings per share, interim reporting and insurance contracts) (IASB, 2008c, Update; IASplus, 2008).

The second type of cross-reference in the exposure draft related to optional cross- references to accounting policy options in the full IFRS (IASB, 2008h, Observer Notes). This meant that SMEs could apply the method identified in the proposed standard or use accounting policy options available in full IFRS by referring to full IFRS for guidance. The basis for conclusion for the exposure draft explained that “ ... when full IFRSs allow

167 accounting policy options, the IFRS for SMEs should include only the simpler option, and the other (more complex) option(s) should be available to SMEs by cross-reference to the full IFRS” (IASB, 2007a: BC 109, BC of ED). The other accounting policy options provided by a cross-reference to full IFRS in the SME standard were: a. Investment property – fair value through profit or loss model b. Property, plant and equipment – revaluation model c. Intangible assets – revaluation model d. Borrowing costs – capitalisation model e. Presenting operating cash flows – direct method f. Accounting for government grants – any of the IAS 20 methods g. Development costs – capitalisation model h. Associates – equity method i. Jointly controlled entities – equity method and proportionate consolidation j. Financial instruments – use IAS 39 and IFRS 7 in full instead of Section 11. Also, SMEs choosing Section 11 are still given the ‘fair value option’ to measure all financial assets and financial liabilities at fair value through profit or loss (IASB, 2008h: 4, Observer Notes).

Staff reported that “by a two to one margin” the respondents to the exposure draft, about 20 per cent of the field test entities and all the working group members had suggested that all or most accounting policy options in full IFRS should be made available to SMEs (IASB, 2008h: 3, Observer Notes). Staff, however, recommended to the board that the accounting policy options listed above should not be made available for SMEs. In support of this recommendation, the staff explained that allowing the other accounting policy options for SMEs seems inconsistent with the efforts to make the SME standard a stand-alone document; SMEs will generally choose simpler options as they would be less costly and require less expertise; by removing the cross-reference to complex options the volume of guidance would be reduced in the SME standard and by not providing accounting policy options, comparability of SME financial statements would be increased (IASB, 2008h, Observer Notes). One board member suggested that the board should put the cross- referencing details in an appendix (IStaR, 2008 May).

In May 2008, the board decided that “all accounting policy options in full IFRSs should be made available” for SMEs with the simpler options to be included in the body of the standard, and the more complex options placed in a separate appendix (IASB, 2008c: 2, Update). In response to this decision, the board “received a significant amount of feedback from various parties that allowing the complex accounting policy options is not consistent

168 with the Board’s objective of a simplified standard for small entities and will hinder comparability” (IASB, 2009g: 3, Observer Notes): For example, while supporting the Board’s tentative decision to make the [SME standard] a stand-alone standard, EFRAG, FEE, and several national professional bodies have written to the Board disagreeing with the tentative decision during redeliberations to retain all or most of the complex options. This issue was discussed at the Standards Advisory Council (SAC) meeting in November 2008 and all SAC members supported including in the [SME standard] only the simpler options. They noted that if a [SME] felt strongly about using one or more of the complex options, it could elect to follow full IFRSs rather than the [SME standard] (IASB, 2009g: 3, Observer Notes).

EFRAG had continued to exert pressure on the IASB to remove all the cross-references to full IFRS to make the eventual SME standard a stand-alone document (EFRAG, 2008; 2009). In January 2009, the board revisited its decision on whether to allow SMEs to apply the more complex accounting options (IASB, 2009g, Observer Notes).30 The board removed the accounting policy options from the appendix of the proposed SME standard. The options that were removed were the option to revalue property, plant and equipment (section 16 Property Plant and Equipment) and intangible assets (section 17 Intangible Assets other than Goodwill); the option to capitalise borrowing costs (section 24 Borrowing Costs) and to capitalise development costs (section 17 Intangible Assets other than Goodwill). The options that the board retained within the SME standard were: the guidance to use the direct method to present cash flow from operating activities (section 7 Cash Flow Statement) and the use of the equity method within the SME standard (section 13 Investment in Associates) (IASB, 2009b, Update). Of the two methods for joint venture accounting (proportionate consolidation and equity method) that were available in the exposure draft by an optional cross-reference to full IFRS, the board removed the option to apply proportionate consolidation and included in the proposed standard the equity method (section 14 Investment in Joint Ventures) (IASB, 2009b, Update). In (section 15 Investment property), the board removed the choice between the cost and fair value methods and required entities to use the fair value model if fair value can be measured reliably, otherwise the cost model must be used.

The only section that retained an optional cross-reference to full IFRS was (section 11 Financial Assets and Liabilities). Entities were given the option to use either the requirements in the SME standard for financial instruments or use the IAS 39 and IFRS 7

30 In January 2009, the project was titled IFRS for NPAEs.

169 from full IFRS (IASB, 2009b: 4, Update). Eventually, it seemed that EFRAG was successful in convincing the IASB to make the SME standard a stand-alone document (EFRAG, 2009).

7.6.4 Use of Fair Value

Full IFRS are primarily developed for the world’s capital market participants, and some of the full IFRS favour the use of the fair value model. In the IFRS for SMEs exposure draft, some of the accounting policy options that required use of fair value measurement were given as optional cross-references to full IFRS. These include the options to revalue property, plant and equipment, intangible assets and investment property. Other requirements to use fair value were included within the body of the exposure draft, including the annual assessment of the residual value of property, plant and equipment.

Staff reported that many respondents to the exposure draft and a high proportion of field test entities had argued that fair value measurement was problematic for SMEs (IASB, 2008h, Observer Notes). The requirements to perform annual fair value measurements, such as assessment of the residual value of property, plant and equipment, was argued to be complex, costly and often not possible due to the difficulty of obtaining reliable values and an inability to bear high specialists’ fees (IASB, 2008h, Observer Notes). Those seeking some easing of the fair value requirements proposed as a general principle that use of fair value should be restricted to situations where: (a)[m]arket price is quoted or readily determinable without undue cost or effort (e.g. financial instruments, agriculture etc). Some respondents also thought it was necessary items were readily relisable and /or there is an intention to dispose or transfer; plus (b) all derivatives (IASB, 2008e: 9, Observer Notes).

According to the staff summary the working group proposed that an overall ‘undue cost or effort’ exemption to fair value measurement be included in the SME standard (IASB, 2008h: 18, Observer Notes); that the term ‘fair value’ should be replaced with a simple description of the requirements; and that clarification should be provided that the exposure draft proposed an historical cost model for most non-financial assets except agriculture (IASB, 2008d: 7, Observer Notes). Staff recommended to the board, that the term “fair value” be replaced with a clear description of the measurement required in each specific case but that there “should not be an overall undue cost or effort exemption from fair value measurement since this is often an important measurement, for example when assessing impairment” (IASB, 2008h: 18, Observer Notes). At its May 2008 meeting, the IASB rejected

170 the idea of including “an overall 'undue cost or effort' principle” and instructed the staff to propose a draft wording of fair value for discussion at a future meeting (IASplus, 2008, May). In December 2008, the staff decided that finding another term for fair value was a drafting issue, therefore it was “ decided to drop this issue” (IASB, 2009h: 6, Observer Notes).

In summary, of these significant changes the board retained the IFRS for SMEs title despite knowing that it did not describe the scope of the standard. In developing the SME standard the board did not focus on user needs but rather sought to minimise divergence from full IFRS. Although the board suggested that the SME standard was intended to benefit developing countries, developing countries’ needs were not considered. The board clarified that the standard was not for use by publicly accountable entities narrowly defined as financial public accountability. Those entities whose primary business is to hold funds in a fiduciary capacity, were regarded as publicly accountable while those that hold funds as a sideline to their primary business activity were not regarded as publicly accountable. The board also clarified that the standard was not for small listed entities. The board further clarified that micro entities should use the SME standard. Although the board suggested that the SME standard was indented to benefit developing countries, developing countries’ needs were not considered. In developing the final standard, the mandatory cross- reference to full IFRS was deleted and four topics—lessor accounting for finance leases, equity-settled share-based payment, hyperinflation and agriculture—were reinstated. The board, in response to private lobbying by some groups including EFRAG and FEE, was convinced to remove the optional cross-reference to complex accounting policy options in the SME standard, except for financial instruments. Complex options, such as the option to revalue property, plant and equipment, and to capitalise borrowing costs and development costs were deleted, and requirements for other options that were to be previously available by cross-reference were to be included in the final standard. These including the use of the direct method to measure cash flows from operating activities.

From May 2008 onwards the IASB also deliberated the issues raised by the responses to the exposure draft, field test entities and the working groups’ comments on the significant issues and issues specific to the different sections in the exposure draft. In March 2009, the board debated whether there was a need to re-expose the revised SME standard as a result

171 of changes made during re-deliberation. Jim Leisenring, the board member who consistently opposed the SME project sought re-exposure of the revised exposure draft. Had this been done the project would have been delayed by some 12 to 18 months, thus delaying the issue of the eventual standard. Such a delay would have meant that the project would have been in the final stages of the chairman’s and vice-chairman’s terms at the IASB. The staff recommendation to the board was that the exposure draft not be re- exposed as there was no new information to be learnt. Staff listed the decisions made by the board during its re-deliberations and argued that no “substantial issue ... emerged during the comment period [on] the exposure draft that it had not previously considered” (IASB, 2009f: 2, Observer Notes). In support of the view that the revised exposure draft not be re-exposed the director of the SME project also explained that: There had also been [116] field tests and a huge amount of outreach. The project had been discussed at seven SAC meetings, there had been four meetings of the working group and the issue had been discussed at five meetings of the world standard-setters. He did not think anyone could suggest there had not been the most thorough due process (IStaR, 2009b, March: 23).

The board voted 13 to one that re-exposure of the exposure draft was not required. Jim Leisenring, the sole opponent of that decision “did not think the Board had to re-expose, but he thought it should” (IStaR, 2009b, March: 24). At that March 2009 meeting an indicative vote on the final standard showed that only one board member (Jim Leisenring) was likely to vote against the standard (IStaR, 2009b, March). In July 2009, the final standard was approved by 13 board members with Jim Leisenring the only board member voting against it (IASB, 2009d, BC for IFRS for SMEs).

7.7 Release of the Final Standard—IFRS for SMEs

The IFRS for SMEs standard was promulgated in July 2009. According to the (IASB, 2009a, Press Release) the standard was a “self-contained document” of about 230 pages, but it was accompanied by two additional documents, a Basis for Conclusions and Implementation Guidance that contained Illustrative Statements and Disclosure Checklist. When launching the IFRS for SMEs standard, the chairman of the IASB, Sir David Tweedie said: [t]he publication of IFRS for SMEs is a major breakthrough for companies throughout the world. For the first time, SMEs will have a common high quality and internationally respected set of accounting requirements. We believe the benefits will be felt in both developed and emerging economies (IASB, 2009a, Press Release).

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A complete list of the topics in the final standard is provided in Table 7.4. In revising the exposure draft for the promulgation of the final standard, some sections had been re- named and re-numbered.

Table 7.4 Topics in the final standard—IFRS for SMEs Section Title 1 Small and Medium-Sized Entities 2 Concepts and Pervasive Principles 3 Financial Statement Presentation 4 Statement of Financial Position 5 Statement of Comprehensive Income and Income Statement 6 Statement of Changes in Equity and Statement of Income and Retained Earnings 7 Statement of Cash Flows 8 Notes to the Financial Statements 9 Consolidation and Separate Financial Statements 10 Accounting Policies, Estimates and Errors 11 Basic Financial Instruments 12 Other Financial Instruments Issues 13 Inventories 14 Investments in Associates 15 Investments in Joint Ventures 16 Investment Property 17 Property, Plant and Equipment 18 Intangible Assets other than Goodwill 19 Business Combinations and Goodwill 20 Leases 21 Provisions and Contingencies Appendix-Guidance on recognising and measuring provisions 22 Liabilities and Equity Appendix- Example of the issuer’s accounting for convertible debt 23 Revenue Appendix- Examples of revenue recognition under the principles in Section 23. 24 Government Grants 25 Borrowing Costs 26 Share-based Payment 27 Impairment of Assets 28 Employee Benefits 29 Income Taxes 30 Foreign Currency Translation 31 Hyperinflation 32 Events after the End of the Reporting Period 33 Related Party Disclosures 34 Specialised Industries 35 Transition to the IFRS for SMEs Source: (IASB, 2009c, IFRS for SMEs).

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7.8 Changes made in the Final Standard: Recognition and Measurement Simplifications

To provide a better understanding of how the board arrived at some of its decisions in the final standard, the board’s treatment of the four sample standards is now considered in more detail. In July 2003, when the IASB commenced the SME project, it intended the SME standard to preserve the recognition and measurement criteria of the full standard (IStaR, 2003a, July). Later, when the IASB did eventually decide to allow some recognition and measurement simplifications (IASB, 2005e, Insight) it aimed to keep them to a minimum. This intent is evident from the analysis of the sample four sections selected for closer examination in chapter six: section 16 Property, Plant and Equipment; section 18 Business Combinations and Goodwill; section 19 Leases; and section 36 Specialised Industries.

Detailed analysis of each of the sample four sections from the exposure draft in February 2007 to the final standard in July 2009 is provided in Appendix 5, Table A5.1 for Section 16 Property, Plant and Equipment; Table A5.2 for Section 18 Business Combinations and Goodwill; Table A5.3 for Section 19 Leases; and Table A5.4 for Section 35 Specialised Industries. The purpose of this tabulation is to follow systematically the formal input to the IASB’s decision-making process and to help to identify whether, and to what extent, any changes resulted and where the board changed the wording by rewriting the requirements and retained the major principles of that requirement.

These tables have been compiled as follows: the first column shows the board’s decision made relating to the staff questionnaire in November and December 2005, while the second column states the relevant requirements in the exposure draft. The third column covers the staff summary of the responses to the exposure draft, and this staff summary is followed by a summary of the analysis performed for this study. This analysis provides additional details about the responses and identifies the respondents raising those matters. The fourth column summarises the staff summary of the field test results and the fifth column the views of the working group members. The sixth column shows the staff recommendation to the board and the seventh column provides the board’s decision in response to the various matters in the exposure draft, field test results and the working group members’ views reported by the staff to the board in July 2008. It should be noted that the board would have seen only the staff summaries of the various responses and not

174 the actual responses. The eighth column shows the board’s decision in the final standard in July 2009.

7.8.1 Section 16 Property Plant and Equipment

At its December 2005 board meeting, in relation to Section 16, the IASB had decided to: retain the revaluation option in the proposed SME standard by providing a optional cross- reference to IAS 16 in full IFRS; to rewrite the section on component depreciation without using the term ‘component depreciation’; and to retain the requirement for annual assessment of the residual value and useful life of property, plant and equipment (IASB, 2005d, Update) (see column 1 of Table A5.1). Apart from rewording component depreciation, these decisions did not change the requirements.

Respondents to the exposure draft commenting on Section 16 identified matters that required simplification for SMEs: the option to revalue property, plant and equipment; the requirement for component depreciation; annual review of residual value and useful life; and the requirement that land and buildings be separated (see column 3 of Appendix 5, Table A5.1).

Under full IFRS, subsequent to acquisition an entity can select to use either the cost method or the revaluation method to value property, plant and equipment (see column 2 of Table A5.1) (IASB, 2007b, ED). The revaluation option was made available for SMEs by means of an optional cross-reference to full IFRS. Of the 17 respondents who commented on this issue, 16 argued that the option to revalue property, plant and equipment was costly for SMEs and that it should be deleted. (see column 3 of Table A5.1). Staff reported that the respondents to the exposure draft, the field test entities and the working group argued that the option to revalue property, plant and equipment was complex and burdensome for SMEs and should be removed (IASB, 2008g, Observer Notes) (see columns 3-5 of Table A5.1). Staff recommended to the board that the option to revalue property, plant and equipment should not be allowed in the SME standard (see column 6 of Table A5.1). The board decided in July 2008 to retain its earlier decision and retain the option to revalue property, plant and equipment provided by a cross-reference to full IFRS in the SME standard (IASB, 2008b, Update) (see column 7 of Table A5.1). In response to this decision, “the Board and the staff received a significant amount of feedback from [EFRAG, FEE and

175 several national professional organisations] that allowing the complex accounting policy options” which included the revaluation model for property, plant and equipment was not acceptable (IASB, 2009g: 3, Observer Notes). In January 2009, the board removed optional cross-references to “the complex accounting policy options” from the SME standard and this meant that the option to revalue property, plant and equipment was also removed (IASB, 2009g: 3, Observer Notes) (see column 8 of Table A5.1).

The exposure draft required that significant components of an item of property, plant and equipment should be depreciated separately (see column 2 of Table A5.1) (IASB, 2007b, ED). Seven respondents to the exposure draft commented on this issue, six arguing that the component depreciation requirement should be deleted (see column 3 of Table A5.1). The staff summary reported that respondents to the exposure draft and the field test entities and a minority of the working group argued that the component depreciation requirement was burdensome and that it should not be required in the SME standard (IASB, 2008g, Observer Notes) (see column 3-5 of Table A5.1). Staff recommended to the board that the component depreciation should be retained but rewritten to make its application easier (see column 6 of Table A5.1). In July 2008 the board decided to retain the component depreciation requirement but with the requirement rewritten (see column 7 and 8 of Table A5.1).

The exposure draft required an entity to review annually the useful life and the residual value of an asset (IASB, 2007b, ED) (see column 2 of Table A5.1). All 11 respondents who commented on this issue argued that the requirement for an annual assessment of residual value and useful life of asset should be simplified (see column 3 of Table A5.1). The staff summary reported that respondents to the exposure draft, a high proportion of the field test entities and a minority of the working group members thought that the requirement for annual assessment of the residual value and useful lives of property, plant and equipment was costly and burdensome for SMEs (IASB, 2008g, Observer Notes) (see columns 3-5 of Table A5.1). Staff recommended to the board that residual value and useful lives be reassessed only when there is an indication of change (see column 6 of Table A5.1). The board decided in July 2008 that the residual value, useful life and depreciation method be reassessed when there was a clear indication of change (see column 7 and 8 of Table A5.1).

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The exposure draft section on property, plant and equipment required separation of land and building obtained in a single purchase (IASB, 2007b, ED) (see column 2 of Table A5.1). All six respondents who commented on this matter argued that it was difficult to separate land and building obtained in a single purchase (see column 3 of Table A5.1). This was noted to be a problem particularly in South Africa and three of the six respondents who commented on this matter were from the African region. Staff reported that respondents to the exposure draft sought an undue cost exemption for separation of land and buildings, and that neither the field test entities nor the working group had commented (see column 3-5 of Table A5.1). Staff recommended to the board that an undue cost exemption should not be added to the requirement to separate the land and building obtained in a single purchase (see column 6 of Table A5.1). Although the board’s decision in July 2008 was not clear, the final standard shows that the requirement to separate land and building was retained (see column 8 of Table A5.1).

In summary, in response to private lobbying by EFRAG, FEE and several national professional organisations, the IASB removed the optional cross-references to the more complex accounting policy options. This removed the option to revalue property, plant and equipment which meant that property, plant and equipment would be measured using the cost model in the SME standard. The board also eased the requirement for annual assessment of residual value, useful life and depreciation method to a requirement for review when there is an indication that the values may have changed. The requirement for component depreciation was rewritten to include application guidance but the basic principle of component depreciation was retained. The board retained the requirement to separate land and building obtained in a single purchase.

7.8.2 Section 18 Business Combinations and Goodwill

Although Business Combinations (IFRS 3) and Impairment of Assets (IAS 36) are separate IASB standards, in the exposure draft these two standards were combined into one section (Section 18). For that reason, issues relating to business combinations and goodwill are both discussed in this section. In November 2005, the IASB had decided that goodwill should be impairment tested using an indicator approach (IASB, 2005c, Update) (see column 1 of Appendix 5, Table A5.2). The board’s decision in relation to business

177 combinations in November 2005 was that the use of the purchase method should be retained (IASB, 2005d, Update) (see column 1 of Table A5.2). Respondents to the exposure draft argued for simplification of the requirements for impairment testing of goodwill; the purchase method of business combination; the requirement to separately recognise intangible assets acquired in a business combination; the requirement to separately recognise contingent liabilities acquired in a business combination; and guidance on how an entity shall account for adjustments to the fair values of identifiable assets and liabilities that are known to have existed at the acquisition date.

The exposure draft required that goodwill acquired in a business combination should be tested for impairment annually (see column 2 of Table A5.2) (IASB, 2007b, ED). Of the 41 respondents who commented on impairment testing of goodwill, 36 argued that it should be replaced with a requirement to amortise goodwill (see column 3 of Table A5.2). Staff reported that the respondents to the exposure draft, the field test entities and the working group thought impairment testing of goodwill was complex and difficult, and preferred that amortisation of goodwill be required instead (IASB, 2008g, Observer Notes) (see columns 3- 5 of Table A5.2). Staff recommended that amortisation of goodwill over a ten year period be allowed in the SME standard (see column 6 of Table A5.2). In July 2008, the IASB decided to retain the requirement for impairment testing of goodwill (IASB, 2008b, Update) (see column 7 of Table A5.2). The response to this decision was that the “Board and the staff received a significant amount of feedback ... from various parties that the Board should reconsider some of its tentative decisions at previous meetings in order to further simplify the recognition and measurements requirements as the requirements are perceived as too complex for smaller private entities” (IASB, 2009g: 14, Observer Notes): 31

In this regard, the issue most frequently recommended for reconsideration by the Board is amortisation of goodwill. Letters to the Board from EFRAG, FEE, and several national professional organisations have made this point. At the September 2008 meeting, some Board members suggested that the Board should revisit its decision on amortisation of indefinite life intangible assets, including goodwill at a future meeting (IASB, 2009g: 14, Observer Notes).

In January 2009, the IASB revisited the impairment testing of goodwill, the vice chairman explaining to the board that:

31 At this time the project was titled IFRS for Private Entities.

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they wanted to make this standard as palatable as possible. There was something people wanted that was going to cost the Board nothing. Why agonise over it? Mr Engstrom thought this was just being very pragmatic. Why could they not support it? This was an honest working group. One of them had stood up and pointed out that the Board asked 40 of them to come and discuss the standard, but did not listen on this, the most important issue. (IStaR, 2009c, January: 32).

At that January 2009 meeting, nine of the 14 board members approved replacing the impairment testing requirement with a requirement that goodwill be amortised over a maximum ten year period (IStaR, 2009c, January: 33).

The exposure draft required that “all business combinations shall be accounted for by applying the purchase method” (IASB, 2007b: 119 , ED) (see column 2 of Table A5.2). All six of the respondents who commented on purchase method of consolidation argued that the use of the purchase method was not appropriate for cooperatives. They proposed that the pooling of interests method is relevant for the merger of cooperatives (see column 3 of Table A5.2). Staff reported that a few respondents to the exposure draft argued that the purchase method was not appropriate for cooperatives and they instead proposed the pooling of interests method. It was also reported that the field test entities proposed that section 18 was complex and would be costly to apply (IASB, 2008g, Observer Notes) (see column 4 of Table A5.2).32 The working group “did not support allowing SMEs to follow merger accounting for any business combinations other than combinations of entities under common control”(IASB, 2008g: 28, Observer Notes) (see column 5 of Table A5.2). Staff recommended to the board that “SMEs should not be allowed to use pooling of interests accounting for a business combination (other than a combination of entities under common control, which would be excluded from Section 18)” (IASB, 2008g: 28, Observer Notes) (see column 6 of Table A5.2). In July 2008, the board decided that the pooling of interests method would not be permitted for business combinations (IASB, 2008b, Update) (see column 7 of Table A5.2). This meant that the use of the purchase method of business combination was retained in the final standard.

The exposure draft stated that an acquirer shall recognise separately intangible assets acquired in a business combination if it can be measured reliably (see column 2 of Table A5.2). Eight respondents to the exposure draft commented on this issue, two arguing that

32 It was also proposed that the IASB should try to give material relief particularly on the disclosure requirements

179 intangible assets acquired in a business combination should not be separately recognised. Staff reported that the respondents to the exposure draft and the field test entities had difficulty identifying intangible assets in a business combination and proposed that examples of specific intangibles should be provided within this section (see column 4 of Table A5.2). It was also reported that the working group supported the requirement to identify separately intangible assets acquired in business combination if their fair value can be measured reliably (IASB, 2008g, Observer Notes) (see column 5 of Table A5.2). Staff recommended to the board that intangibles acquired by an SME in a business combination should be recognised separately if their fair value could be measured reliably (IASB, 2008g, Observer Notes) (see column 6 of Table A5.2). In July 2008, the board decided that intangible assets acquired in a business combination should be recognised separately when fair value can be measured reliably and that an undue cost or effort exemption would not be added (IASB, 2008b, Update) (see column 7 of Table A5.2).

The exposure draft stated that “the acquirer recognises separately a contingent liability of the acquiree only if its fair value can be measured reliably” (IASB, 2007b: 122, ED)(see column 2 of Table A5.2). Of the ten respondents who commented on contingent liabilities, seven argued that contingent liabilities should not be recognised when allocating the cost of a business combination (see column 3 of Table A5.2). Staff reported that the respondents to the exposure draft argued that contingent liabilities should not be recognised in the business combination (see column 3 of Table A5.2). Staff also reported that the field test entities did not comment on this issue (see column 4 of Table A5.2) and that the working group supported the requirement proposed in the exposure draft that requires “recognition of contingent liabilities acquired in a business combination”(IASB, 2008g: 26, Observer Notes) (see column 5 of Table A5.2). Staff recommended to the board that contingent liabilities in a business combination should be recognised separately if their fair value could be measured reliably but that no undue cost exemption be allowed (see column 6 of Table A5.2). In July 2008 the board decided that contingent liabilities acquired in a business combinations should be recognised separately when fair value can be measured reliably and that an ‘undue cost or effort’ exemption should not be added (IASB, 2008b, Update) (see column 8 of Table A5.2).

