Critically Assess The Proposals To Introduce A Specialised Ifrs For Smes And Briefly Outline The Problems That Still Have To Be Resolved Before A Final Standard Is Published Later This Year.
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Critically assess the proposals to introduce a specialised IFRS for SMEs and briefly outline the problems that still have to be resolved before a final standard is published later this year.
Since the early 1970’s, International Financial Reporting Standards (IFRS) have been in place in order to meet the needs of companies whose securities trade in public capital markets. In recent years, these full IFRS have been adapted by small and medium entities (SMEs), in tandem with some SMEs using other outdated or different accounting standards. In recognition of these concerns, the International Accounting Standards Board (IASB), which develops IFRSs, proposed to develop a “set of internationally recognised accounting standards, but ones less complex than full IFRS.” (ICAEW, 2007).
In developing SME IFRS, the IASB outlined five objectives of SME standards listed below:
To provide high quality, understandable and enforceable accounting standards suitable for SMEs globally
To focus in meeting the needs of users of SME financial statements
Building SME IFRSs in the same conceptual framework as IFRS
To reduce the financial reporting burden on SMEs that want to use global standards
To allow an easy transition to full IFRSs for those SMEs that become publicly accountable (IASB, 2004, P5)
These objectives are also stated in the IASB press release stating that, “by removing choices for accounting treatment, eliminating topics that are not generally relevant to SMEs and simplifying methods for recognition and measurement a self-contained set of accounting standards that would allow investors for the first time to compare SMEs financial performance across international boundaries on a like for like basis” (IASB, 2007), would be resulted.
SMEs represent a significant proportion of enterprise, in both, emerging and developed economies. Research by the International Federation of Accountants (IFAC) indicates that “SMEs represent 95.7 per cent of all US employers” (IFAC, 2006, p2). In theory the aims set down by the IASB in the вЂ?Exposure Draft’ (ED) are comprehensive, but it is apparent that “a draft accounting standard has rarely generated so much heat as IFRS for SME” (ICAEW, 2007).
Contention lies with the definition of SMEs, the IASB proposing that SMEs are “entities without public accountability” (Schiebel, 2006), yet “the term SME means different things in different jurisdictions” (IASB, 2007). The IASB have in mind “non-publicly accountable entities with about 50 employees and annual revenue of $10 million” (IASB, 2006, p5). If this is the case, then micro-entities with turnover and staffing levels below this, for example in emerging economies in particular, will not be accounted for, “in the case of Fiji, a SME comprises less than 20 employees or gross operating revenue of less than $2.5 million” (Chand et. al. 2006). This confusion is addressed with the ASB suggesting an alternative label, “IFRS for non-publicly accountable entities (NPAE)” (IASB, 2007).
As evident from the above discussion, it appears that before any of the integral policies of SME IFRSs are looked upon, there is already a great deal of contention in deciphering terminology used to describe the new procedures. On this note, the next logical step is to explain what the IASB have undertaken and proposed in creating SME IFRSs.
From analysis of the ED of IFRS for SMEs (IASB, 2007(ii)), it becomes clear that the IASB have greatly reduced full IFRSs, in doing this certain topics “not relevant to typical SMEs are omitted” (IASB, 2007), such as earnings per share and segment reporting. Additionally simpler alternatives to existing IFRS have been included e.g. by allowing to treat borrowing costs as an expense and thirdly, recognition and measurement simplifications are inserted e.g. allowing two categories of financial assets rather than four. Full IFRS have been reduced by 85%, and the ED gave the public a chance to respond to the proposals put forward, the responses of which would be detailed at a “meeting with prepares and users of financial statements of SMEs to discuss possible modifications” (IASB, 2005). Thus it is evident that the IASB have the users’ intentions in mind, obvious by organisation of SME IFRSs in a topical manner rather than in an IAS/ IFRS number sequence utilised in full IFRSs.
When assessing the proposals to introduce specialised IFRS for SMEs, one has to think of the need for such a standard and its universal application. The SME IFRSs will “allow financial statements to be prepared for use of lenders, vendors, credit rating agencies and other external parties” (ACCA, 2007). This is idyllic in theory especially for companies wishing to obtain an international audience, but for whom applying full IFRS would be daunting, an example of such applies to IFRS compliance in Pakistan. By adopting international accounting standards, global markets have been opened, asserting assurance to financial reports enabling cross border mergers, a low cost of capital and benefits of using standards that Pakistan would be unable to develop on their own (Shah, (ii)). This has proved to be beneficial but, “Pakistan have also adapted their own SME standards, keeping in view their country requirements” (Shah). Adversely, there are some who categorically reject SME IFRSs on the basis of their applicability. The Building Societies Association in the UK believe that “IFRS, in any shape or form, are not a suitable reporting vehicle for most SMEs in the UK, and certainly not for smaller Building Societiesthe drive for global comparability and global standards while being of benefit for multinational companies is completely unnecessary for SMEs who do not have overseas interests” (BSA, 2007). This addresses the assumption of the IASB, that all SMEs want or have a financial interest in becoming publicly accountable.
The end users of the accounts differ from one SME to another dependent upon their size, function, information needs, location and national legislation. There is a specific oversight in developing nations with emerging economies, where unlike multinational or listed companies; SMEs are predominantly domestically based. In developed worlds “users of SME financial