1 October 2007 SME Comment Letters International Accounting Standards Board 30 Cannon Street London EC4M 6XH UNITED KINGDOM VIA E-mail and Postal Mail Re: Comments on the Exposure Draft of a Proposed IFRS for SMEs
Dear Members of the IASB: On behalf of the members of the National Cooperative Business Association, I am writing to comment on the proposed International Financial Reporting Standard for Small and Medium Enterprises (SMEs). The National Cooperative Business Association is the only national organization in the U.S. representing cooperatives across all sectors of our economy—including agriculture, childcare, electricity, finance, food retailing and distribution, healthcare, housing, insurance, purchasing and shared services, telecommunications and many others. Many cooperatives are direct members of NCBA and we represent many thousands of other cooperatives through our members that are national and state-level associations of cooperatives. NCBA is a member organization of the International Co-operative Alliance and I serve on its Board. Cooperative businesses are owned and democratically controlled by their members – the people who use the cooperative’s services or buy its goods – not by investors. Tens of thousands of cooperatives in the US range in size from small storefronts to Fortune 500 companies. An estimated 154 million people in the US are members of cooperatives. Changes in accounting standards over the past few years have created enormous challenges for cooperatives and their members. After FAS 150 was released, NCBA and cooperatives quickly realized the need to monitor, educate and try to influence accounting standard setters. Now that convergence of US and international standards is underway, NCBA appreciates the potential impact of IASB proposals on the US cooperative enterprise. We understand the need to improve the standard setting process to accommodate a global market. But some of the current accounting standards and proposals may not be relevant or useful for users of cooperative financial statements. And compliance with these standards is
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costly. We have urged FASB to create separate accounting standards when the differences in financial structure warrants it. We support changes in accounting standards to accommodate different types of entities but the approach taken in the SME proposal does not appear to achieve that objective. In general, the SME standard is based on current international standards, which do not address the specific and distinct needs of the cooperative structure. In addition, compliance with the SME proposal would require a knowledge and understanding of the full IFRS, providing little benefit to smaller entities that struggle to maintain the resources and staff to keep up with the changes to the financial statements. Equity, Section 21 The definition of equity in section 21 provides little clarity and assurance for cooperatives that want to preserve the status of cooperative shares as equity. The definition includes the term liabilities, which section 2.12 and 2.17 describe as a present obligation arising out of a past event. The obligation may be legal or constructive, which can be based on an established pattern of past practices. Read together, the definition of equity could exclude financial instruments that have been subject to redemption in the past, a situation many cooperatives face. We worked in the US to delay the implementation of FAS 150 because of its potential disastrous consequences on cooperative balance sheets as co-op equity shares would have been reclassified as liabilities. A central issue in whether co-op shares would continue to be classified as equity was whether they would be considered mandatorily redeemable based on past practices. As we wrote to the IASB in 2004, While many cooperatives have a past practice of redeeming members’ shares upon the members’ withdrawal from the cooperative or their death or according to a schedule of equity revolvement, they generally give their boards of directors ultimate discretion as to whether and when to redeem members’ shares. Members of a cooperative may have an expectation that the cooperative will continue to redeem their shares as they have in the past, but the members’ expectations should not cause these shares to be classified as liabilities. Indeed, retained member equity is the primary way that cooperatives capitalize their businesses; it is true risk capital and members cannot assume that their equity investment will be fully redeemed to them. The definition of equity in the SME proposal does not ensure that cooperative shares will be treated as equity. A lack of clarity as to whether co-op shares are equity, a critical piece of information that helps determine an entity’s financial position, does not promote the objective of providing information that is useful for economic decision making. More useful would be a definition of equity that captures its participation in the business risk, the losses and gains of an entity. Business Combinations, Section 18 Though the draft describes a business combination as the bringing together of separate entities or businesses into one reporting entity, it states that nearly all business combinations involve
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one entity, the acquirer, obtaining control of one or more other businesses, the acquiree. The proposal requires that all business combinations shall identify an acquirer and acquiree and be accounted for by applying the purchase method. The purchase method, as we have argued to the FASB, is not appropriate for cooperatives for several reasons. There is no identified acquirer and acquiree in a merger between cooperatives and there is no change in control as members, who are the owners, have the same voting power as before the merger. There is typically no exchange of consideration and no exchange of member interests. In addition, allocated member equity remains in the members’ accounts at the same amounts as prior to the merger. And, the management may be selected by members of both cooperatives and not be clearly dominated by one entity. The numerous and possibly conflicting approaches to fair value that result from application of various valuation techniques presents challenges for cooperatives and runs counter to the goal of creating a consistent standard that enhances comparability. Because cooperatives generally are not publicly traded companies and there is no agreed upon valuation technique, the valuations would be as numerous and diverse as the accountants or firms providing them. Determining fair value can be a costly and burdensome process without any attendant benefits for cooperatives, most of which are small businesses. The pooling method has served cooperatives and users of cooperative financial statements well. There is little evidence that the pooling method – as it applies to cooperatives – has caused lack of comparability or problems for users. It is simple, produces consistent results and has not been found to be overly burdensome or costly for cooperatives. In addition, for many cooperatives the ultimate result of the acquisition method would be the same as pooling but involve much more cost. We appreciate the opportunity to comment on this SME draft proposal. Please email me at phazen@ncba.coop or Mary Griffin at mgriffin@ncba.coop if you have questions or need more information. Sincerely,
Paul Hazen, CEO
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