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Section 18 in the exposure draft did not have clear guidelines on how an entity should account for adjustments to the fair values of identifiable assets and liabilities that are known to have existed subsequent to acquisition. Staff reported that the respondents to the exposure draft argued that they were not sure how to account for adjustments to the fair value of identifiable assets and liabilities after acquisition, the field test entities did not comment and the working group did not discuss this issue (see columns 3 – 5 of Table A5.2). Staff viewed this as an issue concerning additional guidance and recommended to the board that the requirements in IFRS 3 for measurement period—that explains the requirements of how to account for business combinations that are incomplete at the end of the reporting period—be included in the SME standard (see column 6 of Table A5.2). The measurement period in IFRS 3 states that: If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognised as of that date. During the measurement period, the acquirer shall also recognise additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or leans that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date (IFRS 3,para 45).

That is, including the requirements of how to account for business combinations that are incomplete at the end of the reporting period (referred to as measurement period) in section 18 will provide guidance on how to account for adjustments to fair values of identifiable assets and liabilities known after acquisition date. In July 2008, the board decided to include in section 18 the guidance on how to account for business combinations that are incomplete at the end of the reporting period (IASB, 2008b, Update) (see column 7 of Table A5.2).

In summary, the board sought to retain the requirement to impairment test goodwill but following private lobbying by EFRAG, FEE and several national professional organisations, replaced the requirement for impairment testing of goodwill with a requirement to amortise goodwill over a maximum of ten years. For those matters relating to business

181 combinations, the board made no changes to the requirement to identify separately intangible assets and contingent liabilities acquired in business combination if they could be measured reliably and the purchase method of business combination was retained. The board provided guidance on how to account for business combinations that were incomplete at the date of reporting in the SME standard. This guidance was previously missing in section 18 of the exposure draft.

7.8.3 Section 19 Leases

In November 2005 the IASB had decided that the SME standard would retain the distinction between operating and financing leases (see column 1 of Appendix 5, Table A5.3). Respondents to the exposure draft sought three simplifications: to treat all leases as operating leases; to use methods other than the straight-line method for reporting the expense associated with operating leases; and to measure the finance lease using the fair value of the leased property or the present value of minimum lease payments if lower (see column 3 of Table A5.3).

The exposure draft required that a distinction between operating and finance lease be made (IASB, 2007b, ED)(see column 2 of Table A5.3). Of the 23 respondents who commented on classification of leases, six argued that all leases should be treated as operating leases (see column 3 of Table A5.3). Staff reported that the respondents to the exposure draft, the field test participants and some working group members wanted all leases treated as operating leases (see columns 3–5 of Table A5.3). The staff recommendation to the board was that instead of requiring all leases to be classified as operating leases, the wording used in Section 19.4 (b) “major part of the economic life of the asset” be changed to “substantially all of the economic life of the asset” (IASB, 2008g: 32, Observer Notes). According to the staff the change in wording was likely to have fewer leases being classified as finance leases (IASB, 2008g, Observer Notes) (see column 6 of Table A5.3). The board retained the distinction between operating and finance leases in the final standard (see column 7 of Table A5.3).33

33 The board decided that additional guidance should be added to the criterion “major part of the economic life of an asset” in 19.4 (d) of the exposure draft(IASB, 2008a: 3, Update).

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The exposure draft required that a lessee shall “recognise lease payments under operating leases ... as an expense on a straight-line basis unless another systematic basis is representative of the time pattern of the user’s benefit, even if the payments are not on that basis”(IASB, 2007b: 129, ED). The straight-line method of recognising operating lease expense means that the total lease payment are spread evenly over the lease term (IASB, 2008g, Observer Notes). Six respondents commented on the use of the straight-line method for operating leases, four suggesting that it should be removed (see column 3 of Table A5.3). Staff reported that the respondents to the exposure draft proposed that the straight-line method for operating leases should not be required, while the working group argued that the requirement to recognise lease payments under operating leases on a straight-line basis should be retained (see columns 3 and 5 of Table A5.3). It was also reported that the field test entities did not comment on this issue (see column 4 of Table A5.3). Staff recommended that the board revise section 19.13 to include “the case where payments to the lessor are structured to compensate for the lessor’s expected cost increases”(IASB, 2008g: 30, Observer Notes): A lessee shall recognise lease payments under operating leases (excluding costs for services such as insurance and maintenance) as an expense on a straight-line basis unless either (a) another systematic basis is representative of the time pattern of the user’s benefit, even if the payments are not on that basis; or (b) the payments to the lessor are structured to compensate for the lessor’s expected cost increases (IASB, 2008g: 29, Observer Notes).

In July 2008, the board did not make any decision on this issue and asked the staff to refine its recommendation for board discussion at a future meeting (see column 7 of Table A5.3). In October 2008, when this issue was revisited, the staff recommended to the board the following revised section 19.13. The underline shows the additions made to the requirement, and the strikethrough is the text deleted from what was proposed in July 2008: A lessee shall recognise lease payments under operating leases (excluding costs for services such as insurance and maintenance) as an expense on a straight-line basis unless either (a) another systematic basis is representative of the time pattern of the user’s benefit, even if the payments are not on that basis; or (b) the payments to the lessor are structured to increase in line with expected inflation to compensate for the lessor’s expected cost increases. If payments to the lessor vary due to factors other than inflation, then condition (b) is not met (IASB, 2008i: 5, Observer Notes).

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The board agreed with the staff’s revised proposal but felt that the term “expected inflation” should be clarified to mean “changes in general purchasing power based on published statistics, rather than a general estimate of the lessor’s future cost increases” (IASB, 2009h: 35, Observer Notes) (see column 8 of Table A5.3 ).

Section 19.8 of the exposure draft, which related to initial recognition of finance leases for lessees, states that “lessees shall recognise the rights and obligations under finance leases as assets and liabilities in their balance sheet at amounts equal to the fair value of the leased property determined at the inception of the leases ...” (IASB, 2007b: 128, ED). Of the 46 respondents who commented on measurement of finance lease, 30 argued that SMEs should be allowed to use present value of the minimum lease payments instead of fair value (see column 8 of Table A5.3). Staff reported that respondents to the exposure draft proposed one or other of the following two alternatives to be included in the SME standard: “lower of fair value and present value of minimum lease payments or just ... [the] present value of minimum lease payments” (IASB, 2008g: 30, Observer Notes). It was also reported that some field test entities argued that information about fair value was either difficult to obtain or unavailable for measuring a finance lease, while some entities thought that measuring “the fair value of the leased asset is less practicable than if entities were able to use the present value of minimum lease payments” (IASB, 2008g: 30, Observer Notes) (see column 4 of Table A5.3).

Staff reported that the working group had proposed retention of the measurement based on fair value for the leased asset and related lease obligation, but that the measurement should not be called ‘fair value’ because SMEs have difficulty understanding and applying the term (see column 5 of Table A5.3). Staff recommended that the board “retain the single measurement, to describe it as ‘the cash price that the lessee would have paid if it had acquired the asset rather than leased it’, and to state that if that cash price is not available from a price quotation in an active market it may be necessary to measure it at the present value of minimum lease payments” (IASB, 2008g: 31, Observer Notes) (see column 6 of Table A5.3). In July 2009 the board decided that “the IAS 17 Leases measurement principles should be used for lessee measurement of finance leases (i.e. measure at fair value of the leased property or, if lower, the present value of the minimum lease payments, determined

184 at the inception of the lease)” (IASB, 2009h: 36, Observer Notes) (see column 8 of Table A5.3).

In the exposure draft, the lessors’s side of a finance lease involved a mandatory cross- reference to full IFRS. As discussed earlier in this chapter, in May 2008, the mandatory cross-reference to full IFRS to measuring finance leases for lessors was removed and the relevant requirements were included within section 19.34 In developing the final standard, the board decided the lessor would be required to present finance leases as receivables at “amounts equal to the net investment in the lease” which is the lessor’s “ gross investment discounted at the interest rate implicit in the lease” (IASB, 2009c: 114, IFRS for SMEs).

The requirements for lessors to account for lease income from the operating leases was changed in a similar manner to the requirements for lessee accounting. That is: the payments to the lessor are structured to increase in line with expected inflation (based on published indexes or statistics) to compensate for the lessor’s expected inflationary cost increases. If payments to the lessor vary according to factors other than inflation, then condition (b) is not met (IASB, 2009c: 20.25 (b), IFRS for SMEs).

In summary, the board rejected the request to treat all leases as operating leases, and retained the distinction between the operating and finance lease. The requirement for the straight-line method for reporting operating leases expense was rewritten to accommodate cases “where payments to the lessor are structured to compensate for lessor’s expected cost increases” (IASB, 2008g: 30, Observer Notes). The board added to the measurement requirement for finance lease for lessees, that lower of the fair value of the leased asset or the present value of the minimum lease payments could be used. For accounting from the lessor’s side, the mandatory cross-reference to full IFRS for measuring finance lease for lessors was removed and the relevant requirements were included within Section 19.

7.8.4 Section 35 Specialised Industries

In December 2005, the board had decided not to allow the choice of the cost model for valuing agricultural produce (see column 1 of Appendix 5, Table A5.4) but seven months later it decided to make the cost model less restrictive (IASB, 2006c: 2, Update). The IASB retained its earlier decision of making the cost model less restrictive in February 2007, and

34 Of the 46 respondents who commented on measurement of finance leases, 15 proposed that the requirement for accounting for finance leases by lessors should be included within section 19.

185 made the requirement to determine the fair value of agricultural assets a mandatory cross- reference to full IFRS. This meant that an entity engaged in agricultural activities was referred to IAS 41 in the full IFRS for guidance on determining the fair value.

The requirement for agriculture given in the exposure draft was as follows: 35.1 An entity ... engaged in agricultural activity shall determine, for each of its biological assets, where the fair value of that biological asset is readily determinable without undue cost or effort:

(a) The entity shall apply the fair value model in paragraphs 10–29 of IAS 41 Agriculture to account for those biological assets whose fair value is readily determinable without undue cost or effort, and the entity shall make all related disclosures required by IAS 41.

(b) The entity shall measure at cost less any accumulated depreciation and any accumulated impairment losses those biological assets whose fair value is not readily determinable without undue cost or effort ... (IASB, 2007b: 217, bold in original, ED).

Of the 25 respondents who commented on accounting for agriculture, 15 argued that the cost model should be allowed as an alternative accounting policy choice (see column 3 of Table A5.4). The staff summary reported that respondents to the exposure draft and the field test entities raised similar concerns that the cost model should be allowed as an accounting policy choice (see columns 3-4 of Table A5.4). Staff recommended to the board that there was no need to provide the cost method as an alternative policy choice in the SME standard (see column 6 of Table A5.4). Staff explained that this was because fair value was often readily available as markets are active and quoted prices are easily accessed. Staff viewed measuring cost as more burdensome and arbitrary because of the extensive allocation required in this process (IASB, 2007f, Staff Overview of ED).

In July 2008, the board retained its earlier decision not to allow the cost model as an accounting policy choice to value agricultural produce (see column 7-8 of Table A5.4). Also, as discussed earlier in section 7.6.3, as part of the board’s decision in May 2008 to remove the mandatory fallback to full IFRS, the requirement to determine the fair value of agricultural assets was reinstated within section 35. In summary, the board retained the option for use of the cost model but did not make the cost model an alternative accounting policy option for valuing agricultural assets in the SME standard. As part of the board’s earlier decision on mandatory fallback in May 2008, the guidance on determining the fair

186 value of agricultural assets was reinstated within the SME standard (IASB, 2008c, Update; IASplus, 2008).

In summary, a closer examination of the four sample sections shows the IASB’s resistance to simplifying the recognition and measurement requirements of full IFRS meant that the recognition and measurement criteria in the SME standard were changed only minimally. The simplifications that the board rejected in the final standard were: to treat all leases as operating leases in section 19 leases; the application of the cost model for agriculture in section 35, the requirement to separate land and building acquired in a single purchase in section 16; the requirement to separately identify intangible assets and contingent liabilities acquired in business combination in section 18. The board did a rewrite of some requirements such as component depreciation in section 16, but these were mainly a change in wording to make the application easier without simplification of the major principles. The board, however, removed the mandatory cross-reference to full IFRS. This reinstated some topics within the SME standard that required referral to full IFRS including determining the fair value of agricultural assets in section 35 and lessor accounting to measure finance lease in section 19.

7.9 Analysis Using Kingdon’s Three Streams of Problem, Policy and Politics

Sections 7.2 to 7.8 set out the events that occurred during steps (f) to (k) of the IASB’s due process for IFRS for SMEs. These steps covered publication of publishing the exposure draft through to the release of the final SME standard. This section applies Kingdon’s three streams of problem, policy and politics to analyse the events set out in sections 7.2 to 7.8.

Chapter six showed that the IASB’s policy community remained divided over the IASB’s SME project. Within the IASB’s policy community, the hidden cluster grew to include four sets of people: the director of the SME project; the working group (33 members); informal panel of users (eight members); and a sub-committee of the board (six members).

As Kingdon suggested might be expected, the IASB pursued the approach that it was familiar with developing standards. That is, the IASB chose to start from full IFRS and to make only minimal changes to modify them for SMEs. Instead of focusing on the two

187 objectives the IASB had identified as primary objectives (reducing the reporting burden for SMEs, and meeting SME user needs), the IASB resisted changes to the recognition and measurement criteria, and worked with the assumption that the needs of users of SME financial reports and listed companies were the same. As a result, it seemed its listed secondary objectives—facilitating easier transition to full IFRS—seemed to justify the IASB’s effort to minimise changes from full IFRS. As a result, it seemed even at this early stage that the proposed standard was not aimed at SMEs and that it would be too complex for SMEs. The director of the SME project facilitated the task of building consensus for the IASB’s SME project in the wider policy community and within the IASB.

In chapter six, analysis of events within the politics stream showed that those board members who opposed the project seemed to impede the development of the project, thus making it difficult for this project to proceed. To overcome this opposition a sub- committee of the board was formed in November 2004. The IASB was aware that outside of its policy community its proposed SME standard was perceived as too complex for SMEs. UNCTAD had decided to refine its reporting guidelines for micro entities because it viewed the IASB’s approach as inappropriate for SMEs. In Europe the IASB’s SME proposal was also not well received and EFRAG started work on developing its own SME standard. The vice- chairman of the IASB facilitated the task of building political support for the SME project within the IASB.

Analysis of the problem stream in chapter six showed that the IASB increasingly focused on the objective of facilitating easier transition to full IFRS in developing the SME standard. This allowed the IASB to pursue minimal divergence from full IFRS. Given the IASB’s expertise in developing standards for large and sophisticated entities, this may have been a practical option for the IASB even if the resulting standard might not be suitable for SMEs.

This next step of the analysis applies Kingdon’s three streams approach to the events covered in sections 7.2 to 7.8. It continues the analysis of the detailed policy formulation within the three streams of problem, policy and politics. The next section analyses the development of the SME standard within the policy stream (section 7.9.1) and this is followed by analysis of the politics stream (section 7.9.2) before concluding with discussion of the problem stream (section 7.9.3).

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7.9.1 Policy Stream

In the period between January 2006 and June 2009, when the IFRS for SMEs was promulgated, the hidden cluster continued to grow. Another staff member—Ms Michelle Fisher—was recruited in July 2007 to assist the director of the SME project and the working group that already consisted of 33 members was further expanded to 40 members. The four groups in the hidden cluster were: staff (director of the SME project and Ms Fisher); the working group (40 members); informal panel of users (eight members); and a sub- committee of the board (six members). This provided the director of the SME project with a wide pool of expertise to draw on in developing the SME standard.

According to Kingdon (1984), those within the hidden cluster carry out most of the work required to develop the technical aspects of a policy. Clearly, evidence in this chapter showed that Paul Pacter, the director of the SME project, was the key person involved in facilitating the development of the exposure draft, the field test questionnaire and in finalising the eventual standard. After Ms Fisher joined the IASB as a staff member she assisted Paul Pacter. Other groups in the hidden cluster were there mainly to provide advice, and provide comments and feedback on the draft proposals.

The close involvement of the staff in policy formulation suggests that they can influence the alternatives from which policy makers make a choice (Kingdon, 1984). Staff, for example, analysed and summarised all the information before it went to the board, the board therefore receiving only second hand information. The IASB had worked with this assumption that SMEs and developing countries had similar problems, and if it addressed SME problems then developing countries’ problems would also be addressed (David Tweedie, interview, 13 November 2008, London). Evidence in this chapter showed that when the exposure draft was released the chairman of the IASB emphasised that the SME standard was also to benefit developing countries (IASB, 2007d, Insight). However, the exposure draft contained no questions on developing countries and staff did not acknowledge comments about developing countries when analysing the responses and findings. Rather, issues raised about developing countries seemed to be combined with the overall issues and not specifically presented to the board. Similarly, despite the fact that one of the aims of the field test was to assess developing countries’ problems (IASB, 2007e, Project Update), the field test results did not identify issues facing developing countries

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(see IASB, 2008j, Observer Notes). Rather the issues raised were summarised based on issues, without any acknowledgement of the problems encountered by field test entities in developing countries.

Policy communities may be either fragmented or tightly knit and the extent of this fragmentation or closeness affects policy making (Kingdon, 1984). Chapter six showed fragmentation within the visible cluster of the IASB’s policy community made it difficult for the board to agree on how to develop the standard. Evidence in this chapter showed that this fragmentation within the board continued, with opposing board members impeding the progress of the SME project. This matter is discussed further in the politics stream (section 7.8.2). Within the visible cluster there were some changes in board membership with four board members leaving as their terms expired and four new board members joining the IASB.35 The terms of two board members especially important to the SME project were soon to expire. The term of Tom Jones, the vice-chairman of the IASB and the chairman of the board sub-committee on the SME project, was due to expire in June 2009. Also chairman Sir David Tweedie’s term was expiring in June 2011. There was a possibility that if the project went beyond his term at the IASB, the special position that was created for the director of the SME project reporting directly to Tweedie could be removed—with the role reverting to a normal staffing one (see chapter 5). It would have also meant losing two votes in favour of the project. But more importantly the completion of the project could have been jeopardised. It is important to note that the project was finished in the last month of Tom Jones’s term at the IASB.

Kingdon (1984: 87) observed that “as policy makers consider the alternatives from which they will choose, they repair to ideas and approaches with which they are already familiar”. Chapter six showed that the IASB chose to start from full IFRS and minimise changes because this was a familiar approach given its expertise in developing standards for large and sophisticated entities. In developing the exposure draft, the IASB focused on transition to full IFRS rather than reducing the reporting burden on SMEs, which it had identified as a primary objective in developing the SME standard (IASB, 2004a: para 16-17, DP). The

35 The following board members left the IASB—Geoff Whittington in June 2006, Tricia O’Malley in June 2007, Anthony Cope in June 2007 and Hans-Georg Bruns in June 2007. The following new appointments were made—Philippe Danjou in November 2006, Wei-Guo Zhang in July 2007, Stephen Cooper in August 2007 and Pabhakar Kalavacherla in January 2009 (IASplus, 2011b).

190 proposals in the IASB’s exposure draft meant that SMEs would need to know both sets of the financial reporting requirements—the full IFRS and the SME standard. Evidence in this chapter showed that despite requests by the respondents to the exposure draft and the field test entities to make the SME standard a self-contained document, it contained an optional cross-reference to full IFRS for accounting policy choices. This was removed only after the private lobbying efforts of other policy communities (this is explained further later in this section).

According to Kingdon (1984), a policy maker protects its policy making domain to pre-empt others from coming into their domain or turf—in Kingdon’s term. In doing so, it is likely that policy proposals put forward by other policy communities may be rejected. Chapter six showed that EFRAG was another policy community that had begun work on developing an alternative proposed SME structure because EFRAG thought the IASB’s proposed SME standard was too complex and complicated for SMEs. EFRAG continued to exert pressure on the IASB to make the SME standard a stand-alone document. Evidence in this chapter showed that after the IASB issued its exposure draft in February 2007, EFRAG emerged with its own alternative SME structure for the SME standard and a proposed model standard based on that structure (Stig Enevoldsen, interview, 9 December 2011, telephone). There are mixed views on whether this was an attempt to replace the IASB’s proposed standard or to influence the IASB to change its proposed standard, but the director of the SME project did report that he got “some ideas from” EFRAG’s proposal that were used in the IASB’s SME project (Paul Pacter, interview, 14 November 2008, London). Despite this, EFRAG’s SME proposal was criticised as having been developed without using due process and as “very loose and left a lot of flexibility and room for judgement about almost everything” (Paul Pacter, interview, 14 November 2008, London). Clearly the IASB was protective of its standard setting domain and it did not want other groups to develop the SME standard. Given the IASB dominance over the policy environment, the chairman of the IASB dismissed EFRAG’s proposal to restructure the SME standard.

Another policy community developing a potentially competing policy was UNCTAD, which had begun to refine its third-tier reporting guidelines for micro entities. UNCTAD’s intent was not to supplant the IASB’s SME proposal but rather to impose pressure on the IASB so that it would complete its SME project soon (Richard Martin, interview, 6 November 2011,

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Geneva). Also, because UNCTAD thought that the IASB’s eventual SME standard would be inappropriate for smaller entities, it believed that its reporting guidelines for micro entities could be beneficial for smaller entities (Richard Martin and Vickson Ncube, interview, 6 November 2011, Geneva). The IASB had rejected the idea of developing a third-tier of reporting when it was brought to its attention in response to the exposure draft (IASB, 2008c, Update).

Contrary to the other primary objective of focusing on the user needs of SME financial statements (IASB, 2004a: para 16-17, DP), the IASB simply assumed that users of SME financial reports and listed companies’ financial reports had similar needs (IStaR, 2004b, December). Chapter six showed that the IASB did not analyse what SME user needs were but rather worked with the assumption that SME user needs are similar to the needs of users of listed entities’ reports. Other policy communities, such as EFRAG, proposed that “the needs of users of SMEs’ financial statements are different from the needs of users of listed entity financial statements” and given this difference in information needs for SME users, there could be “different pervasive recognition and measurement principles” required (CL 161, ED: 26-27). EFRAG argued that the IASB should undertake a proper analysis of SME user needs (CL 161, ED), but the IASB’s assumption that SMEs users’ needs were similar to listed entities allowed the IASB to pursue minimising divergence from full IFRS. There is no evidence to suggest that the IASB did analyse SME user needs between the exposure draft stage and in finalising the standard. In other words, there is nothing to suggest the IASB did fulfil this second primary objective in developing the SME standard.

The IASB’s focus on minimising divergence from full IFRS meant that it was prepared to make only minimal changes to the recognition and measurement simplifications in response to the public due process. Closer analysis of the sample four sections—Section 16 Property Plant and Equipment; Section 18 Business Combinations and Goodwill; Section 19 Leases and Section 35 Specialised Industries—revealed that although wordings were changed at times from full IFRS, the substance of the requirements either did not change or changed only minimally. For example, in Section 16 with component depreciation, the board retained the basic principles of component depreciation but rewrote that requirement (IASB, 2009c, IFRS for SMEs). SMEs still had to apply component depreciation. The board also refused to make changes to the requirement to separate land and building

192 obtained in a single purchase. In Section 18 the board resisted making any changes. It retained the use of purchase method of business combinations; retained the requirement that intangible assets and contingent liabilities that are acquired in a business combination should be separately recognised if they could be measured reliably; and retained the requirement to adjust fair values after acquisition, although it did provide the guidance from full IFRS on the requirements to account for business combinations that are incomplete at the end of the reporting period as a means of assisting preparers. The board also initially retained the requirement to test goodwill for impairment. In Section 19 with operating leases the respondents requested that the straight-line method should not be required for expensing operating leases (IASB, 2008g, Observer Notes). The IASB retained the principles of the straight-line method for expensing operating lease payments but rewrote that section to allow entities to use methods other than straight-line for operating leases when the payments to the lessor are structured to increase with expected general inflation (IASB, 2009c, IFRS for SMEs: 110). In Section 35, the IASB rejected the cost model as an optional accounting policy choice for SMEs to measure agricultural produce, but made the use of the cost model less restrictive when fair value was not readily available (IASB, 2009c, IFRS for SMEs).

Despite the IASB’s focus on minimising divergence from full IFRS and its determination to resist changes sought via the public due process, the private lobbying by other policy communities and interest groups did influence the IASB to make some recognition and measurement simplifications. For example, after the board rejected requests to allow amortisation of goodwill, and decided to retain impairment testing of goodwill (IASB, 2008b, Update) “significant … feedback” from “EFRAG, FEE, and several national professional organisations” apparently convinced the board that it should allow amortisation of goodwill (IASB, 2009g, Observer Notes: 14). Similarly such feedback to replace some of the optional cross-references to simpler accounting, included expensing all borrowing and research and development costs and using historical cost model to value property, plant and equipment in Section 16 Property, Plant and Equipment and Section 17 Intangible Asset (IASB, 2009b: 4, Update). In Section 15 Investment Property, the board removed the choice between fair value and the cost model and replaced it with requiring SMEs to use the fair value model if fair value can be measured reliably without undue cost or effort, otherwise it must use the cost model. In Section 14 Jointly Controlled Entities,

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SMEs were allowed to could choose from the cost, equity or fair value method except proportionate consolidation.

