Re: June, 2012 Request for Information (RFI) of the International Accounting Standards Board (IASB), Comprehensive Review of the IFRS for SMEs

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1 December 5, 2012 Ms. Michelle Fisher Senior Technical Manager IFRS Foundation / IASB 30 Cannon Street London, EC4M 6XH United Kingdom Re: June, 2012 Request for Information (RFI) of the International Accounting Standards Board (IASB), Comprehensive Review of the IFRS for SMEs Dear Ms. Fisher: One of the objectives that the Council of the American Institute of Certified Public Accountants (AICPA) established for the Private Companies Practice Section (PCPS) Executive Committee is to represent the views of local and regional firms on professional issues in keeping with the public interest, primarily through the Technical Issues Committee (TIC). This communication is in accordance with that objective. These comments, however, do not necessarily reflect the positions of the AICPA. TIC has reviewed the RFI and is providing the following comments for your consideration. GENERAL COMMENTS TIC believes that modifications or updates to the IFRS for SMEs should be considered for the following: Applicability to certain not-for-profit organizations (Question 3) The issuance of IFRS 10, Consolidated Financial Statements, modified as appropriate for SMEs (Question 4) The issuance of IFRS 9, Financial Instruments (Question 5) The issuance of IFRS 13, Fair Value Measurement (Question 6) The issuance of IFRS 11, Joint Arrangements (Question 8) Useful life of intangible assets, including goodwill (Question 11)

2 Changes to IFRS 3, Business Combinations (Question 12) Share subscriptions receivable (Question 13) Adopting an amendment to IAS 12, Income Taxes, which establishes a rrebuttable presumption that investment property at fair value is recovered through sale (Question 18) LIFO inventory costing method (Question 20) Applicability of IFRS for SMEs to large private companies without public accountability (Question 20). However, TIC recommends that IFRS for SMEs should not be revised to reflect the following proposed changes: Expanding the scope of the standard to cover publicly traded entities (Question 1) Allowing each jurisdiction to decide whether the standard could be applied to financial institutions (Question 2) Moving all guidance on fair value to a separate section of the standard (Question 7) Use of the revaluation model for property, plant and equipment (Question 9) Capitalization of development costs (Question 10) Capitalization of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (Question 14) Recognition of deferred income taxes and conformity with IAS 12 (Questions 16 and 17) Details on each of TIC s views are provided below. SPECIFIC COMMENTS Part A Specific Questions on Sections 1-35 of the IFRS for SMEs 1. Should entities whose debt or equity instruments trade in a public market continue to be prohibited from using IFRS for SMEs or should each jurisdiction decide whether such entities should be permitted or required to use IFRS for SMEs? TIC believes publicly traded entities should not be allowed to use IFRS for SMEs. TIC believes all publicly traded entities, regardless of size, have public accountability, a characteristic which should automatically exclude publicly traded entities from IFRS for SMEs. Public company equity and debt investors and analysts typically have different recognition, measurement and disclosure needs from the users of the financial statements of private entities. Those needs may be inconsistent with the concepts and principles underlying the IFRS for SMEs. Allowing each jurisdiction to decide whether publicly traded entities would be eligible to use IFRS for SMEs will lead to inconsistency in the application and understanding of

3 the standard. Certain jurisdictions would take a more lenient approach and allow companies to use IFRS for SMEs, whereas other jurisdictions would not. TIC believes relaxing the current prohibition would also reduce the comparability of financial statements across jurisdictions, an outcome that would be inconsistent with the objective behind a high-quality set of global accounting standards. For the standard to gain increasing acceptance for usage by nonpublic entities worldwide, the Board should limit the scope of the standard at this time to private company financial reporting. 2. Should financial institutions and other entities that hold assets for a broad group of people continue to be prohibited from using IFRS for SMEs or should each jurisdiction decide whether such entities should be permitted or required to use IFRS for SMEs? TIC does not support modifying the standard for usage by financial institutions and other entities that hold assets for a broad group of people. TIC believes industryspecific accounting guidance should apply to all entities within the industry irrespective of public/private considerations or the size of the entity. For example, fair value measurements are likely to be equally relevant to all financial statement users of financial institutions. TIC acknowledges, however, that the definition of financial institution or financial company is not well defined and could encompass micro-sized entities (very small companies with just a few employees), as well as special purpose entities, such as captive insurance companies, which have become increasingly prevalent. Therefore, perhaps further consideration of what constitutes a broad group of people should be explored. If industry-specific accounting standards are to be applied across the board, then the definition or scope of the companies included in that industry should be given careful consideration, including any regulatory considerations, to ensure that all entity types that are classified as part of a particular industry are characterized by the same or similar financial statement objectives. 3. Should IFRS for SMEs be revised to clarify whether an NFP entity is eligible to use it? TIC would be supportive of the Board considering the use of IFRS for SMEs for certain not-for-profit organizations that would meet the SME definition. TIC believes the global not-for-profit community is in need of an SME solution, especially since full IFRS does not include a comprehensive set of standards for this industry. Adding a not-for-profit chapter to IFRS for SMEs would help the standard gain increasing acceptance worldwide. 4. Should IFRS for SMEs be revised in consideration of recent changes to IFRS 10, Consolidated Financial Statements? [Such changes include agency relationships, control with less than a majority of voting rights, assessing control where potential voting rights exist, such as options.]

