Article
Background :
Published by the International Accounting Standards Board (IASB)
on 9 July 2009, International Financial Reporting Standard for Small and
Medium-Sized Entities (‘IFRS for SMEs’) is a simplified version of full IFRS
aimed at responding to the compelling need expressed by both developed and
emerging economies for a rigorous and common set of accounting standards for
smaller and medium-sized businesses that is much simpler than full IFRSs. Prior
to its release, the standard-setters engaged themselves in comprehensive
dialogue with SMEs worldwide in order to ensure that the document finally
released would meet the needs and capabilities of small and medium-sized
entities (SMEs), which are estimated to account for over 95% of all companies
around the world.
Application :
The IFRS for SMEs has the potential to revolutionise and
harmonise financial reporting by private companies across the world. It remains
a stand-alone product that is separate from the full set of International
Financial Reporting Standards (IFRSs).
Thus, it is available for any jurisdiction to adopt whether
or not it has adopted the full IFRSs. Also it is incumbent upon each
jurisdiction to determine which entities should use the standard.
In particular, the IFRS for SMEs will :
- provide improved comparability for users of accounts
- enhance the overall confidence in the accounts of SMEs
- reduce the significant costs involved of maintaining
standards on a national basis, and
- provide a platform to growing businesses that are
contemplating entering the public capital markets in due course of time and
thus give them an opportunity to prepare themselves for adopting full IFRSs.
South Africa is an example of a country that required all
companies to use IFRS and has responded very positively to benefits for SMEs
proposed by the new standard. It had adopted the Exposure Draft which preceded
the IFRS for SMEs in October 2007 as a ‘Statement of Generally Accepted
Accounting Practice for SMEs in South Africa’ in a bid to reduce the reporting
burden on SMEs and provide them with a simpler accounting framework that was
easier to understand and apply than full IFRS. Further, it has quickly published
the final version of the IFRS for SMEs (without any change to the text) as a
‘Statement of Generally Accepted Accounting Practice’ with relevant entities
allowed to apply it for annual financial statements authorised for issue after
13th August 2009.
In India, the concept paper on Convergence with IFRS, issued
by the Institute of Chartered Accountants of India aims to converge Indian
accounting standards to the equivalent of full IFRS for all public interest
entities effective 1st April 2011. In its present form, companies with turnover
exceeding Rs.100 crores or with borrowings in excess of Rs.25 crores qualify as
‘public interest entities’. This is expected to include a significant number of
unlisted entities. The concept paper refers to use of IFRS for SMEs only for
non-public interest entities.
Basis :
The principles enshrined in this standard have been derived
from IFRS foundation itself. However, so as to ensure that it addresses the
specific needs of users of SMEs’ financial statements and cost-benefit
considerations, many of the complexities inherent in the full IFRSs have been
removed. Furthermore a cost-benefit approach has been taken in developing the
IFRS for SMEs, with the emphasis being on easing the financial reporting burden
on private companies.
The key differences are enumerated below :
- Topics not relevant to SMEs have been omitted.
- Where full IFRSs allow accounting policy choices, the
IFRS for SMEs allows only the easier option.
- Many of the principles for recognising and measuring
assets, liabilities, income and expenses in full IFRSs have been simplified.
- Significantly fewer disclosures are required.
- The standard has adopted a simplified redrafting so as to
facilitate ease of understanding and translation.
- Moreover to further reduce the reporting burden for SMEs,
revisions to the IFRS will be limited to once every three years.
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Full IFRS
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IFRS for SMEs
|
|
Numbered by
Standard
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Organised by topic (e.g.,
inventories)
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Around 3,000
potential disclosures
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Around 300 potential disclosures
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Around 2,800 pages
in length
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Less than 230 pages
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Updated several
times a year
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Anticipated to be
updated on a 3-yearly basis
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Unlike full IFRS, the IFRS for SMEs contains illustrative
financial statements and a disclosure checklist. With around only 300 potential
disclosure requirements, compared to 3,000 under full IFRS, the advantages of
the IFRS for SMEs in terms of the amount of time to be spent preparing the
financial statements are already clear. The point is underlined however, by the
Illustrative Financial Statements that the IASB has prepared to accompany the
Standard. At just 17 pages in length, they compare favourably to full IFRS
financial statements which often run to over 100 pages.
Omitted topics :
The IFRS for SMEs does not address the following topics that
are covered in full IFRSs :
- Earnings per share
- Interim financial reporting
- Segment reporting
- Special accounting for assets held for sale.
Examples of options in full IFRSs NOT included in the IFRS for SMEs :
- Financial instrument options, including available for sale, held-to-maturity and fair value options
- The revaluation model for property, plant and equipment, and for intangible assets
- Proportionate consolidation for investments in jointly-controlled entities
- For investment property, measurement is driven by circumstances rather than allowing an accounting policy choice between the cost and fair value models
- Various options for government grants.
Conclusion:
The potential of this new standard is that SMEs catapult themselves to a position where stakeholders (lenders and investors) would be able to assess company performance from financial statements that use directly comparable, authoritative, internationally recognised principles, regardless of the company’s country of origin. Further this transition to IFRS framework for them would be at a significantly reduced cost, as the standard has endeavored to reduce the complexities in accounting for transactions and disclosure of financials as compared to full IFRSs.