To ensure that a policy proposal is widely accepted, consensus is built in the policy stream through persuasion and diffusion. This helps to create “something akin to a bandwagon” that builds wider support and eventually leads to “…agreement on solutions or proposals” (Kingdon, 1984: 147). With its exposure draft released in February 2007 the IASB sought this kind of support and acceptance of its standards. For example, to increase comprehension and possibly to ensure that its exposure draft was well-received, about two months after the exposure draft was released, Paul Pacter prepared and posted on the IASB’s website A Staff Overview of the Exposure Draft (see IASB, 2007f, Staff Overview of ED). This overview of the exposure draft was “in question-and-answer format ... The purpose of the overview was to provide an introduction to the proposals in non-technical language” (IASB, 2009d: BC 33, BC of IFRS for SMEs). The staff overview of the exposure draft document might be considered a simpler, easier to comprehend version of the exposure draft, because possibly the exposure draft was perceived as too technical for smaller entities.

Also, to facilitate wider support and acceptance of its SME standard, for the first time the IASB published its exposure draft in languages other than English—Spanish, French, German, Romanian and Polish (IASB, 2007e, Project Update). The translations in European languages were an effort on the IASB’s part to overcome the language barrier that prevents some (but not all) countries, where English is not the first language, from participating in its standard setting process. Responses to the exposure draft were also provided by 14 respondents in languages other than English (see Appendix 4, Table A4.1). These responses were translated into English so they could be incorporated as part of the analysis. Similarly, the IASB issued its field test questionnaire in French and Spanish, as well as English (IASB, 2007c, FT Questionnaire).

The process of building support may be facilitated by a policy entrepreneur who attempts to persuade both policy communities and the wider public by writing reports, holding and attending hearings, getting media attention and meet “endlessly with important and not- so-important people” (Kingdon, 1984: 214). During the development of the SME standard

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Paul Pacter, the director of the SME project, “undertook a comprehensive outreach programme that involved presentations at 104 conferences and round-tables in 40 countries, including 55 presentations after the ED was published” (IASB, 2009e: 1, Fact Sheet). He discussed the SME project at seven SAC meetings and five WSS meetings and (IStaR, 2009, March), published seven articles (in English, Spanish, German and Russian) shortly after the exposure draft was issued in February 2007 (Paul Pacter, pers. comm., 20 February 2008: SAC presentation).

As the project progressed towards the standard, Paul Pacter, Tom Jones, the vice-chairman of the IASB, and Senior Manager Education Mike Wells, conducted two webcast sessions for the SME project on 10 September 2008 (IASB, 2008f, web page), which allowed questions and answers with the international audience. Nearly 1000 participants were registered to take part in or watch the live webcast (IASB, 2009d: BC 33, BC for IFRS for SMEs).

Within the IASB’s policy community, it was also important to build support and acceptance for the SME project to ensure that it got the required votes to pass the eventual standard. Over time, some board members who had opposed the project earlier accepted and eventually supported the SME project. Ultimately, only one board member (Jim Leisenring), who consistently opposed the project, opposed the release of the final standard as the final vote was 13 to 1 (IASB, 2009d, BC for IFRS for SME).

7.9.2 Politics Stream

Once a project is on an agenda, organised forces such as interest groups, other policy communities, or some policy makers may try to influence the outcome of the policy (Kingdon, 1984). Failing that, they may try to block the project being developed. Other policy communities, such as EFRAG, did not readily accept the implications of the IASB’s focus on minimising divergence from full IFRS. They thought that the SME standard would be too complicated for SMEs and tried to influence the IASB to make further simplifications. Several groups that had received the staff draft in early 2006, including “ten European members of the Working Group” and EFRAG, as well as some from Africa and the Caribbean (IStaR, 2006a, February: 19) responded that the “staff draft included too much detail that was not relevant to SMEs … They also thought there was not enough relaxation of

195 recognition and measurement rules …” (IStaR, 2006a, February: 20). EFRAG also tried to draw the IASB’s attention to the needs of small and micro sized entities (CL 161, ED).

Policy makers can sense the mood of those in the wider policy community from “communications that come to them, including mails, visits ... .and conversation with constituents” (Kingdon, 1984: 170). The IASB was well aware that outside of its policy community the proposed SME standard was perceived as too complex for SMEs. Such circumstances provide scope for efforts to defeat a policy proposal or to replace it (Kingdon, 1984).

EFRAG’s alternative SME proposal and private meeting with Sir David Tweedie to discuss this proposal exemplifies this type of response to unpopular policy. Whether EFRAG’s alternative was an attempt to compete with the IASB for the policy maker role or merely to make the IASB realise that its SME standard was still too complicated, is not clear. Although the chairman of the IASB criticised and dismissed EFRAG’s proposal, Pacter reported that he did take notice of it and used some ideas in further developing the standard. EFRAG and other interest groups continued to press the IASB for further concessions in the SME standard. This suggests that the private lobbying by influential parties may be more influential than the public due process.

Outside the IASB’s policy community, to gain acceptance and in order to make its proposed SME standard as palatable as possible to the wider policy community, the IASB did make some recognition and measurement simplifications, such as allowing amortisation of goodwill and removing the cross-reference to accounting policy options in the full IFRS. In some cases, however, these were made only after private lobbying (IASB, 2009b, Update) and (IASB, 2009g, Observer Notes). The IASB had to give in to some of the requested recognition and measurement simplifications, such as amortisation of goodwill in section 18 Business Combinations and Goodwill to get the support of the wider policy community.

Events within the policy community can provide a powerful impetus to escalate or block the development of a policy. Sometimes some policy makers within the policy community that may be opposed to the development of a policy try to impede the progress of the policy (Kingdon, 1984). Within the IASB, those board members that opposed the SME project did

196 seem to impede the development of the SME project. One longstanding observer of the IASB’s meetings, pointed out that one board member (Mary Barth) made the staff “go back and redo lots of things. Because she thought they weren’t being especially rigorous”, and this added “months and months to the project” (Peter Walton, interview, 27 November 2008, telephone). Similar observations were published by Robin Jarvis from the IASB’s working group, Richard Martin and Peter Walton that: In our view, the process was also lengthened by the problem that some IASB members were opposed in principle to the very idea of an SME standard and fought every concession that the staff proposed. The two board members who were most strongly opposed made sure that all stages of the IASB’s due process were conducted as extensively as possible (Jarvis et al., 2008: 119).

Possibly it was because of this opposition to the SME project that the staff carried out such an extensive due process by performing all the mandatory and non-mandatory steps to develop the SME standard, as well as additional steps—this would slow the progress of issuing the eventual SME standard, although it did help to build consensus. Clearly, even so the board did not re-expose the exposure draft as wanted by one of the most strongly opposed board members (IStaR, 2009b, March). Had the exposure draft been re-exposed it would have added least another 12 to 18 months to the project, further delaying the issue of the eventual standard. As it was, the standard was issued as the vice-chairman’s term at the IASB ended, in June 2009. The final standard was released in July 2009.

Consensus is generally built within the politics stream by “bargaining” whereby the policy makers negotiate amongst themselves and with other policy communities to reach an acceptable policy solution (Kingdon, 1984: 167). Within the IASB, the vice-chairman tried to build support and make the board work together on the SME project, reminding the board several times of others waiting for the IASB’s project to fail so they could develop a different SME standard (IStaR, 2006b, January; 2008a, September). Such threats to the IASB’s “turf” may have motivated the IASB to cooperate. Obtaining the acquiescence of the opposing board members was essential, according to Sir David Tweedie: We’ve got to get nine votes though. It will become counting votes in the sense, what do I have to do to buy yours. Let’s say we’ve got five areas, for simplification. I might be able to get four of them, I might not be able to get the fifth one, in which case, okay, I’m better getting four than blowing the whole standard up (David Tweedie, interview, 13 November 2008, London).

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7.9.3 Problem Stream

Policy makers may sometimes perceive that they have solved a problem by passing legislation, but whether the policy solution actually solves the problem is debatable given the nature of the legislative process (Kingdon, 1984). The IASB worked with the assumption that SMEs and developing countries had similar problems and if they addressed SME problems then developing countries’ problems would also be addressed (David Tweedie, interview, 13 November 2008, London; Tom Jones, interview, 25 November 2008, telephone).

The chairman of the IASB, at the release of the exposure draft in February 2007 (IASB, 2007d, Insight) and the final standard in July 2009, had stated that the SME standard would be beneficial for both SMEs and developing countries (IASB, 2007d, Insight; 2009a, Press Release). However evidence in this chapter revealed that the exposure draft did not have any question about developing countries in the SME standard (see Table 7.2). The exposure draft was translated into some European languages (Poland and Romania are classified as developing countries) but not into languages of other major developing countries such as China. There were also no translations into the Asian and African languages. Further to that when responses to the exposure draft were analysed, responses commenting on developing countries were not acknowledged, although 22 respondents provided additional comments on the exposure draft (see Appendix 4, Table A4.5). Rather, the staff focused on analysing the responses based on the issues and not its origin. Also, when discussing simplifications for the SME standard, the board did not consider developing countries’ needs or circumstances in making those simplifications (Paul Pacter, interview, 14 November 2008, London; Peter Walton, interview, 27 November 2008, telephone).

The IASB, however, had undertaken the field testing of the exposure draft in some of the developing countries. Although one of the objectives of the field test was to assess problems in developing countries, when the field test results were analysed the issues facing developing countries were not separately analysed or acknowledged. It is therefore debatable whether the IASB’s focus primarily on SMEs addressed the needs of developing countries. The manner in which the IASB dealt with developing countries might be

198 perceived to be consistent with Kingdon (1984)’s ideas that sometimes problems may remain unsolved because policy makers do not know how to address the problem.

From the IASB’s determination to minimise divergence from full IFRS it was apparent that the IASB increasingly focused on one of its secondary objectives—to facilitate easier transition to full IFRS as opposed to meeting its two primary objectives (focusing on the SME user needs and reducing the reporting burden on SMEs). This suggested that the eventual standard under development was unlikely to be appropriate for SMEs.

The IASB’s focus on minimising divergence from full IFRS and its narrowly defined concept of public accountability suggests that the eventual standard was not for SMEs. For example, in developing the exposure draft, of the four indicators for determining public accountability, the IASB removed two indicators: (c) public utility; and (d) economic significance criteria based on size (IStaR, 2006a). By using such a narrowed concept of public accountability it was apparent that the board was not focusing on SMEs. Similar concerns were raised by the respondents to the exposure draft, field test entities, and other policy communities, such as EFRAG, that the SME standard focused on the larger entities and overlooked the needs of the smaller and micro-sized entities (IASB, 2008h, Observer Notes; Jarvis et al., 2008)CL 161, ED). Some respondents to the exposure draft and field test entities argued that this meant there may be a need for a third-tier of reporting (IASB, 2008h, Observer Notes).

This effort to minimise divergence caused difficulties over the title of the standard as it became increasingly apparent that it was not for SMEs. The board could not agree on a title that adequately described the entities that could use the eventual standard and changed the title five times during the process of developing the standard. It began as IFRS for SMEs, and then changed to IFRS for Non-publicly Accountable Entities in February 2005 but changed back to IFRS for SMEs (see chapter six). In May 2008 the IASB changed the title to IFRS for Private Entities, then to IFRS for Non-publicly Accountable Entities in January 2009, and in April 2009 just two months before issuing the standard it was changed back to IFRS for SMEs, the chairman declaring “that was now the title and he did not wish to debate it” (IStaR, 2009a, April: 34).

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7.10 Summary and Conclusion

This chapter examined the remaining steps of the IASB’s due process steps (f) to (k) to understand how the IASB proceeded in developing the proposed simplified IFRS. Evidence in this chapter showed that the IASB’s policy community remained divided over the simplified IFRS project even as the IASB embarked on developing the exposure draft for the project. This division had eased off to some extent as the project moved in the final stages of finalising the project but clearly there was one board member (Jim Leisenring) who remained opposed to the project. This division made it difficult for the board to agree on providing further simplifications in the proposed SME standard.

The hidden cluster grew further to 56 members during this stage of the project. These members were the director of the SME project, Paul Pacter and staff member, Ms Fisher; informal user panel (eight members); a sub-committee of the board (six members); and the working group (40 members). Evidence in this chapter suggests the working group became more active in the later stage, and provided feedback and comments on the project. The roles played by the informal user panel and the sub-committee of the board were not clear.

Within the visible cluster there were some changes in board membership, with four board members leaving the board as their term expired and four new board members joining the IASB. The terms of the two board members who were important to this project were soon to expire. The term of the vice-chairman of the IASB, who also chaired the sub-committee of the board and the working group SME project, expired in June 2009 and the term of the chairman of the IASB was due to expire in June 2011. There was a possibility that if the project went beyond the term of the chairman of the IASB, Sir David Tweedie,, the special position that was created for the director of the SME project where the director reported directly to Tweedie could be removed or revert to a normal staffing role. The loss of these board members also meant the loss of two votes in favour of the SME standard, but more importantly the completion of the project could have been jeopardised. Therefore it was in the interest of the chairman and vice-chairman of the IASB to complete the project before their terms expired at the IASB.

The IASB continued to pursue its intended policy response to minimise divergence from full IFRS throughout the project. It did this by focusing on one of the secondary objectives

200 identified for the project to facilitate transition to full IFRS. This could easily be translated to the IASB’s policy objective of minimising divergence from full IFRS. As a result the IASB did not fulfil its two primary objectives for developing the SME standard, which were to focus on meeting the user needs of the SME standard and to reduce the reporting burden for SMEs. There is no evidence to suggest in this chapter that the IASB tried to fulfil two of its primary objectives.

After the IASB released its exposure draft in February 2007, UNCTAD had begun work on refining its third-tier of reporting guidelines for micro entities. UNCTAD wanted to use it as a means to put pressure on the IASB to provide further simplifications in the SME standard. The IASB dismissed the idea of developing a third-tier of reporting. It was not in the IASB’s interest to develop a third-tier of reporting using simple accrual accounting like UNCTAD’s reporting guidelines for micro-entities because this would make it difficult for entities to make the transition to full IFRS.

EFRAG also had proposed an alternative SME standard. EFRAG wanted the IASB to replace its SME standard with EFRAG’s proposal because EFRAG viewed the IASB’s proposal as too complex for SMEs. EFRAG’s proposal was, however, dismissed by the chairman of the IASB because it seemed to be developed from a different platform from that proposed by the IASB for its SME standard and this would make transition to full IFRS difficult.

Although the IASB was aware that its proposed SME standard was still too complex for SMEs, it continued to resist changes to recognition and measurement simplifications and made minimal changes to full IFRS. The case of the selected four sample sections—section 16 Property Plant and Equipment, section 18 Business Combinations and Goodwill, section 19 Lease and section 35 Specialised Industries—showed that the board resisted making changes sought via the public due process. Although the wordings were changed at times from full IFRS, the substance of the requirements either did not change or changed only minimally.

However, private lobbying outside of the IASB’s due process by other policy communities and interest groups did influence the IASB to make some recognition and measurement simplifications. Feedback from EFRAG and FEE and several national professional

201 organisations apparently seemed to have convinced the IASB that it should allow amortisation of goodwill in section 18 Business Combinations and Goodwill and to replace some of the optional cross-references to accounting policy options with simpler accounting in the proposed SME standard.

To build wider support and understanding of the IASB’s SME project, the IASB for the first time published the SME exposure draft in languages other than English. These other languages were Spanish, French, German, Romanian and Polish. This was an effort to encourage participation from countries where English was not the first language.

The director of the SME project, Paul Pacter, who acted as the policy entrepreneur, conducted a massive outreach program in which he made presentations about the SME project at 104 conferences and round-tables in 40 countries. He also published seven articles in English, Spanish, German and Russian shortly after the exposure draft was published. The IASB worked on building consensus for the SME project both outside and within its policy community. Two months after the exposure draft was released the director of the SME project had released A Staff Overview of the Exposure draft in a question and answer format to provide an introduction to the exposure draft in non- technical language. Also, as the project neared completion, the vice-chairman of the IASB, the director of the SME project, and the Senior Manager Education conducted two webcast sessions that allowed questions and answers with the international audience where nearly 1000 participants took part. Through facilitating such consensus building the IASB was able to reach out to the wider policy community and educate them about its SME project and ultimately build support. Consensus also needed to be built within the IASB to ensure that it got the required votes to pass the eventual standard. It seemed that eventually some of the board members who opposed the project came around to support the project, and there was only one board member who remained opposed.

Analysis of the politics stream revealed that within the IASB’s policy community those opposed to the project tried to impede the development of the SME project to slow the development and eventual promulgation of the SME standard. Those opposed to the project tried to make the IASB carry out all the due process steps both mandatory and non- mandatory that slowed the progress of the project. Regardless of the IASB’s extensive due

202 process and outreach one board member advocated that the exposure draft should be re- exposed. Had the re-exposure being done, then the eventual standard would have being delayed by several months.

Outside the IASB, a view was developing that the proposed SME standard was too complex for SMEs. Other policy communities, such as UNCTAD and EFRAG, had developed their own SMEs initiatives. UNCTAD had continued to refine its reporting guidelines for micro-entities with the intent to put pressure on the IASB to finish its SME project. UNCTAD was aware that the IASB’s SME standard was inappropriate for micro entities and in which case countries may want to use its third-tier reporting. The IASB, however, had rejected such claims for a third-tier of reporting. EFRAG proposed an alternative SME standard, which it wanted to replace the IASB’s proposed SME standard. EFRAG’s proposed SME standard seemed to be developed from a different platform than IFRS and the chairman of the IASB rejected the proposed standard. The IASB continued to build political support for its proposed SME standard within the IASB to ensure that the project moved forward and to build support to get the required votes to pass the eventual standard.

Analysis of the problem stream showed the IASB continued to work with its assumption that the SME project could focus primarily on SMEs that subsumed developing countries. Given such assumptions, neither the exposure draft contains any question on developing countries nor were comments made by respondents about developing countries acknowledged. The IASB’s objective in developing the SME standard focused increasingly on facilitating transition to full IFRS, thus allowing the IASB to minimise divergence from full IFRS. Given such focus, the board struggled to clarify for whom it was developing the proposed SME standard. The board was aware that the approach they were taking to develop the project would not necessarily result in a standard for SMEs. It was also clear that the eventual standard would not assist developing countries because they were not directly addressed in developing the project. For that reason, the board struggled to find an appropriate title for the standard and the IASB changed the title three times from IFRS for SMEs to IFRS for Private Entities then to IFRS for Non-publicly Accountable Entities. Then in April 2009 the title reverted to IFRS for SMEs.

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The findings also suggest that the SME standard appears to be geared towards the larger end of the SME spectrum. The SME standard outlines that the standard is for entities that do not have public accountability and produce general purpose financial statements. This indicates that the standard is targeting larger SMEs or large private entities that do not have public accountability. It is not clear how the SME standard would be made beneficial for small entities or micro entities.

Developing countries were not considered in the SME standard. It was evident from the findings in chapter six and seven that developing countries were not dealt with in developing this standard. The IASB’s consultative documents-discussion paper, staff questionnaire on recognition and measurement and the exposure draft did not have any questions about developing countries. Further to that, in analysing the responses to these documents, developing countries were not considered by the board. It was also not clear from the field test results if developing countries were considered.

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Chapter Eight Conclusions

8.1 Introduction

This thesis examined how and why the SME project was added onto the IASB’s agenda. It also examined the complete SME project to understand the IASB’s standard setting activity. The literature has identified the need for empirical examination of how issues get onto the IASB’s agenda, “especially given the pre-eminence of the IASB as the global standard setter” (Howieson, 2009: 595). This study is the first to examine the IASB’s agenda setting process. The literature also identified the need for closer examination of how international accounting standard setters make decisions (Barth, 2000; Cooper and Robson, 2006) and, in particular, the need to examine the IASB’s standard setting process (Larson, 2007). Prior studies on accounting standard setting generally have noted that analysis of written submissions and other material available as part of the public due process provides an incomplete understanding of the politics surrounding the development of an accounting standard (Walker and Robinson, 1993; Hodges and Mellett, 2002). This is because events that are not apparent from the information in the public domain may be influential in shaping the eventual standard. For this reason, the accounting standard setting process has been described as taking place within a “black box” (see Hodges and Mellett, 2008: 3). Consequently, to understand how standards are developed and the nature of the political activity surrounding that development, it is important to go beyond the evidence in the public domain. For example, it may help to interview “members and technical staff of the standard setting body and to look to identify those outside who actively lobbied them during the exposure draft” (Hodges and Mellett, 2008: 22).

This study went beyond the evidence in the public domain and drew on additional evidence that included: some detailed IStaR reports of the IASB’s board meetings; interviews of key people involved in developing the SME standard such as Sir David Tweedie, the chairman of the IASB, Tom Jones, the vice-chairman of the IASB, Paul Pacter, the director of the SME project, and some other IASB members including Jim Leisenring, the board member who opposed the project and other knowledgeable observers (see full list of interviewees in chapter 4). From these additional sources information emerged that was not apparent in the public domain but was crucial to understanding both how the SME project got on the IASB’s agenda and the IASB’s development of this project.

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Section 8.2 sets out the key findings in relation to the research questions of this study, which were to examine how and why the SME project was added onto the IASB’s agenda and to examine the complete SME project to understand the IASB’s standard setting activity. Section 8.3 demonstrates how this study has filled some gaps in the accounting standard setting literature. Section 8.4 acknowledges the limitations of this study and identifies directions for future research. Finally, section 8.5 provides the concluding comments of the thesis.

8.2 Key Findings of the Thesis

Chapter five used Kingdon’s three streams of analysis—problem, policy and politics—to examine how and why the SME project was added on to the IASB’s agenda. The IASB had inherited the SME project as a legacy issue from its predecessor, the IASC. Chapter five showed that from the time of the IASB’s establishment in 2001, there was division amongst the board members and the senior staff as to whether it should add the SME project to its agenda. Those tensions were not apparent from information in the public domain.

Initially, the IASB used its dominance over the standard setting environment to defer committing to the SME project, but it was apparent that it could not do that for long. There were pressures from external groups, including EFRAG, UNCTAD and IFAC, that wanted the IASB to develop the SME standard. In 2003, UNCTAD’s ISAR group had published a three- tier reporting framework (Jarvis et al., 2008). There was a possibility that if the IASB did not commit to the SME project the SMEGA guidelines (second tier of the reporting framework) would become authoritative (Jarvis et al., 2008). Also around that time EFRAG and IFAC indicated that they may pursue an SME project if the IASB did not commit to it. It seemed that to pre-empt other groups from developing the SME standard and stepping into the IASB’s standard setting domain, the IASB had to commit to developing the SME standard.

Those board members and staff opposed to the SME project argued that it was not within the IASB’s mandate. There was the possibility that those opposed to the project could block it (Tom Jones, interview, 25 November 2008, telephone). The chairman and the vice- chairman of the IASB requested the IASCF’s trustees to change the IASB’s objectives (Tom Jones, interview, 25 November 2008, telephone). The revised constitution, promulgated in 2005, included amongst the IASB’s objectives that the IASB should “take account of, as

206 appropriate, the special needs of small and medium-sized entities and emerging economies” (IASCF, 2005a: 32). This overcame division within the board over the IASB’s constitutional mandate. From 2003 the knowledge that constitutional review was likely to result in changes to the IASB’s objectives removed this obstacle to adding the SME project to its active agenda (IASCF, 2003b: 4).

It is also apparent that, on its own, initiating a constitutional change was deemed not sufficient to achieve a successful outcome for the SME project. Chapter five revealed that the chairman of the IASB, Sir David Tweedie, changed the staffing structure for the SME project and created a new senior staff position at the IASB—the director of the SME project—that reported directly to him. This appointment was made to ensure that the project was not blocked or sidetracked by those senior technical staff who opposed the project (Chris Nobes, interview, 12 November 2008, London; Paul Pacter, interview, 14 November 2008, London). More importantly, this helped to ensure that the project stayed on the agenda, after it gained entrance.

The chairman of the IASB, Sir David Tweedie, acted as a policy entrepreneur (Kingdon, 1984) to put the SME project on the IASB’s agenda. He had the power to remove the obstacles that were placed by those board members and senior staff of the IASB opposed to the SME project. First with the support of his vice-chairman he removed the perceived constitutional impediments to agenda entrance by obtaining constitutional change. Then, by establishing the special senior staff position reporting directly to him (Sir David Tweedie), he established a staffing structure that allowed him to shepherd the project through to completion.

The IASB was aware of demand for simplified accounting standards for both SMEs and developing countries. Recently, the World Bank had advocated a standard for developing countries. The IASB’s predecessor had noted that neither the needs nor wants of developing countries in relation to accounting standards was clear. The IASB combined the two sets of demands by assuming that SMEs and developing countries had similar problems, and that if it developed a standard for SMEs, that standard would also be applicable to developing countries. Whether this is, in fact, the case is debatable.

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Before the SME project was added to the IASB’s agenda in July 2003, the IASB had stated that its likely policy proposal would be to minimise divergence from full IFRS. That is the IASB did not intend to develop a separate standard especially for the users of SME financial reports. Rather, the IASB intended to develop a standard that is a simplified sub-set of its pre-existing standards (IStaR, 2003a, July). This approach seemed potentially acceptable to those board members who opposed the project.

Once the project was on the IASB’s agenda, the role of the policy entrepreneur passed to Paul Pacter, the director of the SME project, who started the process of building support for the proposed policy to develop the SME standard. At his first WSS meeting in September 2003, using highly decorated power point slides, Paul Pacter used the seize or cede game to build support for the IASB developing the SME standard and for its proposed policy to develop the eventual standard. With the board divided on this project, building outside support for the project may have been important for the project to proceed.