4 Yes, TIC supports revision of the IFRS for SMEs to reflect the main changes from IFRS 10 outlined above (modified as appropriate for SMEs). One of the modifications to IFRS 10 that TIC encourages the Board to consider for the IFRS for SMEs is the elimination of the requirement for consolidation when an investor has the ability to exercise power over its variable returns from an investee. The guidance in IFRS 10 (Revised as of June 2012) is similar to FASB Accounting Standards Codification TM Topic 810, Consolidation, which is based on the power and control (variable interest) model taking precedence over the voting interest model. U.S. GAAP and full IFRS are heavily influenced by the needs of users of listed companies financial statements. As such, the risk of non-consolidation of off-balancesheet items and entities is greater among publicly traded companies than those of private companies. Private companies will use an array of variable interest entities in areas of risk management, estate planning, as well as income tax planning. Each of these items is used not to misrepresent the financial statements but rather for legitimate business purposes in a private entity. TIC encourages the IASB to consider the ways that private companies use variable interest entities and appropriately modify the standard to better reflect the needs of the users of private company financial statements. Another important modification that the Board should consider is the applicability of the parent company only model for SMEs, as discussed in the SME Implementation Group s Interpretation No. 2011/01, Use of the IFRS for SMEs in parent s separate financial statements. TIC believes that issuance of parent only financial statements should be an acceptable GAAP alternative for SMEs not a GAAP departure. The Interpretation represents a significant step toward this objective and should be incorporated within the IFRS for SMEs. Before the Interpretation is integrated into IFRS for SMEs, TIC recommends that the Board consider certain modifications to clarify its applicability. The Interpretation is unclear as to whether consolidated financial statements must be prepared whenever separate parent company financial statements are issued. For many SME financial statement users in the U.S., consolidated financial statements are not relevant. Therefore, TIC believes that separate, standalone parent company statements (without accompanying consolidated financial statements) should be permissible in all cases, as long as the parent does not itself have public accountability and appropriate disclosures are provided. TIC believes this clarification could potentially increase the usage of the IFRS for SMEs in the United States. 5. How should the current option to use IAS 39 in IFRS for SMEs be updated once IFRS 9, Financial Instruments, becomes effective? TIC supports continuing the current option to allow entities to follow the recognition and measurement provisions of IFRS 9, which will supersede IAS 39. TIC understands that IFRS 9 was written to be more principles-based and less complex than IAS 39.

5 The overall concepts of financial instruments are inherently complex, and while IFRS 9 may be clearer or slightly less complex than IAS 39 (which can be debatable), the standard is still beyond the scope that many SMEs may want to consider for purposes of their financial statements. Additionally, IFRS 9 retains most of the requirements of IAS 39 for classifying and measuring financial liabilities. 6. Should IFRS for SMEs be revised in consideration of recent changes to IFRS 13, Fair Value Measurement? [IFRS 13 includes an emphasis that fair value is a market-based versus entity-specific measurement; an amended definition of fair value to focus on exit price; and more specific guidance on determining fair value, including assessing the highest and best use of non-financial assets and identifying the principal market.] TIC believes that fair value guidance should be the same for both IFRS and IFRS for SMEs. Therefore, a revision to IFRS for SMEs as a result of IFRS 13 s replacement of IAS 39 would be appropriate. 7. Should the guidance regarding fair value be moved into a separate section of IFRS for SMEs? TIC believes that having any guidance in its own comprehensive section is, on the surface, beneficial. However, the application of fair value accounting is highly complex, and consolidation of the guidance, in practice, may be of little use to SMEs. They may not know that the guidance applies or to what extent and may neglect to look to the separate section. Therefore, TIC believes SMEs would benefit more if fair value guidance remained closely aligned to the specific area of IFRS for SMEs that is being evaluated by the SME. If the Board decides to move all fair value guidance on both financial and non-financial items to a separate section, then a cross-reference to the separate section should be provided within each of the sections addressing fair value measurements. 8. Should IFRS for SMEs be revised in consideration of recent changes to joint venture accounting in IFRS 11, Joint Arrangements, which replaced IAS 31, Interests in Joint Ventures? Yes, TIC believes that IFRS for SMEs should be revised to reflect changes to IFRS 11, as IFRS 11 reflects substance over form, based on the parties rights and obligations, as opposed to the legal structure of the arrangement. 9. Should an option to use the revaluation model for property, plant and equipment be added to the IFRS for SMEs? TIC does not support modification of the standard to allow the use of the revaluation model for SMEs. TIC believes the addition of this option could reduce the reliability and relevance of financial statements prepared using the revaluation option due to the volatility in many geographic markets as well as the absence of well-defined application guidance. In addition, the revaluation of property, plant and equipment

6 does not necessarily provide any added value to users of the financial statements of SMEs. When property plant and equipment are used as collateral for lending, financial institutions often require a separate valuation to be performed. Revaluation adjustments also introduce more complexity into the presentation of financial statements. Use of the option would also present comparability issues between those entities that elect the option and those that don t. 10. Should IFRS for SMEs be revised to require capitalization of development costs meeting criteria for capitalization? TIC does not support a change in the standard to require capitalization of development costs. The proposed change could reduce the reliability and relevance of financial statements prepared under the standard. These concepts are not well understood by many preparers and users of SME financial statements. Many SMEs may not be sophisticated enough to track the costs and, accordingly, there would be inconsistency in practice. 11. Should the accounting for intangible assets (including goodwill) for IFRS for SMEs be revised to state If an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall be presumed to be 10 years unless a shorter period can be justified? TIC does not entirely support this proposal. If management is unable to develop a reliable estimate of the useful life of an intangible asset (including goodwill), TIC could support a proposal to adopt a default useful life of 10 years. However, the proposed language above seems illogical. If a shorter life than 10 years is determined to be appropriate, then this estimate is inherently more reliable than the default 10- year amortization period. In such cases, the lower estimate should be used. Although the proposed language above is meant to help entities reach that conclusion, TIC recommends separating the two concepts into two separate sentences and providing additional guidance surrounding the meaning of reliability to ensure that entities do not default to the 10-year period simply because they can t justify with certainty a specific life in the one-to-ten year time-frame. The best estimate of an entity s useful life should be used. In addition to the above guidance, TIC believes additional guidance should be added to the standard regarding amortization methods for intangible assets to illustrate the potential utilization of the asset on a basis other than straight-line. The guidance should emphasize that amortization of intangible assets should always reflect the pattern in which the economic benefits of the asset are consumed or used up. If that pattern cannot be reliably determined, then straight-line amortization is appropriate. TIC also suggests adding a requirement to state that there is a rebuttable presumption that intangible assets other than goodwill will not be assigned an asset life that exceeds the life assigned to goodwill.

7 12. Should IFRS for SMEs be revised in consideration of recent changes to IFRS 3, Business Combinations? [The principal changes would include: expensing acquisition-related costs, contingent consideration recognition; goodwill determination and fair value of existing/acquired interests and non-controlling interests.] Yes, we believe that IFRS for SMEs should be revised to reflect changes to IFRS Should IFRS for SMEs be revised to permit or require presentation of share subscriptions receivable as an asset? While TIC supports the current SME accounting guidance that prohibits the presentation of share subscriptions receivable as an asset, TIC believes some flexibility is appropriate. TIC believes that it would be reasonable to permit SMEs to present them as assets, upon meeting the criteria similar to those outlined in U.S. GAAP (i.e., cash is received prior to the issuance of the financial statements). Further, TIC believes that jurisdictional laws should be permitted to prevail when accounting for subscriptions receivable. This exception is similar to the accounting for treasury shares under U.S. GAAP, which defaults to the provisions of state law where such law governs the circumstances under which an entity may acquire its own stock and prescribes the appropriate accounting treatment. 14. Should IFRS for SMEs be revised to require capitalization of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, with all other borrowing costs expensed as incurred? TIC does not believe the standard should be modified to require capitalization of borrowing costs for the acquisition, construction or production of a qualifying asset. The current guidance provides a practical expedient from the complexity and subjective nature of the capitalization of borrowing costs. The capitalization of borrowing costs is a reflection of the capital and liquidity resources of an entity. A well-capitalized and liquid entity may not choose to borrow funds to construct or produce a qualifying asset. Therefore, such an entity would have a lower basis in the asset than an entity which, due to a more restricted capital and liquidity position, has to borrow funds for the qualifying asset resulting in a higher basis. While the company with a more restricted basis would have higher depreciation cost on a subsequent-period basis, as well as potential impairment (ignoring the economic inefficiency of the impairment model), the utility of the asset would be the same. The concept of capitalizing borrowing costs may be of little use for SMEs whose primary concern is usually cash flows, which is also the primary concern of many of the SME stakeholders. In addition, capitalizing borrowing costs would add little benefit to the evaluation of whether or not a SME can pay back the related debt.