Chapters six and seven examined the SME project after agenda entrance to understand the IASB’s standard setting activities. These chapters showed that the opposition within the IASB board continued throughout the project even after the project was added onto the IASB’s agenda. Some board members opposed to the project tried to impede the development of the SME standard and, at times, gave conflicting advice to the director of the SME project (IStaR, 2004b, December). The division within the IASB’s policy community made it difficult for the board to agree on certain aspects of the project (IStaR, 2004g). This seemed to slow the progress of the project.

The IASB had decided even before the project was added to its agenda that it would minimise divergence from IFRS (IStaR, 2003a, July). The IASB selected an approach with which it was familiar to develop the SME standard, with several potential benefits for the IASB: it reduced board opposition; was familiar; and, perhaps because it was familiar, implies a less resource intensive project than would be required were the IASB to develop a different set of standards for SMEs. Such an approach is consistent with Kingdon’s (1984) ideas on policy formulation, but it is inconsistent with the IASB’s claim that its standards are set to meet the needs of users. All of this occurred before the public due process began.

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At the commencement of the public due process, the IASB identified multiple objectives for the SME project, including two primary objectives (to focus on meeting SME user needs and to reduce the reporting burden on SMEs). In developing the standard, however, the IASB increasingly focused on one of the secondary objectives (to facilitate easier transition to full IFRS). This secondary objective was consistent with the IASB’s prior policy decision. There is little evidence to suggest that the IASB analysed the needs of the users of SME financial statements. Instead it seemed to assume that users of SME financial statements had needs similar to those of users of listed entities’ financial statements. Although an informal user panel was formed to provide a user perspective in developing the standard, this group of users seemed predominantly to deal with larger and more sophisticated listed entities, rather than SMEs (IStaR, 2004c, February).

There is also little evidence to suggest that the IASB focused on reducing the reporting burden on SMEs in developing the SME standard. The IASB resisted changing any recognition and measurement requirements in standards. In the case of the sample four sections that were selected for closer analysis: Section 16 Property Plant and Equipment; Section 18 Business Combinations and Goodwill; Section 19 Leases and Section 35 Specialised Industries, the IASB made only minimal changes. Over the course of developing the standard, the IASB seemed to be reluctant to remove from the SME standard the optional cross-reference to full IFRS for accounting policy options. This seemed to contradict the IASB’s objective of reducing the reporting burden on SMEs, by increasing the burden. Private lobbying was more influential than the input from the public due process in making changes to the recognition and measurement criteria and in removing the optional cross-reference to full IFRS. Private lobbying also seemed to be far more effective than the public due process at convincing the IASB of the need for particular simplifications. The optional cross-reference to full IFRS for accounting policy options was eventually removed (IASB, 2009g, Observer Notes).

Some groups, such as EFRAG, wanted the IASB to develop a standard especially for SMEs, rather than merely a subset that minimised divergence from full IFRS. From 2006 EFRAG developed an alternative SME proposal because it viewed the IASB’s proposed SME standard as too complex for SMEs. After the IASB released its exposure draft in February 2007, EFRAG representatives met privately with the chairman of the IASB and proposed an

209 alternative structure for the IASB’s SME standard (Paul Pacter, interview, 14 November 2008, London; Stig Enevoldsen, interview, 9 November 2011, telephone). Also, UNCTAD’s ISAR group refined its third tier reporting guidelines for micro entities because of views that the IASB’s proposed SME standard was too complex for micro entities. The IASB, however, opposed both of these developments and argued that its proposed SME standard was appropriate for SMEs and that third tier reporting guidelines for micro entities were not necessary (IASB, 2008c, Update). In other words, the IASB protected its standard-setting “turf” by arguing that its SME standard was appropriate for SMEs and micro-entities.

Defining what is meant by an SME was a problem for the IASB because of the difficulty in developing a definition that would be applicable internationally. The IASB used a narrowly defined concept of public accountability to determine which entities can use the eventual standard. In the standard, SMEs are described as those entities that do not have public accountability and that publish general purpose financial statements for external users. An entity is deemed to be publicly accountable if it trades in the public market to raise funds or if it holds assets in a primary fiduciary capacity (IASB, 2009c, IFRS for SMEs). Those entities that meet these criteria will not necessarily be SMEs, but rather will be those that are regarded as non-publicly accountable, according to the IASB’s definition of public accountability. This gives rise to inconsistencies between the title of the standard and the criteria for application of the standard.

The IASB struggled to find a title for the standard that aptly described the scope of the standard. The title of the project was changed five times over the course of developing the standard. Initially the project was titled IFRS for SMEs, then it was changed to IFRS for Non- publicly Accountable Entities, and then back to IFRS for SMEs. Later the titled was changed to IFRS for Private Entities and then back to IFRS for Non-publicly Accountable Entities, before the chairman declared in April 2009 that the standard would be called “IFRS for SMEs” (IStaR, 2009a, April). The final decision to call the standard IFRS for SMEs was said to be because the IASB wanted to use a title that was widely understood and that gave a positive impression about the standard (IStaR, 2008c, May).

The director of the SME project played an important role in managing the SME project over the six year period—July 2003 to July 2009—in which the project was developed. He was

210 involved in drafting the discussion paper, the staff questionnaire for the recognition and measurement simplifications, the exposure draft, the field test questionnaire and in finalising the final standard. Apart from that, Paul Pacter prepared summaries of all submissions to the board, working group meetings, round-table discussions, field test results, and other private correspondence between the board/staff and other groups. The closeness of the technical staff in developing the project means there is a possibility that if staff does not perceive an issue to be important, it may not be included in the summaries that go to the board, and consequently that particular issue will not get the board’s attention. For example, the issues raised about developing countries were not acknowledged separately in the staff summaries that were presented to the board. These issues were rather combined with the overall issues raised by the respondents. Added to the possibility of unintentional omission is the scope for intentional omission or obscuring of information. According to Paul Pacter, part of the role of the sub-committee of the board was to advise him how to present contentious issues to the board in order to move the project forward (Pacter 2011, pers. comm., 12 March 2011). This suggests that there is a possibility that certain controversial issues may have been reported to the board in a manner that would not assist board members opposed to the project to build their case against it.

To support the director of the SME project in managing and providing feedback about the SME project, the hidden cluster eventually grew to 56 people. Initially the hidden cluster comprised the director of the SME project and an 18 member advisory panel. In February 2004, an informal user panel comprising eight members was formed to provide feedback from users’ perspective and in November 2004, a sub-committee of the board comprising six board members was formed. In January 2005, the advisory panel was extended to 33 members and renamed the working group. Later five more members were added. Finally in July 2007, a new staff member, Michelle Fisher, was hired to assist Paul Pacter in managing the standard (Michelle Fisher, pers. comm., 17 June, 2011).

The IASB’s due process requires the IASB to hold wider consultations as part of its standard setting process. While this may allow for policy input it may also be used as a means to build support for a project, rather than to contemplate change. The director of the SME project made presentations at 104 conferences and round-tables in 40 countries and at five

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WSS meetings. After the exposure draft was published in February 2007 he published seven articles (in English, Spanish, German and Russian). According to the IASB, this massive outreach was carried out to educate small practitioners, regional bodies, the world’s standard setters and the wider public about the IASB’s SME project (IASB, 2009e, Fact Sheet).

Outside the IASB, to facilitate easier comprehension and understanding of the exposure draft, Paul Pacter published a staff overview of the exposure draft, in a question and answer format that explained the exposure draft in a non-technical language (IASB, 2009d: BC 33, BC of IFRS for SMEs). He also, together with the vice-chairman of the IASB Tom Jones and the Senior Education Manager Mike Wells, conducted two webcast sessions in September 2008 that explained the SME project and answered questions from the almost 1,000 participants registered for those sessions (IASB, 2008f, web page). While this allowed the IASB to reach out to a wider audience and to educate them about the IASB’s SME project, it could also be seen as building support for, that is selling, the project.

Within the IASB, an educational session was also organised in July 2005 for its board members. The director of the SME project invited Richard Roberts of Barclays Bank and Isobel Sharp of the UK’s Accounting Standards Board to help the board understand how banks made lending decisions to various categories of SMEs, and how disclosure and measurement simplifications were made in the UK’s FRSSE (IStaR, 2005b, July). This might also be perceived as a means of educating the board members in an attempt to reduce their opposition to the SME project.

The IFRS for SMEs standard was promulgated in July 2009. As the project neared completion, the chairman of the IASB explained that obtaining the acquiescence of the opposing board members was essential. According to Sir David Tweedie, towards the end of the project it came down to counting votes, which meant that he did not want to provoke board members’ opposition by pushing for further simplifications. He explained this would produce a better outcome than not getting the required votes to pass the eventual standard (David Tweedie, interview 13 November 2008, London). Eventually of the 14 board members, 13 voted to approve the standard (IASB, 2009d, BC for IFRS for

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SME). One board member (Jim Leisenring) remained opposed to the project throughout the entire course of developing the standard (IASB, 2009d, BC for IFRS for SME).

8.3 Contributions to the Accounting Standard Setting Literature

8.3.1 Agenda Entrance

Agenda entrance has been identified as one stage of the accounting standard setting process that receives relatively little attention in the accounting literature (Walker and Robinson, 1994). Prior studies on agenda entrance primarily focused on the national accounting standard setting context of Australia, New Zealand, UK, and the US. These studies identified influences that contribute to an issue gaining entrance onto an accounting standard setter’s agenda which include: pressure from external parties (Johnson and Swieringa, 1996); informal communications between the accounting standard setters and key interested players (Rahman et al., 1994); availability of feasible solutions to address a potential problem (Young, 1994); and individuals with privileged access (Hodges and Mellett, 2005). However, to date there has been no empirical study examining how issues gain entrance onto the IASB’s accounting standard setting agenda (Howieson, 2009). This study adds to the agenda entrance literature by providing some understanding of the IASB’s agenda setting process.

Consistent with prior studies on agenda entrance conducted in the national accounting standard setters’ context (Nobes, 1991; Klumpes, 1994; Walker and Robinson, 1994; Gordon and Morris, 1996; Ryan, 1998), this study found that that the IASB is subject to pressure from external parties in adding issues onto its agenda. However, this study has shown the IASB is subject to pressure from some different external parties than those of a national standard setter. The IASB was subject to pressure from global international groups such as UNCTAD, IFAC and the World Bank, and regional bodies like EFRAG, that were influential in prompting the IASB to add the SME project onto its agenda. As the global standard setter the IASB is subject to pressure because of perceived thinking that the IASB should take into account the needs of entities beyond the world’s capital market participants. This suggests the IASB may have to add projects to its agenda that it may not have wanted to otherwise.

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This study also showed how interactions of IASB board members and senior staff can block a project or escalate a project onto the IASB’s agenda. Some IASB board members and senior staff opposed to the SME project tried to block it. However, the chairman of the IASB, an advocate for the SME project, played an influential role in removing the obstacles placed by those opposed. Without the efforts of the chairman of the IASB, it may have been difficult to add a controversial project like the SME project onto the IASB’s agenda.

The criteria used by the IASB to add projects onto its agenda are vague (Howieson, 2009). It is unclear whether the factors identified in the Due Process Handbook are those actually used (Howieson, 2009). The IASB’s over-arching criterion is user needs (IASCF, 2008). This study showed that the SME project was added onto the IASB’s agenda for reasons other than SME user needs, suggesting that the SME project may have been added to the agenda for reasons that had little to do with the criteria in the Due Process Handbook (see IASCF, 2006: para 53). This research showed that other matters seemed more important to agenda entrance than these criteria, including political pressure on the IASB and the need to pre-empt potential competitors.

Young (1994) observed that before an accounting problem is added to the FASB’s agenda, it must be constructed and interpreted as appropriate for the FASB’s action. She showed that merely constructing a particular issue as a problem is not necessarily sufficient to ensure that the problem will be included on the standard setter’s agenda (Young, 1994). It is also important to have a feasible solution before a project is added onto the FASB’s agenda (Young, 1994).

This study showed that the IASB also constructed and interpreted the problems as appropriate for IASB action and identified a solution the IASB thought was feasible. Before adding the SME project onto its agenda, the IASB combined the demand for two additional standards—one for developing countries and one for SMEs—into one standard for SMEs. The IASB then re-defined the SME project in a manner that enabled it to focus on minimising divergence from full IFRS rather than focusing on meeting SME user needs. This meant that the IASB did not have to go beyond its usual thinking to develop the SME standard, but could draw instead on its existing IFRS. Similar to Young’s (1994) study, the IASB not only re-defined the problem to suit its standard setting activity, but went further

214 to combine two different accounting problems into one project, enabling it to construct and interpret the accounting problem in a way which made its standard setting activity easier.

This study also showed that the IASB did contemplate feasible solutions and decided on its preferred solution, minimising divergence from full IFRS, before adding the SME project to its active agenda(IStaR, 2003a, July). This suggests that the IASB may decide on a solution that is convenient for the board, even if it is not the best way to address the problem. Because the IASB had its solution to the problem well before commencing its due process, it seems that the due process may be less important for developing the standard than for obtaining acceptance of the IASB’s solution.

8.3.2 Processes to Develop Standards

Accounting standard setters have projected their standard setting activities as sequential, thorough and complete, suggesting that they follow a rational, ordered approach to developing standards. The IASB also portrays its due process as following a rational, ordered approach during which it consults a wide range of interested parties, including a public due process in which public comments on its published consultation documents are invited. Meetings are held by the IASB with its “groups of preparers, users, academic and others to test the proposals and to understand concerns raised by affected parties” (IASCF, 2008: para 12-14).

Other commentators have argued that accounting standard setting does not have the “virtues of orderliness and completeness” and that, really, standard setters go through what appears to be disorganised, messy and jumbled processes that Gerboth (1972: 47) described as “muddling through”: The [rational] approach is a prescription for solving problems by mastering them. The incremental approach is a strategy for coping with problems that cannot be mastered. The [rational] approach is plainly normative-it holds up an ideal that is beyond human attainment (Gerboth, 1972: 46).

This study showed that the IASB followed all the steps of its due process (both mandatory and non-mandatory), and also carried out an additional step to ascertain the recognition and measurement simplifications needed in the SME standard. Some of these due process steps would not be required in a national standard setting context. One such step was the

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IASB’s engagement with interested parties at the international level, such as World Bank, IOSCO, and UNCTAD (IASCF, 2008: para 12-15). However, this study showed that what appears on the surface to be a rational, ordered process is deceptive. The IASB began developing the SME standard with its policy predetermined. It neither related to SME user needs, nor attempted to identify what these needs were. Throughout the project, the IASB was confused about the group of entities for which it was developing the SME standard and what should be the appropriate title of the project. The five changes to the title of the project illustrate this point. On closer scrutiny, it became apparent that the IASB was “muddling through”.

Many studies of accounting standard setting have been limited to examining comment letters as part of the public due process. Some have argued that such studies provide limited insights into the nature of standard setting and how standards are developed (Walker and Robinson, 1994; Hodges and Mellett, 2008). Therefore, some studies have identified the need to go beyond the information available in the public domain to understand the nature of the standard setting process (Walker and Robinson, 1993; Hodges and Mellett, 2008). This study found information beyond the public domain and this provided greater insights in the development of the SME standard. By going beyond the information in the public domain, it was apparent that there was significant opposition to the SME project both within the IASB board and from senior staff of the IASB and that this opposition remained throughout the entire course of the project, and impeded it. This study also provided insights into why the IASCF’s constitution was changed to include SMEs and emerging economies, why a director of the SME project, who reported directly to the chairman of the IASB, was appointed to carry out the SME project, and the controversies surrounding EFRAG’s alternative proposal to restructure the IASB’s proposed SME standard. It was also evident that once the project was on the agenda, the IASB pursued its proposed policy of minimising divergence from full IFRS rather than focusing on meeting users’ needs. None of this was apparent in the publicly available information alone and, by obtaining insights about these matters, a better understanding of the SME project was obtained. This indicates that studies drawing only on publicly available information may be very limited indeed. For example, important political aspects of the accounting standard setting process that play a critical role in shaping the eventual standard are not apparent.

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In the context of the Accounting Standards Board in the UK, Hodges and Mellet (2008) showed that written submissions sought via the public due process were not particularly influential in making changes to the development of a standard. They showed that influences that were not visible in the public domain were more influential than the written submissions (Hodges and Mellett, 2008). Closer examination of the IASB’s standard setting process revealed that the IASB was not open to making legitimate changes to the proposed SME standard when those changes were sought via written submissions to the IASB as part of the public due process. Private lobbying outside of the IASB’s public due process seemed to be more influential than the public due process. An example of this was the recognition and measurement simplifications in the SME standard, such as amortisation of goodwill in section 18. It was private lobbying that convinced the IASB to remove impairment testing of goodwill and to replace it with amortisation of goodwill in section 18 (IASB, 2009g, Observer Notes; 2009b, Update). Private lobbying was also successful in making the SME standard a stand-alone document as the IASB eventually removed the optional cross- reference to accounting policy options to full IFRS (EFRAG, 2009; Stig Enevoldsen, interview, 9 December 2011, telephone). Had this study not gone beyond the evidence in the public domain, the impression would have been that the public due process had convinced the IASB to make these changes.

It may be difficult to develop international accounting standard in comparison to developing a standard at the national level (Alali and Cao, 2010). This study showed that the IASB faced difficulties in developing an international accounting standard for SMEs, because it was difficult to define SMEs in a manner that would work internationally. The diversity of SMEs across countries meant that the IASB could not use approaches available to national standard setters, such as some sort of size criteria. It may be that a national or regional level standard is more appropriate in some cases than an international one.

The IASB needs to persuade others to enforce adoption of its standards because it does not have the legal mandate to so (Whittington, 2005). A national standard setter may not be required to do this as it has legal backing for its standards. This study provides evidence of the IASB’s efforts to persuade national standard setters in an attempt to build support for its SME standard, so that it would be adopted internationally. If the IFRS for SMEs standard is rejected, this would be an embarrassment for the IASB. Most recently, Australia (with

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New Zealand following) has rejected the IFRS for SMEs standard. The two countries have rejected any simplifications to the recognition and measurement simplifications and produced their own reduced disclosure requirements.

It is also worth noting that the current chairman of the AASB is a former senior technical staff member of the IASB who was known to be opposed to the IFRS for SMEs project (Chris Nobes, interview, 12 November 2008, London; Paul Pacter, interview, 14 November, 2008, London). This shows how someone within the IASB opposed to an IASB project and prevented from blocking it can subsequently obtain a position of power and reject the IASB’s standard.

8.3.3 Role of Staff

Prior studies have noted that little is known about the role of staff in shaping the accounting standard setters’ agenda (Walker and Robinson, 1993) and in “defining and managing technical projects” (Howieson, 2009: 595). A few studies have noted the role and importance of the IASB’s technical staff (Dick and Walton, 2007; Richardson and Eberlein, 2011). A study by Hoffman (2011) examined the summaries produced by the IASB staff to understand the use of verbal quantifiers. A normal feature of the accounting standard setting process is that standard setters receive summaries and/or analysis of the issues prepared by staff (see IASCF, 2008: para 68). However, there is little understanding of how the close involvement of the IASB’s technical staff in the IASB’s standard setting process affects the development of the eventual standard.

The importance of the technical staff was noted from the very beginning in developing this SME project. The director of the SME project played an important role in the on-going due process throughout the project. A vast amount of information is received in developing a standard, and this makes it extremely important that all information received is appropriately analysed and passed to the board. At any one time the IASB is developing multiple projects and it is not realistic to expect that the board members read all the information that is received. The IASB’s Due Process Handbook acknowledges that its staff act as intermediaries on the technical aspects of projects. The board members rely on staff summaries of material. This means that if staff do not perceive an issue to be important or relevant, it may not be included in the summaries that go to the board, and consequently

218 that issue will not get the board’s attention. For example, issues raised about developing countries were not acknowledged in the staff summaries but were rather combined with the overall issues. Added to the possibility of unintentional omission, however, is the scope for intentional omission or obscuring of material. In this study, the scope for intentional omission or obfuscation became apparent when it was realised that the board sub-committee’s role included advising the director of the SME project on how to present contentious matters to the board.

Young (2003: 622) showed that FASB board members and staff continuously engage in efforts to persuade others outside of the FASB that its work is “valuable, appropriate, useful, and correct”. She further explained that the FASB’s persuasion efforts include showing that “the process followed in selecting problems and (re)solving them is legitimate and fair” (Young, 2003: 622). The means used to persuade include speeches given by FASB members and staff, articles published by the FASB, meetings with a wide range of interested parties and groups, publishing exposure drafts, and the final standard and other FASB documents (Young, 2003). This study also showed that the extensive due process seems intended to convince others of the legitimacy of the process. The role of the technical staff extended beyond merely acting as an intermediary on the technical aspects of the project to include building support for, and marketing, the project and its proposed policy. This study showed that it can become difficult to identify whether an event is conducted to educate or to build support because the two seem to be intertwined. This makes it difficult to identify when education turns into marketing.

8.3.4 Application of Kingdon’s framework

Most of the prior studies on accounting standard setting used Cobb and Elder (1972), and Cobb et al. (1976), together with other frameworks to explain the accounting standard setting process (Klumpes, 1994; Walker and Robinson, 1994; Ryan, 1998; Jones et al., 2004). Ryan (1998) applied Kingdon’s framework in conjunction with Cobb et al. (1976) to explain the development of accrual accounting standards in Australia. This study on SMEs appears to be the first accounting study to apply Kingdon’s (1984) framework on its own, and to go beyond the agenda entrance stage using Kingdon’s framework to interpret the accounting standard setting process.

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Kingdon’s framework highlighted the importance of policy entrepreneurs in placing a problem onto the IASB’s agenda. This study showed how the chairman of the IASB played the role of policy entrepreneur and was influential in placing the SME project onto the IASB’s agenda. He removed the obstacles placed by those opposed to the SME project. This study goes further to show that the policy entrepreneur’s role does not end when the project is added onto the IASB’s agenda, but rather it continues until the final standard is eventually developed. Without the continued support of someone in a powerful position within the IASB, it may be difficult to complete a controversial project.

The application of Kingdon’s framework also helped to highlight several subtleties embedded in the IASB’s standard setting process that may not otherwise have been noticed or given much attention. This study highlighted the close involvement of the technical staff in developing the SME standard and showed that it is within this hidden cluster that the technical aspects of the SME standard were developed. The study also revealed that the IASB board members rejected the director of the SME project’s effort to develop a conceptual framework for SMEs and therefore set boundaries on what could be done. It also showed the importance of participants in the hidden cluster to develop the SME standard. For example, it showed how the sub-committee of the board advised the director of the SME project on the best way to present contentious issues to the board. This might provide means to not further aggravate board members opposition and make it easier to move the project forward.

The use of Kingdon’s framework also highlighted the need to build political support within the IASB to approve the eventual standard. The chairman of the IASB acknowledged the need for him to remain conscious of likely votes for or against controversial projects within the IASB. This study showed that trade-offs had to be made when deciding how far the board could go with simplifications because the chairman had to ensure that enough board members would vote for the eventual standard.

According to Kingdon (1984), a policy community comprises specialists in a particular area. In accounting standard-setting, the standard-setters are thought to have the expertise and skills necessary to develop a standard. This study has shown that the IASB may not necessarily have the expertise in developing international accounting standards for entities

220 beyond its area of specialisation, that is, capital markets. The IASB struggled to develop the standard for SMEs, which was, perhaps beyond the IASB’s area of expertise.

8.4 Limitations and Further Research

8.4.1 Limitations

Like any research activity this study also has limitations and the findings of this study should be evaluated in light of these limitations. This study has used historical research methods to examine the case of the SME project in order to understand how and why the IASB adds issues to its agenda. It examined the complete SME project to understand the IASB’s standard setting activity. The findings of this study shed light on agenda entrance and how the IASB develops standards, but the findings cannot be generalised.

The use of historical research methods has its own limitations. In interpreting the historical data there is a possibility of bias in that the researcher may be looking for certain facts to fit the theoretical interpretations already made. In this process it may ignore other facts that are potentially important to the study. In analysing the findings of this study using Kingdon’s three streams of analysis—problem, policy and politics—there is a possibility of bias that, by primarily concentrating on the theoretical framework, some important facts may have been ignored. However, attempts were made to reduce such bias by firstly laying out all the relevant material as part of the narrative history and then interpreting the material using the theoretical framework. Also attempts were made to provide a balanced argument by acknowledging the possibility of other explanations as to why certain events happened.

Another limitation of using the historical research method is that it “may not reveal the cause of an event as a certainty but it can indicate probable factors affecting the event” (Previts et al., 1990b: 9). The findings in this study, therefore, cannot reveal the cause of certain events but rather what may have been the probable factors affecting that event. This study presented the material in a manner that was not claiming causation.

This study selected four sample sections to examine the recognition and measurement simplifications made in the SME standard. The analysis of these sections sheds some light

221 on how the board was not open to making substantial changes, as part of its due process, to the SME standard. However, the findings of these four sections cannot be generalised across the remaining sections in the SME standard.

Considering the time span covered in this study, 2000 to 2009, it was difficult to obtain some material from the early 2000 period. For example, there is limited information available between 2001 and 2003 that provided a detailed account of the SAC and NSS meeting with the IASB and private lobbying that occurred between the IASB and influential groups that led the IASB to add the SME project onto its agenda.

The researcher did not have access to the informal discussion that occurred between the board members outside public board meetings and private correspondence via letters and email that may have been influential in shaping the eventual standard. This study relies on the staff summary that reported that there was private correspondence between the board and a few influential groups such as EFRAG, FEE and several national professional bodies. At the time the interviews were conducted in November 2008, the researcher was not aware of these private lobbying efforts, and did not ask about or try to obtain access to any of the private correspondence documents. Subsequently, attempts were made to obtain some clarifications and further information on these private lobbying efforts via a telephone interview with the chairman of EFRAG, but this was only one example of private lobbying. Also IStaR reports were used to gain insights from the IASB’s board discussion about these lobbying efforts.

Additional insights could have been obtained if participants from the entities that took part in field testing could have been interviewed about their experience in field testing the exposure draft. This was not possible because details of entities that took part in the field test were kept confidential. This study therefore relied on the staff summary of the field test results and, as noted in the research findings, summaries may well omit important or relevant information.

There is also no clear explanation about the two groups—NSS and WSS—with which the IASB liaises in developing its standards. It was difficult to distinguish between the role of the NSS and WSS and which countries make up these two groups. It was also difficult to

222 obtain some of the WSS meeting documents and the NSS meeting documents in the 2003- 2008 period because these were not publicly available. For that reason this study relied on reported details of what was discussed at these meeting from either the staff summaries that were presented to the IASB or from the summaries produced by representatives of the major accounting firms observing those meetings.

8.4.2 Further Research

Closer examination of the development of the SME standard identified at least three further research avenues. Firstly, this study showed that the IASB interacts with a range of groups in the process of developing its standards and one such group was the WSS. This study showed that there is little understanding about the operations of the WSS. One interviewee who was part of this research commented that the WSS meeting is a form of one way communication from the IASB to the WSS, with little input sought from the participants. He perceived the WSS as not necessarily a technical group that the IASB uses to seek advice on technical matters as “the IASB usually hosts them to lunches and dinner to keep friends with them”. This raises questions about the role of the WSS and why it was established? How, if at all, does this group contribute to the IASB’s standard setting process? Further research can explore these questions to provide a better understanding of groups, such as WSS, that the IASB says it consults when developing its standards.

Secondly, the IASB used the public accountability concept to identify entities that could use the SME standard. An entity was considered to be publicly accountable if it was trading in the public market to raise funds or if it was holdings assets in a primary fiduciary capacity. This raises questions as to whether the public accountability criterion used to determine applicability of the SME standard also allows large private entities to use the SME standard. What would be the implications of large private entities using the IFRS for SMEs standard? Future research might examine the politics involved in countries that adopt the IFRS for SMEs standard and any additional criteria developed to supplement the IASB’s public accountability when determining applicability of the IFRS for SMEs standard.

Thirdly, future research could also examine what issues are faced by micro entities in using the IFRS for SMEs standard. Is there a need for further simplification of the recognition and

223 measurement criteria? Such findings will provide valuable input into the IASB’s three yearly review of the IFRS for SMEs standard.

Gerboth (1973: 478) identified a widespread “misconception ... that the critical issues of accounting inquiry are essentially technical when they are actually political”. This thesis has demonstrated the importance of going beyond the formal documents and the evidence in the public domain in order to understand the processes involved in developing accounting standards.

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Appendix 1 World Standard Setters’ Survey Results

Statutory GAAP reporting obligation imposed for:

• All companies : 20 countries • All companies above a certain size: 8 countries • Only listed companies: 2 countries Separate SME GAAP

• Only listed companies: 2 countries No Separate SME GAAP:

• 18 countries. But… • 15 of the 18 have SME exemptions in their basic GAAP • 5 of the 18 are now developing separate SME GAAP • 5 of the 18 have “de facto” SME GAAP because of national laws. When SME GAAP is followed, what does the auditor’s report say?

• Generally retains the “true and fair view” or “presents fairly” wording. • Majority of countries-auditor’s report refers to SME GAAP. • Minority of countries-auditor’s report simply refers to GAAP. IASB’s issue is the basis of presentation note, not the auditor’s report. Does your primary GAAP have disclosure and presentation differences for SMEs?

• Yes: 27 countries • No: 3 Countries Examples (presnt. and disclosure):

• Abbreviated FS and reduced notes. • Omit cash flow statement. • Omit statement of equity. • Omit statement of comprehensive income. • Exempt from consolidation FS. • Omit reconciliations of tangible and intangible assets. More examples (disclosure):

• Omit FV disclosures for Financial Instrumts. • Omit Segments, EPS, Discontinued Ops. • Omit note disclosures on provisions, impairments, related parties, accruals and deferrals, taxation, depreciation, asset reconciliations, contingencies, inventories, cost of sales, remuneration, asset disposals, production data, exports, interim pensions, OPEBs. Does your primary GAAP have recognition and measurement differences for SMEs?

• Yes: 18 countries • No: 12 countries Examples:

• Income taxes-tax payable method. • All leases are operating.

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• Simplified pension calculations. • Simplified impairment calculations. More Examples (recog. & measurement):

• Exempted from equity accounting. • Tax depreciation rates. • Inventory based on net SP minus profit. • Very small co: cash basis of accounting • Not use % of completion method. • FX at settlement amount (no gain or loss). • Allow pooling for small company mergers. • No fair value for Investment property. • Do not capitalise development costs. Should IASB provide presentation and disclosure simplifications?

• Yes: 29 countries. • No: 1 Country. Should IASB provide recognition and measurement simplifications?

• Yes : 24 Countries • No: 6 countries. Cited reasons-those saying yes:

• Existing IFRS are aimed primarily at infor needs of public capital markets: 25 • SMEs lack accounting expertise: 23 • Different user needs: 19 • SMEs report to owner/managers: 19 • Cost of full IFRS exceeds benefits: 3 Cited reasons-those saying no:

• Assets, liabilities, expenses should be recognised and measured the same way for all entities: 6 • Nature of transaction should determine how it is accounted for, not size of entity entering into transaction: 5 • All users have same info needs: 4 • SMEs have complex transactions too: 4 • Competing frameworks and standards: 4 How should IASB publish SME GAAP?

• Within each individual IFRS: 5 countries. • Separate, combined, stand-alone document: 16 countries. • Both: 7 countries How to label IASB SME GAAP?

• “in conformity with IFRS”- 4 countries. • “in conformity with IFRS applicable to SMEs”- 22 countries. • “in conformity with IFRS level 11”-1 country • “in conformity with the recognition and measurement requirements of IFRS but not the presentation and disclosure requirements”-1 country. Source: (Paul Pacter, pers. comm., 17 November 2008, WSS slides).

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Appendix 2 Discussion Document Table A2.1 Complete list of questions in the discussion paper Issue 1: Should the International Accounting Standards Board (IASB) develop special financial reporting standards for SMEs? Question 1a. Do you agree that full IFRSs should be considered suitable for all entities? If not, why not? Question 1b. Do you agree that the board should develop a separate set of financial reporting standards suitable for SMEs? If not, why not? Question 1c. Do you agree that the IASB Standards for SMEs should not be used by publicly listed entities (or any other entities not specifically intended by the Board), even if national law or regulation were to permit this? Do you also agree that if the IASB Standards for SMEs are used by such entities, their financial statements cannot be described as being in compliance with IFRSs for SMEs? If not, why not? Issue 2. What should be the objectives of a set of financial reporting standards for SMEs? Question 2. Are the objectives of IASB Standards for SMEs as set out in preliminary view 2 appropriate and, if not, how should they be modified? Issue 3. For which entities would IASB Standards for SMEs be intended? Question 3a. Do you agree that the Board should describe the characteristics of the entities for which it intends the standards but that those characteristics of the entities for which it intends the standards but that those characteristics should not prescribe quantitative ‘size tests’? If not, why not, and how would an appropriate size test be developed? Question 3b. Do you agree that the Board should develop standards that would be suitable for all entities that do not have public accountability and should not focus only on some entities that do not have public accountability, such as only the relatively larger ones or only the relatively smaller ones? If not, why not? Question 3c. Do the two principles in preliminary view 3.2, combined with the presumptive indicators of ‘public accountability’ in preliminary view 3.3, provide a workable definition and appropriate guidance for applying the concept of ‘public accountability’? If not, how would you change them? Question 3d. Do you agree that an entity should be required to use full IFRSs if one or more of the owners of its shares object to the entity’s preparing its financial statements on the basis of IASB Standards for SMEs. If not, why not? Question 3e. Do you agree that if a subsidiary, joint venture or associate of an entity with public accountability prepares financial information in accordance with full IFRSs to meet the requirements of its parent, venturer or investor, the entity should comply with full IFRSs, and not IASB Standards for SMEs, in its separate financial statements? If not, why not? Issue 4. If IASB Standards for SMEs do not address a particular accounting recognition or measurement issue confronting an entity, how should that entity resolve the issue? Question 4. Do you agree that if IASB Standards for SMEs do not address a particular accounting recognition or measurement issue, the entity should be required to look to the appropriate IFRS to resolve that particular issue? If not, why not, and what alternative would you propose? Issue 5. May an entity using IASB Standards for SMEs elect to follow a treatment permitted in an IFRS that differs from the treatment in the related IASB Standard for SMEs? Question 5a. Should an SME be permitted to revert to an IFRS if the treatment in the SME version of the IFRS differs from the treatment in the IFRS, or should an SME be required to choose only either the complete set of IFRSs or the complete set of SME standards with no optional reversion to individual IFRSs? Why? Question 5b. If an SME is permitted to revert to an IFRS, should it be: (a) required to revert to the IFRS in its entirety (a standard-by-standard approach); (b) permitted to revert to individual principles in the IFRS without restriction while continuing to follow the remainder of the SME version of the IFRS (a principle-by-principle approach); or (c) required to revert to all of the principles in the IFRS that are related to the treatment in the SME version of that IFRS while continuing to follow the remainder of the SME version of the IFRS (a middle ground between a standard-by-standard and principle-by-principle approach)? Please explain your reasoning and, if you favour (c), what criteria do you propose for defining ‘related’ principles?

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Issue 6. How should the Board approach the development of IASB Standards for SMEs? To what extent should the foundation of SME standards be the concepts and principles and related mandatory guidance in IFRSs? Question 6. Do you agree that development of IASB Standards for SMEs should start by extracting the fundamental concepts from the Framework and the principles and related mandatory guidance from IFRSs (including Interpretations), and then making modifications deemed appropriate? If not, what approach would you follow? Issue 7. If IASB Standards for SMEs are built on the concepts and principles and related mandatory guidance in full IFRSs, what should be the basis for modifying those concepts and principles for SMEs? Question 7a. Do you agree that any modifications for SMEs to the concepts or principles in full IFRSs must be on the basis of the identified needs of users of SME financial statements or cost-benefit analyses? If not, what alternative bases for modifications would you propose, and why? And if so, do you have suggestions about how the Board might analyse the costs and benefits of IFRSs in an SME context? Question 7b. Do you agree that it is likely that disclosure and presentation modifications will be justified on the basis of user needs and cost-benefit analyses and that the disclosure modifications could increase or decrease the current level of disclosure for SMEs? If not, why not? Question 7c. Do you agree that, in developing standards for SMEs, the Board should presume that no modification would be made to the recognition or measurement principles in IFRSs, though that presumption could be overcome on the basis of user needs and a cost-benefit analysis? If not, why not? Issue 8. In what format should IASB Standards for SMEs be published? Question 8a. Do you agree that IASB Standards for SMEs should be published in a separate printed volume? If you favour including them in separate sections of each IFRS (including Interpretations) or some other approach, please explain why. Question 8b. Do you agree that IASB Standards for SMEs should be organised by IAS/IFRS number rather than in topical sequence? If you favour topical sequence or some other approach, please explain why. Question 8c. Do you agree that each IASB Standard for SMEs should include a statement of its objective, a summary and a glossary of key terms? Question 9. Are there any other matters related to how the Board should approach its project to develop standards for SMEs that you would like to bring to the Board’s attention? Source: reproduced from the discussion paper.

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Table A2.2 List of respondents to the discussion paper

Reference Organisation Country No CL 136 Winningtons, Chartered Accountants UK CL 2 Swiss Federal Institute of Intellectual Property Switzerland CL 3 Chartered Institute of Taxation UK CL 4 Chartered Institute of Public Finance and Accountancy UK CL 5 Collis, Prof Jill, Kingston University UK CL 6 Deloitte Touche Tohmatsu International Global CL 7 Alecos Papadopoulos MSc, CIA Greece CL 8 Walton, Prof Peter, The Open University Business School UK CL 9 Chamberlain SJ, Henry Italy CL 10 H. W. Fisher & Company Chartered Accountants UK CL 11 Canadian Accounting Standards Board Canada CL 12 Föreningen Auktoriserade Revisorer FAR Sweden CL 13 Treuhand-Kammer Switzerland CL 14 Institute of Certified Public Accountants of Hong Kong Hong Kong CL 15 Goudsmit, Eric Belgium CL 16 Devi, Associate Professor Dr.S. Susela University of Malaya Malaysia CL 17 BDO Stoy Hayward Netherlands CL 18 Consiglio Nazionale dei Dottori Commercialisti and the Consiglio Italy Nazionale dei Ragionieri CL 19 Norsk RegnskapsStiftelse - Norwegian Accounting Standards Board Norway CL 20 New South Wales Treasury Australia CL 21 KPMG Mozambique CL 22 Deloitte Mozambique CL 23 Institute of Financial Accountants UK CL 24 National Housing Federations UK CL 25 Organismo Italiano di Contabilità – OIC Italy CL 26 Van Brussel and Partners Belgium CL 27 New Zealand Treasury New Zealand CL 28 National Public Practice Committee of the Institute of Chartered New Zealand Accountants of New Zealand CL 29 K Kühborth, MD, Klein Pumpen GmbH Germany CL 30 Raad voor de Jaarverslaggeving (Council for Annual Reporting) Netherlands CL 31 Malta Institute of Accountants (MIA) Malta CL 32 III WG of the European Committee of Central Balance Sheet Data Offices European body (ECCBSO) CL 33 South African Institute of Chartered Accountants (SAICA) South Africa CL 34 German Electricity Association (Verband der Elektrizitätswirtschaft - Germany VDEW - e.V.) CL 35 Colombian Superintendence of Securities’ Chairman Clemente del Valle Columbia Borraez CL 36 International Federation of Accountants (IFAC) Global CL 37 Financial Reporting Standards Board (FRSB) of the Institute of Chartered New Zealand Accountants of New Zealand CL 38 Institute of Chartered Accountants in Australia (ICAA) Australia CL 39 Malaysian Accounting Standards Board (MASB) Malaysia CL 40 Australian Government's Department of Finance and Administration Australia CL 41 European Private Equity and Venture Capital Association (EVCA) European body CL 42 Nagendran, Sujatha Unkown CL 43 Institute of Certified Public Accountants of South Africa South Africa

36 CL refers to the comment letter number

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CL 44 Susat & Partner OGH Germany CL 45 Institute of Chartered Accountants of India India CL 46 Association of Chartered Certified Accountants (ACCA) UK CL 47 Association of Certified Accountants in Finland Finland CL 48 Walker, Robert, Chartered Accountant New Zealand New Zealand CL 49 Javeriana University in Cali, Colombia Columbia CL 50 Australasian Council of Auditors-General (ACAG) Australia CL 51 Korea Accounting Standards Board (KASB) Korea CL 52 Accounting and Auditing Standards Committees of the Institute of Pakistan Chartered Accountants of Pakistan (ICAP) CL 53 Institut der Wirtschaftsprüfer (IDW) Germany CL 54 Australian Accounting Standards Board (AASB) Australia CL 55 Swedish Accounting Standards Board Sweden CL 56 Bundessteuerberaterkammer Germany CL 57 PricewaterhouseCoopers (International) Global CL 58 Southern Society Of Chartered Accountants UK CL 59 Small and Medium Enterprise Agency of the Ministry of Economy, Trade Japan and Industry of Japan CL 60 Bundesanstalt für Finanzdienstleistungsaufsicht BaFin Germany CL 61 Accounting Standards Board of Japan (ASBJ) Japan CL 62 Bundesverband der Deutschen Industrie e. V. & Deutscher Industrie und Germany Handelskammertang CL 63 Japanese Institute of Certified Public Accountants (JICPA) Japan CL 64 Chartered Institute of Management Accountants UK CL 65 United Nations Conference on Trade and Development Global CL 66 Swedish Association of Accounting Consultants (SRF) Sweden CL 67 London Society of Chartered Accountants (LSCA) UK CL 68 DATEV e.G Germany CL 69 Institute of Professional Accountants in Bulgaria Bulgaria CL 70 Accounting Federal Council & IBRACON - Brazilian Institute of CPAs Brazil CL 71 European Federation of Accountants and Auditors for SMEs (EFAA) European body CL 72 European Accounting Association European body CL 73 Leaseurope Belgium CL 74 National Organization for the Standards ofFinancial Accounting and Russia Reporting CL 75 AC CHRISTES & PARTNER Germany GmbHWirtschaftsprüfungsgesellschaftSteuerberatungsgesellschaft CL 76 Mouvement des Entreprises de France (MEDEF) France CL 77 EUROCHAMBRES -Association of European Chambers of Commerce and European body Industry CL 78 Institute of Chartered Accountants of Scotland UK CL 79* Institute of Chartered Accountants in Ireland (ICAI) Ireland CL 80 DGRV - German Co-operative and Raiffeisen Confederation Germany CL 81 UNIREC (Unione Nazionale Imprese di Recupero Crediti e Informazioni Italy Commerciali) CL 82 Financial Executives International (FEI) Global CL 83 CFA Institute Global CL 84 Certified General Accountants' Association of Canada (CGA) Canada CL 85 Consejo Mexicano Para La Investigación Y Desarrollo De Normas De Mexico InformaciónFinanciera (Cinif) CL 86 Federacion Argentina de Consejos Profesionales de Ciencias Economicas Argentina (FACPCE) CL 87 German Accounting Standards Committee (DRSC) Germany CL 88 Pitcher Partners Australia CL 89 Association of Accounting Technicians UK

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CL 90 David Cairns International Financial Reporting UK CL 91 Spanish Accounting and Auditing Institute Spain CL 92 Institute of Chartered Accountants in England & Wales (ICAEW) UK CL 93 Zambia Institute of Chartered Accountants in Zambia Zambia CL 94 Eastern Central and Southern African Federation of Accountants European body (ECSAFA) CL 95 KPMG (International) Global CL 96 Council on Corporate Disclosure and Governance (CCDG) Singapore CL 97 Raggy, David Member, IASB Advisory Panel on Small and Medium-sized unknown Entities CL 98 Federation of Enterprises in Belgium Belgium CL 99 Society of Accountants in Malawi Malawi CL 100 Conseil National de la Comptabilité (CNC) France CL 101 CPA Australia Australia CL 102 Austrian Federal Economic Chamber Austria CL 103 Accounting Standards Board (ASB) UK CL 104 Moore Rowland International Europe European body CL 105 Ordem Dos Revisores Oficiais De Contas Portugal CL 106 European Association of Corporate Treasurers (EACT) European body CL 107 Institute of Certified Public Accountants in Israel (ICPAI) Israel CL 108 Bundesverband der Bilanzbuchhalter und Controller e.V (BVBC) Germany CL 109 Davis, Annette UK CL 110 European Commission European body CL 111 Newton, Enrique Fowler Argentina CL 112 American Institute of Certified Public Accountants (AICPA) US CL 113 European Financial Reporting Advisory Group (EFRAG) European body CL 114 European Association of Co-operative Banks (EACB) European body CL 115 Federation des Experts Comtables Europeens European body CL 116 Foreningen af Statsautoriserede Revisorer Denmark CL 117 Union of Industrial and Employer’s Confederations of Europe (UNICE) European body CL 118 Grant Thornton Chartered Accountants (UK) UK CL 119 Australian Institute of Company Directors (AICD) Australia CL 120 Europaischen Parlament European body

CL 121 Colegio de Contadores Publicos de Costa Rica Costa Rica Source: based on submissions to the discussion paper.

*This comment letter was not available

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Table A2.3 Summary of issues identified by responses commenting on developing countries Response Organisation Issue Raised No. From respondents in developing countries CL37 16 Susela Devi University of Provide comprehensive guide to SMEs as in most instances, the Malaya, (Malaysia) accounting personnel of SMEs are not qualified professional accountants. Provide web-published volume of SME standard for easier access if possible. It should be recognised that developing countries require the IASB’s assistance and that there is a greater need for SME standards in such countries. CL 21 KPMG (Mozambique) In developing countries, it is not practical for most companies to meet the complex reporting requirements of IFRS. CL 52 Accounting and Auditing Given that economic conditions between countries differ, the criteria to Standards Committees of the determine which entities are SMEs should be left with individual Institute of Chartered jurisdictions. For example, a large company in a developing country Accountants of Pakistan may be a SME in a developed country. (ICAP) (Pakistan) CL 70 Accounting Federal Council IFRS for SME completely tuned to IASB pronouncements and & IBRACON-Brazilian interpretations, will provide easier way to full adoption of IFRS in Institute of CPAs (Brazil) future. CL 94 Eastern Central and Accessibility of IFRS in developing countries is an issue. Southern African Federation of Accountants (ECSAFA) CL 99 Society of Accountants in The IASB should consider where the need for SME is coming from and Malawi active involvement in SME project of member bodies of developing countries and regional bodies. From respondents in developed countries / international bodies CL 4 Chartered Institute of Public Proposed IFRS for SMEs are too onerous for SMEs in developing Finance and Accountancy countries. (UK) CL 36 International Federation of Due to high costs of compliance with IFRS, many countries especially Accountants (IFAC) smaller developing countries, seek less onerous set of accounting standards. CL 38 Institute of Chartered IFRS for SME project gives the opportunity to create something simpler Accountants in Australia to be used by SMEs and developing countries. (ICAA) (Australia) CL 65 United Nations Trade Special circumstances of SMEs in developing countries should be Cooperation and considered when developing IFRS for SMEs. IFRS is difficult to apply in Development - developing countries. Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (UNCTAD-ISAR) CL 78 Institute of Chartered IFRS for SME should be updated annually or else it would be costly for Accountants of Scotland (UK) developing countries to keep up with the changes. Also provide updated translations if IFRS for SMEs is translated into other languages. CL 92 Institute of Chartered “If in a less developed economy, a small listed entity is permitted to use Accountants in England & the new standards and complies fully with its requirements; its financial Wales (ICAEW) (UK) statements should be described as in compliance with IASB standards for SMEs”. CL 97 Raggy, David Member, IASB Given that developing countries lack active markets, sufficient guidance Advisory Panel on Small and is requested to be provided for the SMEs. Medium-sized Entities CL 101 CPA (Australia) IFRS for SMEs provides a migration path for developing countries to move to full IFRS. Source: from (Singh and Newberry, 2008: 496-497).