8 15. Should the option to recognize actuarial gains and losses in profit and loss be removed? TIC has no response to this question. 16. Should SMEs recognize deferred income taxes and, if so, how should they be recognized? TIC does not believe that SMEs should recognize deferred income taxes. In the U.S., many SMEs are pass-through entities. These entities do not pay income taxes, and the owners are separately responsible for their pro rata share of the entity s taxable profits and losses. In many other jurisdictions, there are no significant timing issues between the financial reporting basis and the tax reporting basis, which further reduces the need for deferred income tax guidance. The concept of deferred taxes is a subject of such complexity that even competent, experienced preparers have difficulty calculating and understanding the accounting and the related disclosures. It is our experience that, for smaller, less sophisticated companies, both management and users neither understand the accounting and disclosures nor utilize such information when making decisions. TIC therefore believes that recognition should be based on current income taxes. 17. Should IFRS for SMEs be revised to conform it to IAS 12, Income Taxes, modified as appropriate to reflect the needs of the users of the SME financial statements? Based on the response in Question 16 above, TIC does not believe that IFRS for SMEs should be revised to conform to IAS Should IFRS for SMEs be revised to incorporate, for deferred tax purposes, an exemption based on the rebuttable presumption that investment property at fair value is recovered through sale? TIC believes that the rebuttable presumption, as noted in IAS 12, should be allowable for SMEs. However, TIC believes that this issue supports the position taken in Question 16, which describes the complexity and confusion by the user community regarding the concept of deferred taxes. TIC requests that the Board consider this when updating the IFRS for SMEs. 19. Are there any topics that are not specifically addressed in the IFRS for SMEs that you think should be covered (i.e., where the general guidance in paragraphs is not sufficient)? No, none noted. 20. Additional specific issues? TIC believes IFRS for SMEs should allow the use of the Last-In, First-Out (LIFO) method of inventory accounting. The LIFO method is a commonly used inventory

9 method in the U.S. for many manufacturing and retail entities. TIC understands that full IFRS does not allow the use of LIFO, nor is it an acceptable method of income tax accounting in many European countries. However, this should not automatically disqualify an acceptable alternative inventory costing method for use in the SME standard. In the U.S., the use of LIFO is permitted for tax purposes subject to a special LIFO Conformity Rule mandated by the U.S. Internal Revenue Service. Under this rule, a taxpayer who elects to use the LIFO inventory method for federal income tax purposes must also use the LIFO method to calculate inventory and cost of goods sold for financial reporting purposes. Therefore, TIC believes that IFRS for SMEs should be modified to permit the use of LIFO if a jurisdiction permits the use of LIFO for income tax purposes and law or regulation also requires LIFO to be used for financial reporting purposes. TIC is suggesting that the LIFO method be permitted by IFRS for SMEs on an exception basis only to accommodate jurisdictional differences and is not suggesting that it is an equally acceptable method compared to other methods discussed in the IFRS for SMEs. TIC believes if LIFO was allowed under these circumstances, IFRS for SMEs could become a more widely considered alternative in the United States. TIC recommends that the Board clarify the applicability of IFRS for SMEs for large private companies without public accountability. Use of the phrase small and medium-sized entities in the title of the standard could be interpreted as intending to exclude large private entities from its scope. However, paragraph 1.2 of the IFRS for SMEs describes SMEs as entities that do not have public accountability and publish general purpose financial statements for external users. Such criteria could describe large private entities, as well as small and medium-sized entities. The title of the standard seems more restrictive than its potential scope. The IFRS for SMEs framework should be clear as to its scope to ensure that it is applied correctly and consistently across jurisdictions. Part B General Questions 4. Do you have any comments on the IFRS Foundation IFRS for SMEs training materials available on the IFRS website? TIC encourages the IFRS Foundation to continue collaboration with the FASB, as well as the AICPA, to promote and service the needs of private company financial statements. In addition, TIC believes that the IFRS Foundation should consider hosting a SME workshop in the U.S. to help build awareness for the standard and highlight the unique needs of SMEs. TIC would be happy to assist with the planning of the workshop as a step toward building such awareness.

10 TIC appreciates the opportunity to present these comments on behalf of PCPS member firms. We would be pleased to discuss our comments with you at your convenience Sincerely, Karen Kerber, Chair PCPS Technical Issues Committee cc: PCPS Executive and Technical Issues Committees