37 CL refers to the comment letter.

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Appendix 3 Staff Questionnaire on Recognition and Measurement Simplifications

Table A3.1 List of respondents to the staff questionnaire on recognition and measurement simplifications Comment Letter Company Name No CL38 1 Moores Rowland (South Africa) CL 2 CPA Ireland CL 3 Institute of Chartered Accountants of New Zealand (ICANZ) (New Zealand) CL 4 Ministry of Finance (People’s Republic of China) (China) CL 5 Finnish Institute of Authorised Public Accountants (Finland) CL 6 Institute of Certified Public Accountants of South Africa South Africa CL 7 Institute of Chartered Accountants of Scotland (ICAS) (UK) CL 8 Eurochambres (Belgium) CL 9 IBRACON – Brazilian Institute of Independent Auditors and CFC-Federal Accounting Council (Brazil) CL 10 S.B. Billimoria & Co. (India) CL 11 Marshall & Stevens (USA) CL 12 The Chartered Institute of Taxation (UK) CL 13 Sigvard Heurlin CL 14 Institute of Chartered Accountants of Pakistan (ICAP) (Pakistan) CL 15 Ordem Dos Revisores Oficiais De Contas CL 16 Conseil National de la Comptabilité (CNC) (France) CL 17 Instituto de Contabilidad y Auditoria de Cuentas (Spain) CL 18 Hong Kong Institute of Certified Public Accountants (Hong Kong) CL 19 The Accounting Principles & Auditing Standards Committee of the California Society of Certified Public Accountants (“AP&AS Committee”) CL 20 Australian Accounting Standards Board (Australia) CL 21 German Accounting Standards Committee (DRSC) (Germany) CL 22 DATEV eG CL 23 Ac Christes & Partner GmbH (Germany) CL 24 FRANK TIMMINS - Member of IASB Working Group on Standards for SMEs (South Africa) CL 25 Financial Reporting Standards Board (FRSB) New Zealand CL 26 CFA Institute CL 27 Bundesverband der Deutschen Industrie e. V. (Germany) CL 28 Swedish Accounting Standards Board (Sweden) CL 29 Japanese Institute of Certified Public Accountants (JICPA) (Japan) CL 30 Dutch Accounting Standards Board (Netherlands) CL 31 OrganismoItaliano di Contabilita (OIC) (Italy) CL 32 Bundessteuerberaterkammer (German Chamber of Tax Advisors) (Germany) CL 33 PricewaterhouseCoopers (International) CL 34 Danish Agricultural Council (Denmark) CL 35 Institute of Certified Public Accountants of Kenya (ICPAK) CL 36 Accounting Standards Board (ASB) (UK) CL 37 Korea Accounting Standards Board (KASB) Korea CL 38 Council on Corporate Disclosure and Governance (CCDG) (Singapore) CL 39 The Association of German Chambers of Industry and Commerce (DIHK) Germany CL 40 South African Institute of Chartered Accountants (SAICA) (South Africa)

38 CL refers to the comment letter number.

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CL 41 Robert B Walker, Chartered Accountant (New Zealand) CL 42 General Confederation of Agricultural Co-operatives in the EU (COPA-COGECA) CL 43 Cooperatives Europe CL 44 International Federation of Accountants (IFAC) CL 45 Small and Medium Enterprise Agency of Japan (Japan) CL 46 Institute of Chartered Accountants in Australia (ICAA) (Australia) CL 47 Australian Institute of Certified Public Accountants (Australia) CL 48 Accounting Standards Board of Japan (ASBJ) (Japan) CL 49 Danish Institute of Certified Public Accounants (Denmark) CL 50 European Association of Corporate Banks (EACB) CL 51 Chamber of Auditors of the Czech Republic (Czech Republic) CL 52 DGRV German Cooperative and Raiffeisen Confederation (Germany) CL 53 National Organization for the Standards of Financial Accounting and Reporting (Russia) CL 54 Union Nazionale Imprese di Recupero Gestione e informazione del Credito (UNIREC) (Italy) CL 55 Financial Executives International (FEI) CL 56 The Groupement National de la Coopération (GNC) CL 57 Leaseurope (Belgium) CL 58 Grant Thornton International CL 59 Coop de France (France) CL 60 Federacion Argentina de Consejos Profesionales de Ciencias Economicas (FACPCE) (Argentina) CL 61 Malaysian Institute of Accountants (MAI) (Malaysia) CL 62 Ernst & Young (International) CL 63 Consiglio Nazionale dei Dottori Commercialisti and the Consiglio Nazionale dei Ragionieri (Italy CL 64 Foreningen af Statsautoriserede Revisorer (FSR) (Denmark) CL 65 Financial Accounting Standards Committee of the American Accounting Association (USA) CL 66 KPMG (New Zealand) CL 67 Institute of Certified Public Accountants in Israel (ICPAI) (Israel) CL 68 Swiss GAAP FER (Switzerland) CL 69 Deloitte Touche Tohmatsu International CL 70 Institut der Wirtschaftsprüfer (IDW) (Germany) CL 71 Norsk RegnskapsStiftelse - Norwegian Accounting Standards Board Norway CL 72 European Financial Reporting Advisory Group (EFRAG) CL 73 Certified General Accountants' Association of Canada (CGA) (Canada) CL 74 BDO Stoy Hayward CL 75 London Society of Chartered Accountants (LSCA) (UK) CL 76 Landbrugsraadet CL 77 Föreningen Auktoriserade Revisorer FAR (Sweden) CL 78 European Private Equity & Venture Capital Association CL 79 Interamerican Accounting Association CL 80 Institute of Chartered Accountants in England & Wales (ICAEW) (UK) CL 81 Pierre Raggay & Co (Spain) CL 82 Dr. Felix Mayrhofer-Grüenbühl (Austria) CL 83 BDO CampsObers Accountants,Audit and Accounting Board (Netherlands) CL 84 Chamber of Accountants and Auditors of Kyrgyz Republic (CAA) CL 85 United Nations Conference on Trade and Development (UNCTAD) CL 86 Association of Chartered Certified Accountants (ACCA) (UK) CL 87 Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera (CINF) CL 88 Colegio de Contadores, Economistas y Administradores del Uruguay (Uruguay) CL 89 Life Care Services LLC (USA)

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CL 90 Institute of Chartered Accountants of India (India) CL 91 The German Confederation of Skilled Crafts and Small Businesses (ZDH) Germany CL 92 European Commission CL 93 Malaysian Accounting Standards Board (MASB) (Malaysia) CL 94 Reinhard Lackner (Austria) CL 95 Fédération des Experts Comptables Européens (FEE) CL 96 University of Malaya CL 97 Confederation Of Asian & Pacific Accountants (CAPA) CL 98 Mouvement des Entreprises de France (MEDEF) (France) CL 99 IIIWG of the European Committee of Central Balance Sheet Data Offices CL 100 The Committee on Monetary, Financial and Balance of Payment Statistics (CMFB) CL 101 Ordre National des Experts Comptables du Cameroun (ONECCA) CL 102 Colegio de Contadores Publicos de Costa Rica ( this comment letter was for the discussion paper) Source: based on submissions to the staff questionnaire.

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Table A3.2 Topics that were suggested to be deleted from the proposed SME standard Standard No. of Respondents respondents IFRS 2 Share based payment 23 CL 8, 9, 15, 23, 28, 29, 34, 35, 40, 43, 50, 51, 56, 60, 61, 62, 63, 69, 73, 76, 77, 79, 88 IFRS 3 Business Combinations 12 CL 8, 22, 29, 34, 35, 42, 43, 60, 63, 76, 88, 90 IFRS 4 Insurance Contracts 36 CL 8, 9, 13, 15, 17, 24, 28, 29, 33, 34, 35, 40, 42, 43, 44, 45, 48, 51, 53, 60, 61, 62, 63, 64, 69, 73, 76, 77, 80, 81, 83, 86, 89, 90, 92, 99 IFRS 5 Non-current Asset held for sale 3 CL 8, 9, 20 IFRS 6 Exploration for and Evaluation of Mineral 2 CL 40, 80 Resources IAS 11 Construction Contracts 8 CL 29, 34, 43, 58, 60, 61, 63, 77 - Combining and segmentation construction contracts IAS 12 Income Taxes 7 CL 28, 29, 49, 52, 76, 77, 79 - Delete requirement to account for temporary difference arising from investment in subs from an SME standard

-temporary difference arising from investment in 5 CL 34, 42, 51, 61, 88 subsidiaries branches associates and interest in joint ventures IAS 14 Segment Reporting 6 CL 8, 35, 62, 80, 81, 86 IAS 16 Property, Plant and Equipment (PPE) 12 CL 15, 23,27, 29, 34, 50, 51, 61, 63, 64, 76, 77 - revaluation of PPE IAS 17 Leases 11 CL 22, 23, 29, 34, 43, 52, 56, 60, 63, 68, 88 -Sale & lease back transactions IAS 19 Employee Benefits 11 CL 9, 24, 43, 60, 64 - defined benefit employee benefit program CL 34, 40, 63, 76, 88 IAS 20 Government Grants 1 CL 62 IAS 23 Borrowing costs 14 CL 22, 23, 29, 34, 43, 50, 52, 56, 60, 63, 64, 68, 76, 77 IAS 26 Retirement Benefit Plans 30 CL 15, 17, 23, 29, 33, 34, 35, 40, 42, 44, 45, 51, 53, 58, 61,62, 63, 64, 69, 72, 73, 79, 80, 81, 83, 86, 88, 90, 92, 99 IAS 27Consolidation 13 CL 22, 29, 34, 43, 44, 48, 51, 60, 63, 76, 79, 88, 99 IAS 28 Investments in Associates 5 CL 29, 35, 42, 48, 99 IAS 29 Financial Reporting in Hyperinflationary 3 CL 42, 63, 77 Economies IAS 30 Disclosures for Banks and Similar Financial 30 CL 13, 15, 17, 29, 33, 34, 35, 40, 42, 43, 45, 51, Institutes 53, 58, 60, 61, 63, 64, 67, 69, 73, 76, 77, 79, 81, 83, 86, 88, 90, 99 IAS 31 Interests in Joint Ventures 3 CL 29, 35, 99 IAS 32 Financial Instruments: Presentation 14 CL 29, 34, 42, 49, 51, 52, 58, 60, 61, 63, 64, 76, -Split accounting for compound financial 79, 88 instruments IAS 33 Earnings per share 6 CL 8, 35, 42, 62, 81, 86 IAS 34 Interim Reporting 9 CL 8, 13, 33, 35, 42, 45, 62, 81, 86 IAS 36 Impairment of Assets 5 CL 34, 43, 63, 88, 90 IAS 38 Intangible Assets -revaluation model for 14 CL 24, 29, 34, 43, 49, 56, 60, 61, 63, 64, 76, 77, intangibles 79, 88 IAS 39 Financial Instruments: Recognition and 11 CL 29, 34, 42, 43, 60, 63, 61, 76, 77, 79, 88 Measurement – hedge accounting 9 CL 29, 34, 60, 61, 63, 64, 76, 77, 88 -derecognition IAS 41 Agriculture 3 CL 8, 29, 77 Source: developed from submissions to the staff questionnaire.

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Table A3.3 Summary of issues identified by responses on developing countries in the staff questionnaire on the recognition and measurement simplification Response Organisation Developing country issues identified No. From respondents in developing countries CL 4 Ministry of Developing countries would have difficulties in using fair value Finance, People’s accounting because they often lack active market prices. Republic of China CL 35 Institute of Developing countries have resource constraints and it is not cost- Certified Public effective for them to invest in the expertise needed to produce financial Accountants of statements that fully comply with IAS. Since the bulk of SME provide Kenya (ICPAK) information for short term stewardship purposes, rather than for long term investment decision making, the use of fair value is “likely to cloud rather than improve comprehension” (pages 1-2). CL 96 Susela Devi In most developing countries, all entities are required to prepare (Malaysia) financial statements in accordance with national standards which are now converged to IFRS. SMEs in most developing countries lack technical expertise in complying with complex standards. From respondents in developed countries / international bodies CL 26 CFA Institute Disagrees that the IASCF objective should include the need to address (global challenges facing SMEs. In emerging and developing countries, problems organisation) are anticipated for some preparers, auditors and regulators where accounting expertise are in short supply, but this does not warrant the development of SME standards. CL 44 IFAC SMEs operating in jurisdictions with less developed capital markets will often lack access to observable market data. SMEs in developing countries face difficulty in calculating present value, where there is limited availability of market data. CL 79 Interamerican Many developing countries lack current and precise market information, Accounting and this should be considered in the development of the standard. Association CL 85 UNCTAD The situation of SME in developing countries should be considered in the development of SME standards. UNCTAD is of the view that special efforts need to be made to ensure the participation of users and preparers of the financial statements of SMEs in developing countries and countries with economies in transition in conducting the public round-table meetings. Fair value estimates are difficult to obtain in developing countries. CL 97 CAPA Many developing countries are in great need of separate SME standards. Given that SMEs in most developing (as well as developed) countries lack technical expertise, it might be appropriate to consider providing a consistent set of financial statements containing information relevant to assessing management stewardship and instilling a notion of accountability to the stakeholders. Source: from (Singh and Newberry, 2008: 500-501).

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Table A3.4 IAS 16 Property, plant and equipment- summary of the issues and board decisions Column 1: IAS Column 2: Responses to staff questionnaire Column 3: Column 4: Column 5: Column 6: Board decision, requirement as at Working Views Staff Nov-Dec 2005 April 2005 group expressed at recommendation round-tables IAS 16: para 29 Staff Summary Majority view Suggest using Staff Retain revaluation option for PPE requires: A small percentage of the respondents recommended was to cost-based recommendation by a cross-reference to IAS 16 “an entity shall that the revaluation model for PPE should not be eliminate the reporting was not to (IASB, 2005d). choose either the included in the SME standard (IASB, 2005h). revaluation model for include the option cost model…or the option for SMEs. That is to revalue PPE in This means an entity will have to revaluation model … Several respondents argued “that SMEs should not be SMEs. Thus the option to the SME version refer to para 31-42 and para 77 as its accounting required to subsequently depreciate revalued allowing the revalue of IAS 16 (IASB, of IAS 16 in full IFRS to apply the policy and shall apply buildings provided that revaluations will be performed cost model to should not be 2005h). option of revaluation of PPE. that policy to an regularly and impairment provisions in relation to PPE be used (IASB, provided in entire class of in IAS 36 will be retained. Staff believes this is not an 2005h). the SME property, plant and SME issue and does not recommend this approach” version of IAS equipment [PPE]”. (IASB, 2005h: 13). Other working 16 (IASB, group 2005h). Others suggested restricting the revaluation model to members PPE where an observable market price is available and would retain where either the asset can be sold easily or the the management is committed to a plan to sell the asset revaluation and an active programme to locate a buyer and option in the complete the plan have been initiated (IASB, 2005h). SME standard by providing a Analysis undertaken for this study (cross- Of the 36 respondents who commented: reference) - 23 argued that PPE should be measured at cost, and referral to IAS the revaluation option should not be provided in the 16 (IASB, SME standard (CL 5, 15, 16, 17, 23, 27, 28, 29, 31, 32, 2005h). 34, 46, 50, 51, 59, 61, 63, 64, 72, 76, 77, 81, 101). -8 proposed to retain the revaluation option for SMEs in the SME standard (CL 24, 36, 47, 58, 60, 73, 88, 90). -3 argued that no modification should be made to this standard in the SME standard (CL 33, 44, 83). -1 proposed that subsequent depreciation should not be required for revalued buildings (CL 1). -1 proposed to restrict the option to revaluation so it is only available if PPE is easily disposable (CL 95).

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Column 1: IAS Column 2: Responses to staff questionnaire Column 3: Column 4: Column 5: Column 6: Board decision, requirement as at Working Views Staff Nov-Dec 2005 April 2005 group expressed at recommendation round-tables IAS 16.43 requires Staff Summary No major Several The SME version SME standard should not refer to that: A small percentage of the respondents suggested that simplification participants of IAS 16 should component depreciation. “each part of an item the component approach should not be included in the needed for noted that not refer to However the guidance in par 44- of property, plant SME version of IAS 16 (IASB, 2005h). SMEs (IASB, “component component 47 should be included (IASB, and equipment with 2005h). depreciation depreciation 2005a). a cost that is Analysis undertaken for this study as a (IASB, 2005h). 16.44 -47 states that: significant in relation Nine respondents commented: significant to the total cost of - All 9 argued that use of component approach to measurement 44. An entity allocates the the item shall be depreciation for property, plant and equipment is burden for amount initially recognised in depreciated costly (CL 1, 27, 32, 40, 42, 49, 52, 70, and 71). SMEs” with respect of an item of PPE to its separately”. no added significant parts and depreciates benefits separately each part. (IASB, 2005h: 15). 45. A significant part of an item of PPE may have a useful life and a depreciation method that are the same as the useful life and the depreciation method of another significant part of that same item. Such parts may be grouped in determining the depreciation charge. 46. To the extent that an entity depreciates separately some parts of item of PPE it also depreciates separately the reminder of the item. The reminder consists of the parts of the item that are individually not significant. If an entity has varying expectations for these parts, approximation techniques may be necessary to depreciate the reminder in a manner that faithfully represents the consumption pattern and/or

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Column 1: IAS Column 2: Responses to staff questionnaire Column 3: Column 4: Column 5: Column 6: Board decision, requirement as at Working Views Staff Nov-Dec 2005 April 2005 group expressed at recommendation round-tables useful life of its parts. 47. An entity may choose to depreciate separately the parts of an item that do not have a cost that is significant in relation to the total cost of the item. IAS 16. 51 states that: Staff Summary No major Staff notes No major The residual value and useful “The residual value A small number of respondents argued that annual simplifications showed no simplification is lives of PPE should be reviewed and the useful life of review of residual value is time consuming and costly needed for discussion on needed for SMEs. annually (IASB, 2005d). an asset shall be for SMEs (IASB, 2005h). SMEs (IASB, this issue A requirement to reviewed at least at 2005h). (IASB, 2005h). review annually the end of each Those respondents recommended that the annual the estimates of annual reporting review of the residual value and useful life should be residual value and period and, if required when there is a clear indication of change useful life is not expectations differ (IASB, 2005h). burdensome from previous (IASB, 2005h). estimates, the “None of the responses addressed the required annual change(s) shall be review of useful life” (IASB, 2005h: 15). accounted for as a Analysis undertaken for this study change in an Of the six respondents who commented: accounting estimate in accordance with -5 argued that annual review of residual value is AASB 108 Accounting complex (CL 21, 27, 40, 62, 101). Policies, Changes on - 1 argued that annual review of useful life and residual Accounting Estimates value is time consuming, complex and costly (CL 1). and Errors”.

* (This was not one of the examples of simplification listed for question one in the appendix to the staff questionnaire).

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Table A3.5 IAS 17 Leases-summary of the issues raised and board decisions Column 1: IAS Column 2: Responses to staff questionnaire Column 3: Column 4: Column 5: Staff Column 6: Board requirement as Working Views recommendation decision, at April 2005 group expressed at Nov-Dec 2005 round-tables IAS 17: 8 states Staff Summary Not Not available Not available All leases should not that: Not available available be treated as Analysis undertaken for this study operating leases. “A lease is Of the 51 respondents who commented: (IASB, 2005c) classified as a - 13 proposed to simplify the financial lease calculations (CL 5, 31, 35, The Board asked the finance lease if it 40, 44, 49, 60, 63, 64, 69, 80, 86, 94). transfers -9 proposed that to allow option to treat all leases as operating leases staff to explore substantially all (CL 10, 44, 58, 67, 73, 81, 95, 100, 101). further the following the risks and - 1 argued that all lease in SME context is financial lease (CL 89). two approaches, and rewards -1 suggested that classification of financial lease and operating lease is bring a incidental to not defined precisely (CL 32). recommendation to ownership. A -1 proposed to eliminate the need to distinguish between the land and the Board at a future lease is classified the building elements of leases (CL 81). meeting: as an operating lease if it does -6 proposed to measure lease liability at the amount equal to present not transfer value of minimum lease payment (CL 16, 17, 43, 50, 56, 72). a) Treat all leases as substantially all -1 suggested that for financial lease, the liability should be measured finance leases with the risks and simply by the addition of the minimum lease payment, without using measurement rewards the present value of those payment (CL 59). simplifications. incidental to - 2 argued that the use straight-line or sum of digits in allocating the ownership”. lease payment between finance charge and reduction of outstanding b) Retain the IAS 17 liability (CL 18, 57). operating and finance -6 argued that lease accounting is complex (CL 13, 19, 27, 28, 30, 89). lease split but with measurement - 11 argued that sale and lease transaction should be not be provided in simplifications (IASB, the SME standard (CL 22,23,29,34,43,52,56,60,63,68,88). 2005c: 2). -3 proposed combining evaluation of sale and lease back transactions is complex and costly for SMEs (CL 32, 46, 54).

254 Table A3.6 IAS 36 Impairment of Assets-summary of the issues and board decisions Column 1: IAS Column 2: Responses to staff questionnaire Column 3: Column 4: Column 5: Staff Column 6: requirement as at Working Views recommendation Board April 2005 group expressed decision, at round- Nov-Dec 2005 tables IAS 36: 20 requires Staff Summary Not Not Not available To retain the that: Not available available available impairment “A cash-generating Analysis undertaken for this study testing of unit to which goodwill Of the 64 respondents who commented: goodwill has been allocated (IASB, shall be tested for - 47 argued that annual impairment testing of goodwill is complex (CL 1, 4, 5, 2005c). It also impairment annually, 8, 9, 13, 15, 16, 18, 19, 21, 22, 27, 32, 33, 34, 35, 38, 40, 41, 42, 43, 44, 50, 51, decided that and whatever there is 52, 56, 61, 63, 64, 69, 70, 71, 72, 73, 74, 76, 77, 79, 80, 81, 83, 85, 86, 92, 95, an indicator an indication that the 101). approach unit may be impaired, - 4 argued that impairment test should be required only when there is should be by comparing the evidence to suggest that asset may have suffered impairment (CL 15, 44, 49, explored for carrying amount of 58, 67). recognising the unit, including the -14 sought use of amortisation method, rather than impairment testing of impairment of goodwill, with the goodwill (CL 4, 5, 16, 19, 24, 27, 28, 29, 31, 40, 43, 88, 95, 99). goodwill, recoverable amount - 11 argued that amortisation over a period of not more than 20 years for which would of the unit. If the goodwill should be allowed (CL 10, 17, 53, 56, 58, 64, 69, 70, 72, 80, 92). replace the recoverable amount - 1 proposed that goodwill should be amortised over a period of 10 years annual of the unit exceeds (CL 68). impairment the carrying amount -6 respondents argued that impairment testing of property, plant and calculation of the unit, the unit equipment should not be allowed (CL 10, 15, 35, 40, 85, 92). (IASB, and the goodwill - 13 proposed simplification of the impairment requirement of property, plant 2005c). allocated to that unit and equipment (CL 17, 18, 22, 25, 28, 29, 46, 61, 80, 81, 88, 94, 99). shall be regarded as -1 suggested that SMEs should be allowed to measure the value in use on the not impaired. If the basis of reasonable estimate instead of computing the value in use by present carrying amount of value technique (CL 90). the unit exceeds the -7 argued measurement on basis of a value in use is complex (CL 23, 29, 44, recoverable amount 48, 52, 60, 69). of the unit, the entity -1 argued that the use of the present value of the future cash flows should be shall recognise the replaced by the algebraic sum of the estimated cash flows (CL 59). impairment loss” - 5 argued that IAS 36 should not be provided in the SME standard (CL 34, 43, 63, 88, and 90).

255 Table A3.7 IAS 41 Agriculture-summary of the issues and board decisions Column 1: IAS Column 2: Responses to staff questionnaire Column 3: Working Column 4: Views Column 5: Staff Column 6: requirement as at April group expressed at recommendation Board 2005 round-tables decision, Nov-Dec 2005 IAS 41.12 requires: Staff Summary “For SMEs, Some argued that “Existing IAS 41 There was no “A biological asset shall be “By a four-to-one margin, respondents believe that the biological assets SMEs often have already provides need for measured on initial application of the fair value method of accounting for should be difficulty in using that if reliable simplification recognition and at each biological assets and agricultural produce at point of measured at fair fair value measure of fair of major reporting date at its fair harvest under IAS 41 would cause problems to SMEs” value only if they measurement. value is not principles in value less estimated point- (IASB, 2005h: 8). (a) have an available, use cost IAS 41 (IASB, of-sale costs, except for the observable market “Allow the cost model. Measures of 2005d). case described in para 30 Analysis undertaken for this study price and either (b) depreciation- the cost of where the fair value cannot Of the 62 respondents who commented: can easily be sold or impairment biological assets That is if be measured reliably”. -35 argued that fair value measurement of biological (c) management is model as an involve arbitrary reliable assets and agricultural produce is costly and complex committed to a plan alternative, allocations of costs, measure of IAS 41.30 states that: (CL 1, 8, 6, 15, 16, 17, 18, 19, 28, 30, 35, 40, 41, 42, 43, to sell the asset. similar to IAS 40” and the resulting fair value is “there is a presumption 44, 46, 73, 50, 56, 58, 59, 62, 66, 67, 69, 71, 77, 79, 80, Otherwise use cost (IASB, 2005h: 9). measurements are not available, that fair value can be 81, 83, 85, 90, 99). with amortisation not as useful as fair cost model measured reliably for a -28 sought to use the use cost method to measure and impairment” Others argued “to values because they could be biological asset. However, biological assets (CL 6, 15, 18, 28, 30, 35, 40, 41, 42, 43, (IASB, 2005h: 9). keep fair value. do not assist in used. that presumption can be 44, 50, 56, 58, 59, 62, 66, 67, 69, 71, 77, 79, 80, 81, 83, Cost is forecasting cash rebutted only on initial 85, 90, 99). meaningless. flows. A cost model recognition for a biological -4 proposed that fair value should be used to measure Bankers want fair would still require asset for which market- biological assets as it is readily available (CL 2, 49, 70, value data, fair value determined prices or 72). particularly for measurements for values are not available -2 argued that other options for fair value method to forests and fish impairment testing” and for which alternatives measure biological assets, agricultural produce should and (IASB, 2005h: 9). estimates of fair value are be provided (CL 10, 14). livestock”(IASB, determined to be clearly -8 suggested that if the criteria for using fair value is not 2005h: 9). The staff unreliable. In such a case, met, cost method should be used (CL 16, 20, 21, 24, 25, recommendation that biological asset shall 31, 74, 99). was that no be measured at its cost less -1 argued that full IFRS should be allowed here as this is simplification of the any accumulated a sector specific standard (CL 22). major principles in depreciation and any -2 argued that a very simple standard is required for IAS 41 was needed accumulated impairment agriculture (CL 14, 101). for SMEs (IASB, losses…” -7 argued that IAS 41 should be not be provided in the 2005h). SME standard (CL 8, 9, 29, 52, 77, 92, 95). -5 proposed no simplification should be provided in IAS 41 in the SME standard (CL 5, 23, 60, 64, 88).

256 Appendix 4 Exposure Draft

Table A4.1 List of responses to the exposure draft. Comment Organisation Country Letter No CL 1 University of Reading UK CL 2 Doug Hester response was not related to SME project US CL 3 Association of the Bavarian Chambers of Business, Bavarian Chamber of Industry and Commerce, Bavarian Association of Cooperatives, Association of Bavarian Savings Banks Germany CL 4 Chris Russell-Rockliff South Africa CL 5 University of Manitoba Canada CL 6 Vienna University of Economics and Business Administration Austria CL 7 Institute of Professional Accountants of Russia Russia CL 8 Kingston Smith LLP UK CL 9 Turku School of Economics Finland CL 10 Anangu Accounting Agency Australia CL 11 CPA Australia Australia CL 12 Institute of Chartered Accountants in Australia Australia CL 13 University of Verona Italy CL 14 Charity Commission UK CL 15 University of Cape Town South Africa CL 16 Organismo Italiano di Contabilita Italy CL 17 Heads of Treasuries Accounting and Reporting Advisory Committee Australia CL 18 Universidad de la Republica O. del Uruguay Uruguay CL 19 Österreichischer Raiffeisenverband Austria CL 20 Interamerican Accounting Association Canada/America CL 21 III WG ON IFRS IMPACT AND CBSO DATABASES Spain CL 22 Accounting Standards Board UK CL 23 Luca Scarani Italy CL 24 Institute of Chartered Accountants of Scotland (ICAS) UK CL 25 Fiji Institute of Accountants (FIA) Fiji CL 26 The Society of Accountants in Malawi Malawi CL 27 Zentralverband des Deutschen Handwerks (ZDH) Germany CL 28 Financial Executives International US CL 29 IBM US CL 30 Indonesian Accounting Standards Board Indonesia CL 31 Korea Accounting Association (KAA) (IFRS Review Committee) Korea CL 32 Bundesverband der Deutschen Industrie e.V. Germany Germany CL 33 JPA France CL 34 Leaseurope Europe CL 35 New York Society of CPA's (NYSSCPA) US CL 36 Institute of Chartered Accountants of Pakistan (ICAP) Pakistan CL 37 Iranian Institute of Certified Public Accountants Iran CL 38 Joint Fabrizio Cerbioni, Marco Ciabattoni, Armando Grigolon, Alessandra Mingozzi, Antonio Parbonetti, Nicola Piovan Italy CL 39 CSOEC and CNCC France CL 40 PKF International UK CL 41 The Chartered Institute of Management Accountants (CIMA) UK CL 42 AIA UK CL 43 German Acturial Association Germany CL 44 United Arab Dubai Financial Services Authority Emirates CL 45 Instituto de Contabilidad y Auditoria de Cuentas (ICAC) Spain

257 CL 46 Certified General Accountants Association of Canada Canada CL 47 The British Private Equity & Venture Capital Association UK CL 48 Institute or Certified Public Accountants of Kenya Kenya CL 49 The International Financial Reporting Standards review Committee of the Korean Accounting Standards Board Korea CL 50 Irish Banking Federation Ireland CL 51 Korea Institute of Certified Public Accountants Korea CL 52 BT Group PLC UK CL 53 Association of German Chambers of Industry and Commerce Germany CL 54 Institute of Certified Public Accountants in Ireland Ireland CL 55 Eurochambers Europe CL 56 Austrian Federal Economic Chamber Austria CL 57 Association of Consulting Actuaries UK CL 58 Maciej Czapiewski and Marek Dobek Poland CL 59 Italiana di Consulenze Italy CL 60 Accounting Standards Board-South Africa South Arica CL 61 National Cooperative Business Association US CL 62 Institut der Wirtschaftsprüfer (IDW) Germany CL 63 Conseil National de la Comptabilité (CNC) France CL 64 NIVRA Netherlands CL 65 National Institute of Accountants Australia CL 66 Bundessteuerberaterkammer Germany CL 67 The International Federation of Francophone Accountants (FIDEF) Global CL 68 South African Institute of Chartered Accountants (SAICA) South Africa CL 69 Zentraler Kreditausschuss Germany CL 70 Coop de France France CL 71 City Group P.L.C UK CL 72 Eura Audit International Global CL 73 ZGV* Germany CL 74 Federacion de Expertos Contables y Auditores de Mesoamérica* Costa Rica CL 75 Fédération Internationale des Experts Comptables Francophones* France CL 76 La Contaduría Pública en Venezuela* Venezuela CL 77 African Consulting Entreprise* Cameroon CL 78 Universidad Tecnológica De El Salvador, Facultad De Ciencias Empresariales, Escuela De Economía Y Negocios, Departamento De Contabilidad Y Costos, Licenciatura En Contaduría Pública. No comment letter available* CL 79 Comentarios del Colegio de Contadores Públicos de Colombia al proyecto de norma, Norma Internacional de Información Financiera para Pequeñasy Medianas Entidades Colombia* Colombia CL 80 Consejo De Vigilancia De La Profesion De Contaduria* El Salvador CL 81 Instituto de Investigaciones Contables del Ecuador* Ecuador CL 82 The School of Accounting of the University Pedagogic and Technologic of Colombia* Colombia CL 83 Conselho Federal de Contabilidade (CFC)* Brazil CL 84 Malaysian Accounting Standards Board (MASB) Malaysia CL 85 American Institute of Certified Public Accountants US CL 86 Ernst & Young Global CL 87 CFA Institute Global CL 88 Instituto de Censores Jurados de Cuenteas de Espana (ICJCE) Spain CL 89 Institute of Chartered Accountants in Ireland (ICAI) Ireland CL 90 Mouvement des Entreprises de France (MEDEF) France CL 91 DFCG (French Association of Financial Executives) France CL 92 Grant Thornton International UK CL 93 Consiglio Nazionale dei Dottori Commercialisti and the Consiglio Nazionale dei Ragionieri Italy CL 94 DATEV eG Germany

258 CL 95 KPMG Global CL 96 The Dutch Accounting Standards Board (DASB) The Netherlands CL 97 National Accounting Standards Board of Russia (NASB) Russian Federation CL 98 Altaf Noor Ali Chartered Accountant Pakistan CL 99 F G S Flick Gocke Schaumburg Germany CL 100 Association of Accounting Technicians UK CL 101 CILEA* Italy CL 102 The Society of Chinese Accountants and Auditors China CL 103 GNC France CL 104 Financial Reporting Standards Board (FRSB) New Zealand CL 105 VMEBF Germany CL 106 WaiChan Chan Hong Kong CL 107 Tim Matthews UK CL 108 Yoyo Mui Not known CL 109 Philippine Financial Reporting Standards Council (PFRSC) Philippine CL 110 British Accounting Association's Financial Accounting and Reporting Special Interest Group UK CL 111 Eastern, Central and Southern Federation of Accountants (ECSAFA) Kenya CL 112 University of Manitoba Canada CL 113 Association Francaise des Investisseurs en Capital (AFIC) France CL 114 Deloitte Touche Tohmatsu Global CL 115 Australian Accounting Standards Board Australia CL 116 Foreningen af Statsautoriserede Revisorer (FSR) Denmark CL 117 International Controllers Association (ICA) Germany CL 118 Association of Chartered Certified Accountants (ACCA) (UK) UK CL 119 P.A. Pieterse van Wijck Netherlands CL 120 BSDG and CMFB Europe CL 121 Norwegian Accounting Standards Board Norway CL 122 Japanese Institute of Certified Public Accountants Japan CL 123 Cooperatives Europe Belgium CL 124 INAA UK CL 125 EAA FRSC EU CL 126 Institute of Chartered Accountants in India India CL 127 Danish Companies and Commerce Agency Denmark CL 128 National Board of Accountants and Auditors(NBAA) Tanzania CL 129 C. Hecht, D&L GmbH, BPG GmbH, Treuh.-ges. Herrmann GmbH Germany CL 130 CINIF Mexico CL 131 Federacion Argentina de Consejos Profesionales de Ciencias Economicas Argentina CL 132 DGRV e.V Germany CL 133 Confederation of British Industry (CBI) UK CL 134 CAPA Global CL 135 BDO International Global CL 136 Institute of Chartered Accountants of Jamaica Jamaica CL 137 PricewaterhouseCoopers Global CL 138 Working Party of Dottori Commercialisti in Milano Italy CL 139 Institute of Certified Public Accountants in Israel (ICPAI) Israel CL 140 Hong Kong Institute of Certified Public Accountants Hong Kong CL 141 ASEAN Federation of Accountants (AFA) Global CL 142 International Federation of Accountants (IFAC) Global CL 143 International Co-operative Alliance Global CL 144 Canadian Accounting Standards Board Canada CL 145 Zambia Institute of Chartered Accountants Zambia CL 146 Family Entrepreneurs - ASU Germany CL 147 Den Norske Revisorforening (Norwegian Institute of Public Accountants) Norway CL 148 BHP Billiton Australia CL 149 FAR SRS -The Institute for the Accountancy Professionals Sweden

259 CL 150 Institute of Chartered Accountants of Barbados Barbados CL 151 Association of Finnish Accounting Firms Finland CL 152 Sunil Goyal - S.R.Goyal & Co., Chartered Accountants India CL 153 Austrian Financial Reporting and Auditing Committee (AFRAC) Austria CL 154 Securities and Exchange Commission Thailand CL 155 Paul H Nettleship South Africa CL 156 London Society of Chartered Accountants (LSCA) UK CL 157 United Nations Conference on Trade and Development (UNCTAD) Global CL 158 Collegio de Contadores Publicos de Costa Rica (Institute of Public Accountants of Costa Rica)* Costa Rica CL 159 Ordre des Experts Comptables de Tunisie* Tunisia CL 160 German Accounting Standards Committee (DRSC) Germany CL 161 EFRAG EU CL 162 Maraz Global Source: based on the comments letters to the exposure draft.

* These comment letters were in foreign languages.

260 Table A4.2 Issues raised in response to question one in the exposure draft Issues raised No. of Comments respondents -Include specific 10 Suggestion made to include the following topics to the SME standard: topics into SME - investment property held under revaluation model (CL 8) standard - other fixed assets held under the revaluation model (CL 8) - changes in accounting estimates (CL 8) - criteria for capitalisation of development costs as an intangible asset (CL 8) -operations under common control (CL 63) -reverse acquisitions (CL 63) -discounting (CL 63) -IFRS for hyperinflation (CL 63, 114, 136, 145, 157) -fair value model in IAS 41 Agriculture (CL 68) - detailed guidance on the classification and measurement of puttable instruments (CL 99) -guidance on agriculture standard (CL 104) -equity method for investment in associates and jointly controlled entities (CL 121) -accounting for financial leases by lessors (CL 145) -Biological assets (CL 145) -No need to 4 -do not think that there is any need to include any other transactions in include other the SME standard (CL 3, 9, 22, 26) transactions -Cross-reference to 43 -no cross-reference to full IFRS (CL 3,24, 25, 30, 41, 45, 46, 47, 52, 53, 59, full IFRS 60, 61, 63, 64, 66, 71, 84, 90, 91, 92, 93, 100, 114, 117, 124, 136, 147, 157, 160) -provide minimal cross-reference to full IFRS (CL 14, 33, 48, 68, 102, 110, 111, 115, 118, 126, 148, 150) -Provide further 5 -provide guidance and examples on the following: guidance -hyperinflation (CL 45) -foreign exchange hedging (CL 14) -financial lease accounting in the lessor’s financial statements in the IFRS for SMEs (CL 21,99) -simplify further the following: -accounting for property, plant and equipment (CL 120 ,21) -sale and lease back transactions (CL 21) -share-based payments (CL 21) -earnings per share (CL 21) -interim financial reporting (CL 21) -Delete topics that 11 Suggestion made to delete the following topics: are not relevant -earnings per share (CL 21, 45, 61, 66, 100, 114, 120, 124, 135, 149 -segment reporting (CL 61, 66, 100, 114, 120, 124, 135, 136) -interim reporting (CL 21, 66, 114,120, 124,135,149) -share based payments (CL 21, 45, 100, 120, 149) -hyperinflation (CL 66,149) -sale and lease back transaction (CL 21, 120) -accounting for finance leases in the financial statements of lessors -agriculture (CL 66) -insurance (CL 136) -defined benefits plan (CL 45) -business combination (CL 45) -assets held for sale (CL 45)

261 -Others 9 -SME standard is not a copy and paste but something that adds to understanding (CL 34) -the reference to 50 employees is not adequate and suggest broadening that assessment method (CL 42, 97, 140) -request made to limit the use of fair value (CL 49, 51) -SME standard should be different from full IFRS (CL 72) -need to consider the user needs first (CL 28, 31) Source: developed from submissions to the exposure draft.

262 Table A4.3 Issues raised in response to question two in the exposure draft

Standard Comments made by respondents Section 16 Property, -reviewing residual value and useful life of the assets at every reporting date is costly Plant and Equipment and unnecessary (CL 59, 60, 68, 114, 114) -requirement to separately provide depreciation of the assets was not feasible in many cases (CL 62, 68) - revaluation method was expensive and costly exercise for SMEs and should be deleted (CL 53, 162) -restatement requirement for discontinued operation seems to be too burdensome for SMEs (CL 59)

(Total number of respondents: 7) Section 18 Business -allow amortisation of goodwill (CL 33, 41, 17, 30, 31, 48, 49, 51, 59, 64, 66, 68, 92, 99, Combinations and 100, 117, 118, 120, 121, 114, 140, 162) Goodwill -amend criteria (d) in section 26 paragraph 26.6 (CL 41) -do not agree that amortisation should be provided (CL 135) -impairment requirement lack relevance and are burdensome (CL 88) -simplify the impairment test (CL 13, 149) -impairment should be based on value in use compared to carrying amount and not fair value (CL 62, 84, 92, 99) -impairment values should be applied to complete groups of assets and not individual assets (CL 100)

(Total number of respondents: 25) Section 19 Leases -allow SMEs to use present value of the minimum lease payments instead of fair value (CL 49, 51, 59, 60, 62, 63, 64, 68, 88, 99, 121, 161) -difficult to split lease for land and building in some jurisdictions (CL 34, 48, 68, 111) -SMEs should be allowed to account for all leases as operating lease (CL 111). -remove the requirement to straight line operating leases (CL 17) -classification of a lease is too complex for SMEs (CL 162) -provide simplification to the lease section (CL 149)

(Total number of respondents: 17) Section 35 Specialised -use cost measurement instead of fair value when obtaining fair value is difficult for Industries biological assets (CL 30, 46, 104, 111, 114, 118, 117, 131, 140) -there is no measurement of the cost of biological asset, particularly for livestock (CL 48). -simplify the measurement of agricultural products (CL 13) (Total number of respondents: 11) Source: developed from submissions to the exposure draft.

263 Table A4.4 Question eight in the exposure draft on adequacy of guidance Areas where additional guidance was No. of Respondents thought necessary by respondents respondents Section 2 Concepts and Pervasive Principles 3 (CL 12, 62, 140) Section 3 Financial Statement Presentation 6 (CL 25, 33, 40, 48, 114, 120, 129) Section 7 Cash Flow Statement 4 (CL 25,63,68,114) Section 9 Consolidation and Separate 10 (CL 12, 45, 49, 51, 62, 68, 84, 89, 92, 104) Financial Statements Section 10 Accounting Policies, Estimates 2 (CL 12, 68, 121) and Errors Section 11 Financial Assets and Financial 12 (CL 12, 14, 68, 84, 86, 92, 99, 104, 109, 114, Liabilities 117, 121) Section 12 Inventories 2 (CL 68, 129) Section 13 Investments in Associates 1 (CL 121) Section 14 Investment in Joint Ventures 1 (CL 121) Section 15 Investment Property 1 (CL 25) Section 16 Property Plant and Equipment 3 (CL 25, 51, 68) Section 17 Intangible Assets other than 2 (CL 12, 68) Goodwill Section 18 Business Combinations and 6 (CL 49, 62, 68, 92, 114, 157) Goodwill Section 19 Leases 6 (CL 14, 34, 99, 109, 157, 160) Section 20 Provisions and contingencies 3 (CL 51, 62, 114) Section 21 Equity 2 (CL 63, 68) Section 22 Revenue 5 (CL 22, 62, 68, 91, 111) Section 25 Share-based Payment 3 (CL 68, 84, 114) Section 26 Impairment of Non-financial 8 (CL 25, 49, 51, 62, 68, 84, 99,121) Assets Section 27 Employee Benefits 7 (CL 61, 62, 84, 109, 111, 114, 122) Section 28 Income Taxes 11 (CL 12, 25, 31, 51, 68, 84, 89, 95, 99, 104, 117) Section 30 Foreign Currency Translation 1 (CL 25) Section 35 Specialised Industries 3 (CL 60, 84, 114) Section 36 Discontinued Operations and 3 (CL 49, 51, 114) Assets Held for Sale Section 38 Transition to the IFRS for SMEs 3 (CL 12, 62, 68) Other areas Implementation 3 (CL 47, 100, 122) Expand glossary 1 (CL 93) Disclosure Checklist 2 (CL 104, 149) Reorganise the document 5 (CL 16, 21, 54, 68, 161) No specific area mentioned but want more 15 (CL 11, 37, 41, 53, 54, 64, 90, 91, 97, 131, 136, guidance overall 144, 153, 161, 162) Source: developed from submissions to the exposure draft.

The respondents also provided some general comments when responding to the exposure draft. The issues that were raised as general issues were:

• exposure draft was still too complicated (25) • consider the needs of the users (29) • use of inappropriate and confusing title of the standard (26)

264 • concern whether the SME standard is for micro entities (14) • use of fair value was costly and burdensome (15) • clarify the scope of the standard (6) • SME standard should provide cost reduction (17) • Concern regarding the use of the top down approach (5) • Others (9)

265 Table A4.5 Summary of responses to exposure draft commenting on developing countries Sub Organisation Country Affiliation Developing Small Lack of Lack of Language Access No. countries’ entities market expertise/ barrier to needs resources IFRS Responses from developing countries CL 15 University of Cape Town South Africa Academic X CL 25 Fiji Institute of Accountants (FIA) Fiji Professional X Body CL 68 South African Institute of Chartered South Africa Professional X Accountants (SAICA) Body CL 84 Malaysian Accounting Standards Malaysia Standard X Board(MASB) Setter CL 131 Federacion Argentina de Consejos Argentina Professional X X Profesionales de Ciencias Economicas Body Responses from developed countries CL 20 Interamerican Accounting Association Canada/ Professional X America Body CL 24 Institute of Chartered Accountants of UK Professional X Scotland (ICAS) Body CL 35 New York Society of CPA’s (NYSSCPA) US Professional X Body CL 46 Certified General Accountants Canada Professional X Association of Canada Body CL 86 Ernst & Young Global Accounting X Firm CL 92 Grant Thornton International Global Accounting Firm CL 93 Consiglio Nazionale dei Dottori Italy Professional X Commercialisti and the Consiglio Body Nazionale dei Ragionieri CL 110 British Accounting Association’s UK Professional Financial Accounting and Reporting Body Special Interest Group CL 118 Association of Chartered Certified UK Professional X X Accountants (ACCA) (UK) Body CL 124 International Network of Accountants UK Professional X X and Auditors (INAA) Body CL 125 European Accounting Association EU Regional Body X X (EAA) FRSC CL 129 C. Hecht, D&L GmbH, BPG GmbH, Germany Corporation

266 Treuh.-ges. Herrmann GmbH CL 134 The Confederation of Asian and Regional Body X X X Pacific Accountants (CAPA) CL 140 Hong Kong Institute of Certified Hong Kong Professional X Public Accountants Body CL 142 International Federation of International X X Accountants (IFAC) Body CL 150 Institute of Chartered Accountants of Barbados Professional X X X Barbados Body CL 156 London Society of Chartered UK Professional X Accountants Body Total 5 6 8 6 1 2 Source: from (Singh and Newberry, 2008: 505-506).

267 Discussion of Table A4.5 Summary of responses to exposure draft commenting on developing countries

Language barrier is one of the accounting issues faced by the developing countries according to the Confederation of Asian and Pacific Accountants (CAPA). This makes it difficult for many developing countries to express their concerns and respond to the IASB’s exposed documents. The cost of access to IFRS presented another barrier, two respondents arguing that the IASB should make its standards freely available from its website.

Several submissions called for specific consideration of developing countries’ needs. The Exposure Draft had omitted simplifications of several matters, including hyperinflation and agriculture because these were deemed not relevant for SMEs, and cross-reference to the full IFRS was proposed should SMEs encounter such issues. Five respondents argued that those matters are relevant in developing countries, and therefore that simplified accounting guidance on accounting in hyperinflationary economies and on agriculture is necessary.

The European Accounting Association (EAA) questioned whether the proposed IFRS did consider the “needs and circumstances of [developing] countries” and urged the IASB to wait for the results of the field tests before promulgating the final standard (CL 125: 13). The Institute of Chartered Accountants of Scotland (ICAS), however, thought the simplified standard proposed would provide a sound basis for financial reporting in developing countries (CL 24).

Six respondents suggested developing countries may lack the resources, expertise and access to the information necessary to prepare financial reports in accordance with full IFRS (CL 124). The Exposure Draft’s cross-references to full IFRS would, therefore, increase the burden on those in developing countries because they would need to know the full IFRS to apply the SME requirements (CL 134). A self-contained, easy to apply and understandable standard was therefore recommended (CL 124).

Eight respondents advised that developing countries lack active markets to allow fair value determinations of most of their assets (for example, CL 84; CL 124). Neither do some developing countries have the specialist support needed to assist in fair value determination, thus potentially undermining the credibility and reliability of information through lack of precision and excessive subjectivity (CL 68; CL 150; CL 142).

268 Six respondents commented on the applicability of IFRS for SME to small entities in developing countries, some arguing that the proposed IFRS was not for small entities at all, but rather was directed at medium sized non-publicly accountable entities (CL 118; 140; 142). Because the needs of small entities had been overlooked, there was potential for the proposed IFRS to be rejected, especially in developing countries.

269 Box A4. 1 EFRAG’s proposed structure for the SME standard

Reproduced from (CL 161, ED: 30-33).

270

271 272

273 Appendix 5 Changes in Recognition and Measurement Criteria

Table A5.1 Section 16 Property, plant and Equipment—summary of issues and decisions made Column 1: Column 2: Relevant Column 3: Responses to exposure Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Board’s decision requirement in exposure draft test as reported Working recommendation Board Decision, July 2009 Nov-Dec 2005. draft in February 2007 by staff group decision, (Refer to Table July 2008 A3.4). Option to revalue The ED states that: Staff summary Few field test WG Staff recommended The option to Option to revalue PPE PPE should be 16.11 An entity shall -Do not provide SMEs with option entities that used members that SMEs should revalue PPE by a cross-reference made available account for all items in to revalue PPE. That is, remove the the revaluation argued to not be allowed the should be to IAS 16 was by referral to IAS the same class of cross-reference to IAS 16(IASB, option for PPE retain the option to revalue retained by a removed. PPE were to 16 (IASB, property, plant and 2008g). argued it was option to PPE (IASB, 2008g). cross- be measured using 2005d). equipment after initial problematic to revalue PPE reference to cost method. recognition using either: Analysis undertaken as part of this refer to IAS 16 in by referral to IAS 16. That is 17.15 of the IFRS for a) the cost model in study order to use this IAS 16 (IASB, “both cost SMEs states that: paragraph 16.12; or method (IASB, 2008g). and “An entity shall b) the revaluation model Of the 18 respondents who 2008g). revaluation measure all items of in paragraph 16.13. commented: model should property, plant and 16.12 An entity shall Several field test be option for equipment after initial measure an item of -16 argued that revaluation of PPE entities argued SMEs” (IASB, recognition at cost property, plant and is expensive for SMEs and should that the option to 2008b: 2). less any accumulated equipment at cost less not be required in the SME revalue PPE depreciation and any any accumulated standard. Cross-reference to IAS should not be accumulated depreciation and any 16 should be deleted (CL 21, 30, 32, allowed(IASB, impairment losses. An accumulated impairment 39, 40, 53, 114, 120,129, 131, 132, 2008g). entity shall recognise losses. 140, 142, 160, 162, 164). the costs of day-to- 16.13 An entity that -2 argued that revaluation option day servicing of an elects to use the should be available in the SME item of property, revaluation model for a standard (CL 97, 121). plant and equipment class of items of PPE shall in profit or loss in the apply paragraphs 31-42 period in which the of IAS 16 Property, Plant costs are incurred” and Equipment and shall (IASB, 2009c: 94). make the disclosures required by paragraph 77 of IAS 16 (IASB, 2007b).

274 Column 1: Column 2: Relevant Column 3: Responses to exposure Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Board’s decision requirement in exposure draft test as reported Working recommendation Board Decision, July 2009 Nov-Dec 2005. draft in February 2007 by staff group decision, (Refer to Table July 2008 A3.4). SME standard The ED states that: Staff summary Component Majority Staff recommends The 17.16 of IFRS for SMEs should not refer 16.14 An entity shall -Component depreciation should depreciation is view: retain retaining the requirement states: to component allocate the amount be either not required or made irrelevant and component principle in 16.14 for depreciation. initially recognised in optional for SMEs (IASB, 2008g). would cause depreciation, but rewriting 16.14 component “If the major However, the respect of an item of problems if as it provides as follows: depreciation components of an guidance in para property, plant and Analysis undertaken as part of this applied strictly for relevant “16.14 If all of the in para 16.14 item of property, 44-47 should be equipment to its study SMEs (IASB, information significant parts of should be plant and equipment included (IASB, significant parts and Of the 7 respondents who 2008g). and is not an item of property, retained but have significantly 2005d). depreciate separately commented: unduly plant and equipment rewritten. different patterns of each such part. However, burdensome have the same The cost of an consumption of if a significant part of an -6 argued that the requirement to for SMEs. useful life and rate item of PPE economic benefits. An item of property, plant provide depreciation separately for Minority of depreciation, the should be entity shall allocate and equipment has a the assets is not feasible in many view: on entity shall recognise allocated to the initial cost of the useful life and a cases and costly (CL 15, 62, 63, 68, cost-benefit and measure the its significant asset to its major depreciation method that 90, 142). basis depreciation charge parts, with components and are the same as the -1 proposed make component component for the asset as a each part depreciate each such useful life and the depreciation optional (CL 114). depreciation whole. If, however, depreciated component separately depreciation method of should be significant parts of separately over its useful life. another significant part of simplified the asset have (component Other assets shall be that same item, those (IASB, significantly depreciation) depreciated over their parts may be grouped in 2008g). different useful lives only when the useful life as a single determining the or rates of parts have asset. With some depreciation charge. With depreciation and the significantly exceptions, such as some exceptions, such as entity intends to different quarries and sites quarries and sites used replace the shorter- patterns of used for landfill, land for landfill, land has an lived part(s) while benefit has an unlimited unlimited useful life and continuing to use consumption useful life and therefore is not the remainder of the (IASB, 2008b). therefore is not depreciated.” (IASB, asset, the entity depreciated” (IASB, 2007b). shall allocate the 2009c: 94). initial cost of an item of property, plant and equipment to its significant parts and depreciate each part

275 Column 1: Column 2: Relevant Column 3: Responses to exposure Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Board’s decision requirement in exposure draft test as reported Working recommendation Board Decision, July 2009 Nov-Dec 2005. draft in February 2007 by staff group decision, (Refer to Table July 2008 A3.4). separately. With some exceptions, such as quarries and sites used for landfill, land has an unlimited useful life and therefore is not depreciated” (IASB, 2008g: 15). The residual 16.17 of the ED states Staff summary A high proportion Majority Staff recommended Clarify that 17.19 of IFRS for SMEs value and useful that: Annual review of residual value, of the field test view was not that an SME should reassessment states: lives of PPE useful life, and depreciation entities had to change reassess residual of residual “Factors such as a should be “An entity shall review method should not be required. It problems the value, useful life and value, useful change in how an reviewed the residual value and should be reassessed only if there performing an requirement depreciation method life and asset is used, annually (IASB, the useful life of an asset is an indication of change (IASB, annual review of to annually for an asset only if depreciation significant unexpected 2005d). at least at each annual 2008g). residual values of review the there is a clear method wear and tear, reporting date and, if assets (IASB, residual indication of change should only technological expectations differ from Analysis undertaken for this study 2008g). value, useful since the last be performed advancement, and previous estimates, Of the 11 respondents who life and reporting date (IASB, if there is a changes in market amend the residual value commented: “Several field test depreciation 2008g). clear prices may indicate or useful life. The entity entities noted method. indication of that the residual value shall account for the -all argued that reviewing residual that the annual change since or useful life of an change in residual value value and useful life of the assets review of useful Some WG the last asset has changed or useful life as a change annually is costly and unnecessary lives and members reporting since the most recent in an accounting (CL 15, 16, 26, 59, 60, 68, 90, 111, depreciation found the date. annual reporting estimate in accordance 114, 121, 142). methods causes requirement Section 16 date. If such with paragraphs 10.13- undue cost” to annually should indicators are present, 10.17” (IASB, 2007b). (IASB, 2008g: 16). review the provide an entity shall review residual examples of its previous estimates “Some field test value, useful indicators and, if current entities suggested life and that could expectations differ, reviews of depreciation trigger such a amend the residual residual values/ method to reassessment value, depreciation useful lives should be (IASB, 2008b). method or useful life. take place at burdensome The entity shall

276 Column 1: Column 2: Relevant Column 3: Responses to exposure Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Board’s decision requirement in exposure draft test as reported Working recommendation Board Decision, July 2009 Nov-Dec 2005. draft in February 2007 by staff group decision, (Refer to Table July 2008 A3.4). longer periods of for an SME account for the time or only if (IASB, change in residual conditions arise 2008g). value, depreciation that would method or useful life require such as a change in an reviews to be accounting estimate performed” (IASB, in accordance with 2008g: 16). paragraphs 10.15- 10.18” (IASB, 2009c: 95).

Should the cost 16.5 of the ED states Staff Summary No comments Not Staff recommended Not clear of 17.8 of IFRs for SMEs of land and that: “Add undue cost exemption for discussed “not to add an the board states that: buildings be “Land and buildings are separation of land and buildings. ‘undue cost or decided at “Land and buildings separated when separable assets, and an This issue also was raised in effort’ exemption for this stage. are separable assets, acquired in a entity shall account for connection with Section 19 Leases the requirement to and an entity shall single purchase them separately, even and Section 15 Investment separate the land account for them was not when they are acquired Property” (IASB, 2008g: 18). and building separately, even when discussed earlier together” (IASB, 2007b: components when they are acquired as part of the 104). Analysis undertaken for this study land and building are together” (IASB, staff Of the 6 respondents who acquired in a single 2009c: 93). questionnaire. commented: purchase transaction There is no board -all argued that it was difficult to under sections 15, decision on this split land and building that was 16 and 19 of the ED” issue. acquired in a single purchase in (IASB, 2008g: 18). some jurisdictions-this was noted to be a problem in South Africa mainly (CL 34, 48, 68, 111, 114, 121).

277 Table A5.2 Section 18 Business Combinations and Goodwill—summary of issues and decisions made

Column 1: Column 2: Relevant Column 3: Responses to exposure Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Decision, Board’s requirement in exposure draft draft test as reported Working recommendation Board July 2009 decision in February 2007 by staff group decision, Nov-Dec July 2008 2005. (Refer to Table A3.6). To retain The ED states that: Staff Summary It would be “WG Staff Rejected Approved amortisation of the 18.21 “after initial recognition, Amortisation of goodwill should be difficult for members recommended amortisation goodwill over its estimated impairment the acquirer shall measure allowed over a limited number of years SMEs to carry unanimously that SMEs should of goodwill useful life of no more than testing of goodwill acquired in a business (IASB, 2008g). out impairment supported be allowed to (IASB, 2008b). ten years. goodwill combination at cost less any Analysis undertaken for this study assessment and amortisation amortise goodwill 19.23 of IFRS for SMEs state (IASB, accumulated impairment Of the 41 respondents who to identify the of goodwill over their that: 2005c). losses. Section 26 Impairment commented: impairment over its estimated useful “…the acquirer shall It was also of Non-financial Assets -36 proposed that amortisation of indicators (IASB, estimated lives (IASB, measure goodwill acquired decided that specifies principles for goodwill should be allowed (CL 13,17, 2008g). useful life, 2008g). in a business combination an indicator recognising and measuring the 30, 31, 33, 41, 48, 49, 51, 58, 59, 62, subject to an at cost less accumulated approach impairment of goodwill”(IASB, 63, 64, 66, 68, 92, 93, 96, 99, 100,106, impairment amortisation and should be 2007b). 110, 114, 116, 117, 121, 128, 132, 133, test using the accumulated impairment explored for 136, 138, 140,145, 161,162) indicator losses: recognising -two did not support amortisation of approach (a)An entity shall follow the impairment goodwill (CL 135, 66) proposed in principles in paragraphs of goodwill, -1 argued that impairment the ED” (IASB, 18.19-18.24 for which requirement lacked relevance and was 2008g: 23). amortisation of goodwill. If would burdensome (CL 88) an entity is unable to make replace the -2 proposed that the impairment test “Many WG a reliable estimate of the annual should be simplified (CL 46, 149) members useful life of goodwill, the impairment -4 argued that impairment should be would impose life shall be presumed to be calculation based on value in use compared to a maximum ten years” (IASB, 2009c: (IASB, carrying amount and not fair value. (CL life of not 107). 2005c). 62, 84, 92, 99) more than ten -1 argued that impairment values years, with should be applied to complete groups some of assets and not individual assets (CL favouring five 100). years” (IASB, 2008g: 23).

278 Column 1: Column 2: Relevant Column 3: Responses to exposure Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Decision, Board’s requirement in exposure draft draft test as reported Working recommendation Board July 2009 decision in February 2007 by staff group decision, Nov-Dec July 2008 2005. (Refer to Table A3.6). Use of 18.5 of the ED states that: Staff Summary Section 18 WG members Staff Pooling of 19.6 of IFRS for SMEs state purchase “All business combinations “A few comment letters suggested that Business opposed recommended interests that: method shall be accounted for by use of book values/pooling of interests Combinations allowing SMEs that pooling of accounting for should be applying the purchase method should be considered. This was and Goodwill to follow interests a business “All business combinations retained method”(IASB, 2007b). predominantly mentioned in relation seems very merger accounting, combination shall be accounted for by (IASB, to cooperatives, where respondents complex and is accounting for should not be was not applying the purchase 2005d). [When pooling of interest felt that the purchase method ‘is not costly to apply any business allowed for SMEs allowed for method” method is used for business appropriate’” (IASB, 2008g: 28). (IASB, 2008g). combinations (IASB, 2008g). SMEs (IASB, (IASB, 2009c: 104). combination goodwill is not other than 2008b). created. This method is not Analysis undertaken for this study Field test combinations provided for SMEs in the ED]. Of the 7 respondents who commented: entities of entities -3 argued that pooling of interests proposed that under method is more appropriate than the the IASB should common purchase method (CL 123, 132, 143). try to provide control (IASB, -4 argued that the pooling of interest SMEs material 2008g). method is relevant for mergers relief, regarding between co-operatives than the the disclosure purchase method (CL 61, 70, 103,143) requirements -3 proposed that the purchase method (IASB, 2008g). is not appropriate for cooperatives (CL 61, 103, 132). Not The ED states that: Staff Summary Identifying WG members Staff Intangible 19.15 of IFRS for SMEs discussed 18.14 “The acquirer shall “Simplify allocation of cost. In intangible supported the recommended assets states that: previously recognise separately the particular do not require separation of assets in a requirement “that intangibles acquired “in a “the acquirer shall acquiree’s identifiable assets, all or certain intangibles (such as those business to separate acquired by an business recognise separately the liabilities and contingent with no quoted market price, those combination intangibles as SME in a business combination acquiree’s identifiable liabilities at the acquisition that are not legal rights, and/or those was difficult for proposed in combination should be assets, liabilities and date only if they satisfy the that were not recognised by the SMEs (IASB, ED should be separately contingent liabilities at the following criteria at that date: acquiree)” (IASB, 2008g: 25). 2008g). paragraphs separately recognised if acquisition date only if they (a) in the case of an asset other 17.6 and recognised if their their fair satisfy the following criteria than an intangible asset, it is Analysis undertaken for this study Specific 18.14(c) fair value can be value can be at that date: probable that any associated Of the 8 respondents who commented: intangibles (IASB, 2008g). measured reliably measured a)in the case of an asset future economic benefits will -2 argued that this section should not should be given without undue reliably (an other than an intangible

279 Column 1: Column 2: Relevant Column 3: Responses to exposure Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Decision, Board’s requirement in exposure draft draft test as reported Working recommendation Board July 2009 decision in February 2007 by staff group decision, Nov-Dec July 2008 2005. (Refer to Table A3.6). flow to the acquirer, and its require separate identification of as examples cost or effort” ‘undue cost or asset, it is probable that fair value can be measured intangible assets (CL 105,157) within this (IASB, 2008g: 26). effort’ any associated future reliably. -2 suggested that more guidance in section (IASB, exemption economic benefits will flow (b) in the case of a liability identifying and accounting for reverse 2008g). should not be to the acquirer, and its fair other than a contingent acquisitions should be provided (CL 63, added)” (IASB, value can be measured liability, it is probable that an 114) 2008b: 3). reliably, outflow of resources will be -3 proposed that accounting treatment b)in the case of a liability required to settle the for step acquisitions should be other than a contingent obligation, and its fair value provided (CL 49, 51, 114). liability, it is probable that can be measured reliably. -1 suggested that more guidance on an outflow of resources will (c ) in the case of an intangible attributing fair value to assets and be required to settle the asset or a contingent liability, liabilities acquired should be provided obligation, and its fair value its fair value can be measured (CL 135). can be measured reliably, reliably” (IASB, 2007b). c)in the case of an [Step acquisition and reverse intangible asset or a acquisition methods are not contingent liability, its fair allowed for SMEs and are value can be measured therefore not included in the reliably” (IASB, 2009c: 106). exposure draft]. Not 18.18 of the ED states that: Staff Summary No related WG members Staff Contingent discussed “the acquirer recognises Do not require recognition of comments. agreed to recommended liabilities previously separately a contingent liability contingent liabilities (IASB, 2008g). require “that contingent acquired in a of the acquiree only if its fair recognition of liabilities assumed business value can be measured Analysis undertaken for this study contingent by an SME in a combination reliably. If its fair value cannot Of the 10 respondents who liabilities business should be be measured reliably: commented: acquired in a combination separately a)There is a resulting effect on -7 argued that contingent liabilities business should be recognised if the amount recognised as should not be recognized when combination separately their fair goodwill or accounted for in allocating the cost of a business (IASB, 2008g). recognised if their value can be accordance with paragraph combination (CL 64, 68, 114, 121, 140, fair value can be measured 18.22; and 142, 157,162). measured reliably reliably (an b)The acquirer shall disclose -1 proposed that additional disclosure without undue ‘undue cost or the information about that about contingent liabilities should be cost or effort” effort’

280 Column 1: Column 2: Relevant Column 3: Responses to exposure Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Decision, Board’s requirement in exposure draft draft test as reported Working recommendation Board July 2009 decision in February 2007 by staff group decision, Nov-Dec July 2008 2005. (Refer to Table A3.6). contingent liability as required provided (CL 116) (IASB, 2008g: 27). exemption by section 20.”(IASB, 2007b). should not be added) (IASB, 2008b). Not No specific guidance given in Staff Summary No related Not discussed. Staff To add the discussed the exposure draft on how to “Unclear how to account for comments. recommended requirements previously account for adjustments to the adjustments to the fair values of “including in in IFRS fair values of identifiable assets identifiable assets and liabilities after Section 18 the 3(2008) and liabilities that are known acquisition, for instance it appears requirements in regarding the to have existed as of the possible to make adjustments without IFRS 3(2008) for 'measuremen acquisition date after the any limitation” (IASB, 2008g: 27). ‘measurement t period' to acquisition took place. period’” (IASB, account for “Simplify the requirements for initial 2008g: 27). adjustments accounting, for instance by prospective to the fair rather than retrospective adjustments, values of and provide a longer period for identifiable determination” (IASB, 2008g: 27). assets and liabilities after Analysis undertaken for this study acquisition Of the three respondents who (IASB, 2008b). commented: -1 argued that obtaining fair value of the acquired business is costly (CL 41) -1 proposed that consideration should be given to providing more guidance on attributing fair values to assets and liabilities acquired.( CL 135) -1 argued that determining fair value can be a costly and burdensome process for cooperatives, particularly for SMEs (CL 143).

281 Table A5.3 Section 19 Leases- summary of issues and decisions made

Column 1: Column 2: Relevant Column 3: Responses to exposure draft Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Board’s decision requirement in test as reported Working group recommendation Board Decision, July 2009 Nov-Dec 2005. exposure draft in by staff decision, (Refer to Table February 2007 July 2008 A3.5). All leases should 19.3 of the ED Staff summary “A few field test WG members Staff To retain the 20.4 of IFRS for SMEs not be treated as states that: entities opposed the recommended guidance in states: operating leases “A lease is classified Simplify the criteria for the classification of encountered addition of the “to change the ED (IASB, 2005c). as a finance lease if a lease as either operating or finance. For problems quantitative 19.4(b) to relating to “A lease is classified as it transfers example, use fewer criteria or introduce applying the criteria into ED ‘substantially all classification a finance lease if it The Board asked substantially all the quantitative tests. Several letters classification paragraphs 19.4 of the economic of leases as transfers substantially the staff to risks and rewards suggested treating all leases as operating criteria given in and 19.5 (for life of the asset’” either all the risks and incidental to 19.4 classification of a (IASB, 2008g: 32). operating or explore further leases (IASB, 2008g). rewards incidental to ownership. A lease (determinative financing lease) financing but the following two ownership. A lease is is classified as an Analysis undertaken for this study factors) and 19.5 (IASB, 2008g). to include classified as an approaches, and operating lease if it Of the 23 respondents who commented: (additional additional operating lease if it bring a does not transfer indicative guidance -6 argued that all lease should be treated does not transfer recommendation substantially all the factors). Several “Some WG regarding the as operating (CL 28, 46, 90, 111, 153, 154). substantially all the risks and rewards entities suggested members argued application of to the Board at a -3 proposed to retain the distinction risks and rewards incidental to examples and that treating all the criterion future meeting: between operating and finance lease (CL incidental to ownership” (IASB, quantitative leases as 'major part of a) Treat all leases 72, 105, 124). ownership” (IASB, 2007b). thresholds would operating is an the economic -2 argued that the illustrative guidance on 2009c: 110). as finance leases be very appropriate life of the the classification of the lease should be with beneficial” (IASB, simplification for asset'(IASB, provided (CL 109, 157). measurement 2008g: 31). SMEs” (IASB, 2008b: 3). -5 proposed that simplification to the lease simplifications. 2008g: 31). section/classification should be provided

(CL 95, 100, 149, 160, 162). b) Retain the IAS -5 argued that SMEs should not be 17 operating and required to split the classification of finance lease split building from leasehold land. It should be but with considered as a single lease (CL 34, 48, 84, measurement 92, 117). simplifications - 1 suggested that further details for the (IASB, 2005c). lease disclosure should be provided (CL 129). -1 argued that clear wording in 19.13 should be provided (CL 1).

282 Column 1: Column 2: Relevant Column 3: Responses to exposure draft Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Board’s decision requirement in test as reported Working group recommendation Board Decision, July 2009 Nov-Dec 2005. exposure draft in by staff decision, (Refer to Table February 2007 July 2008 A3.5). Whether straight- 19.13 of ED states Staff Summary No related “WG members Staff Discussed the 20.15 of IFRS for SMEs line method that: “A lessee shall “Do not require the straight-line method comments (IASB, recommended recommended staff proposal states that: “A lessee should be recognise lease for operating leases (that is spreading total 2008g). that the adding a second to modify the shall recognise lease required for payments under lease payments evenly over the lease requirement for ‘unless’ to 19.13 application of payments under operating leases operating leases term)” (IASB, 2008g: 28). recognising lease so that the the straight- operating leases was not (excluding costs of payments under revised 19.13 line method (excluding costs for discussed earlier services such as in Analysis undertaken for this study operating leases requires: for operating services such as by the IASB. insurance and Of the 6 respondents who commented: on a straight-line 19.13 A lessee leases if insurance and maintenance) as an -3 suggested the removal of the basis as described shall recognise payments to maintenance) as an expense on a requirement of straight line for operating in 19.13 be lease payments the lessor are expense on a straight- straight-line basis leases (CL 15, 17, 68, 114). retained” (IASB, under operating structured to line basis unless either unless another - 2 proposed that the interest recognition 2008g: 29). leases (excluding compensate a) another systematic systematic basis is could be simplified by permitting straight costs for services for expected basis is representative representative of line recognition (CL 150, 157). such as insurance inflation. The of the time pattern of the time pattern of and maintenance) Board asked the user’s benefit, even the user’s benefit, as an expense on the staff to if the payments are not even if the a straight-line refine its on that basis, or payments are not basis unless either recommendat b) the payments to the on that basis” (IASB, (a) another ion for lessor are structured to 2007b). systematic basis is consideration increase in line with representative of at a future expected general the time pattern meeting inflation (based on of the user’s (IASB, 2008b). published indexes or benefit, even if statistics) to the payments are compensate for the not on that basis; lessor’s expected or (b) the inflationary cost payments to the increases. If payments lessor are to the lessor vary structured to because of factors compensate for other than general the lessor’s inflation, then this expected cost condition (b) is not increases (IASB, met” (IASB, 2009c: 112- 2008g). 113).

283 Column 1: Column 2: Relevant Column 3: Responses to exposure draft Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Board’s decision requirement in test as reported Working group recommendation Board Decision, July 2009 Nov-Dec 2005. exposure draft in by staff decision, (Refer to Table February 2007 July 2008 A3.5). Measurement of 19.8 of ED states Staff summary Some field test “WG members Staff Not sure of 20.9 of IFRS for SMEs finance lease. that “ …lessees shall entities would keep a recommended the board states that: “…a lessee This issue was recognise the rights “Do not require a finance lease to be recognised single “to retain the decision here. shall recognise its rights and obligations finance leases for measurement for single of use and obligations not discussed at measured only at fair value of leased under finance property. Two methods were proposed: the first time, the leased asset measurement, to under finance leases as the board earlier. leases as assets and either reinstate lower of fair value and since under their and related lease describe it as ‘the assets and liabilities in liabilities in their present value of minimum lease payments local GAAP only obligation based cash price that its statement of

balance sheet at or just require present value of minimum note disclosure is on fair value, but the lessee would financial position at amounts equal to lease payments. In the later case, some required. A few they would not have paid if it had amounts equal to the the fair value of the letters noted impairment requirements entities argued call the acquired the asset fair value of the leased leased property would prevent overstatement of assets” that this caused measurement rather than property or, if lower, determined at the (IASB, 2008g: 30). ‘undesirable’ ‘fair value’. This leased it’, and to the present value of the inception of the effects as it was because state that if that minimum lease lease ...” (IASB, Analysis undertaken for this study impacted on their SMEs will have cash price is not payments, determined 2007b). Of the 46 respondents who commented: capital (IASB, difficulty in available from a at the inception of 2008g). understanding price quotation in lease” (IASB, 2009c: -30 argued that SMEs should be allowed to that term and in an active market 111). use present value of the minimum lease “Information applying it it may be payments instead of fair value (CL 16, 34, about the fair consistently. necessary to 39, 47, 49, 51, 59, 60, 62, 63, 64, 68, 88, 97, value of the Instead, they measure it at the 99, 105, 114, 115, 116, 121, 124, 127, 129, leased asset recommend that present value of 131, 135, 140, 142, 149, 154, 161). was unavailable the IFRS for SMEs minimum lease -15 proposed that the requirement for to measure describe it as ‘the payments” (IASB, cash price that 2008g: 31). accounting for finance lease by lessors finance leases the lessee would (currently provided through a referral to or was IAS 17) should be included within section have paid if it had burdensome to 19 (CL 11, 34, 52, 62, 86, 92, 93, 97, 99, acquired the asset 104, 116, 142, 145, 156, and 157). identify” (IASB, rather than - 1 argued that the finance lease 2008g: 48). leased it’” (IASB, classification should be simplified by 2008g: 30). retaining only three criteria: 1) the lease Some entities transfers ownership of the asset or 2) the argued “WG members lessee has the option to purchase the asset “measuring the agree that there and the option will be exercised or 3) the fair value of the shouldn’t be any lease term is for the major part of the leased asset was difference at

284 Column 1: Column 2: Relevant Column 3: Responses to exposure draft Column 4: Field Column 5: Column 6: Staff Column 7: Column 8: Board Board’s decision requirement in test as reported Working group recommendation Board Decision, July 2009 Nov-Dec 2005. exposure draft in by staff decision, (Refer to Table February 2007 July 2008 A3.5). economic life of the asset (CL 162). less practicable inception - a numerical threshold for recognising than if entities between the finance leases should be introduced(CL 63). were able to use values at which -2 argued that accounting for finance the present value the liability and leases in the financial statements of lessors of minimum lease the asset should should be dropped (CL 21, 118). payments” (IASB, be recognised” -1 argued that calculating fair value is not 2008g: 30). (IASB, 2008g: 30). an issue for SMEs (CL 32).

285 Table A5.4 Section 35 Specialised Industries- summary of issues and decisions made Column 1: Column 2: Relevant Column 3: Responses to Column 4: Field Column 5: Column 6: Staff Column 7: Board Column 8: Board Decision, July Board’s decision requirement in exposure exposure draft test as reported Working group recommendation decision, 2009 Nov-Dec 2005. draft in February 2007 by staff July 2008 (Refer to Table A3.7). No Section 35.1 of ED: Staff Summary Few entities The addition of Staff The board decided 34.2 of IFRS for SMEs states simplification An entity ... engaged in The cost method should be had problems an ‘undue cost recommendation was that the cost model that: was provided agricultural activity provided as the accounting obtaining the or effort’ that there is no need would not be added “An entity using this IFRS that is for the major shall determine, for policy choice for measuring fair value for criterion for use to allow the cost to section 35 as an engaged in agricultural activity principles in IAS each of its biological biological assets and the the biological of fair value of model as an accounting policy shall determine its accounting 41 (IASB, assets, where the fair use of fair value should be assets and agricultural alternative choice for SMEs policy for each class of its 2005d). value of that biological restricted to only certain agricultural assets is accounting policy (IASB, 2008a). biological assets as follows: asset is readily circumstances (IASB, produce. They appropriate choice because a) The entity shall use the fair That is if determinable without 2008g). argued that the and, therefore, Section 35 provides value model in paragraphs reliable undue cost or effort: (a) Analysis undertaken for this cost model the approach the simplification 34.4-34.7 for those biological measure of fair The entity shall apply study should be used in Section needed for an SME assets for which fair value is value is not the fair value model in Of the 25 respondents who allowed 35 should not (IASB, 2008g). readily determinable without available, cost paragraphs 10–29 of commented: because fair be changed undue cost or effort. model could be IAS 41 Agriculture to -15 argued that cost values was (IASB, 2008g). b) The entity shall use the cost used. account for those measurement should be either costly to model in paragraph 34.8-34.10 biological assets whose allowed instead of fair obtain, or was for all other biological assets”. fair value is readily value to measure the not available (IASB, 2009c: 200). determinable without biological assets. It is (IASB, 2008g). undue cost or effort, difficult to obtain the fair and the entity shall value for such assets (CL 26, make all related 30, 46, 68, 72, 100, 104, disclosures required by 111, 114, 118, 117, 121, IAS 41. 131, 140, 150). (b) The entity shall -2 proposed that there is no measure at cost less measurement of the cost of any accumulated biological asset, particularly depreciation and any for livestock (CL 48, 60). accumulated -8 argued that the impairment losses measurement requirement those biological assets for agricultural produce whose fair value is not should be simplified readily determinable (CL 11, 12, 13, 39, 63, 84, without undue cost or 97, 160). effort ... (IASB, 2007b: 217, ED).

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