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01 technical

ifrs for smes RELEVANT to ACCA Qualification paper p2

The principal aim when developing In July 2009, the International Accounting
accounting standards for small to
medium-sized enterprises (SMEs) Standards Board (IASB) issued the IFRS for Small
is to provide a framework that and Medium‑sized Entities (IFRS for SMEs). This
generates relevant, reliable and useful
information which should provide standard provides an alternative framework
a high quality and understandable that can be applied by eligible entities in place
set of accounting standards suitable
for SMEs. of the full set of International Financial
In July 2009, the International Reporting Standards (IFRSs).
Accounting Standards Board (IASB)
issued the IFRS for Small and
Medium‑sized Entities (IFRS for SMEs). In addition there are certain accounting The standard also contains a
This standard provides an alternative treatments that are not allowable section on transition, which allows
framework that can be applied by under the standard. Examples of all of the exemptions in IFRS 1,
eligible entities in place of the full set these disallowable treatments are the First‑time Adoption of International
of International Financial Reporting revaluation model for property, plant Financial Reporting Standards. It also
Standards (IFRSs). and equipment and intangible assets, contains ‘impracticability’ exemptions
The IFRS for SMEs is a self-contained and proportionate consolidation for comparative information and the
standard, incorporating accounting for investments in jointly controlled restatement of the opening statement
principles based on extant IFRSs which entities. Generally, there are simpler of financial position.
have been simplified to suit the entities methods of accounting available to As a result of the above, the
that fall within its scope. There are a SMEs than those accounting practices, IFRS requires SMEs to comply with
number of accounting standards and which have been disallowed. less than 10% of the volume of
disclosures that may not be relevant for Additionally the standard eliminates accounting requirements applicable to
the users of SME financial statements. the ‘available-for-sale’ and ‘held-to listed companies complying with the
As a result the standard does not maturity’ classifications of IAS 39, full set of IFRSs.
address the following topics: Financial instruments: recognition and There is no universally agreed
¤ earnings per share measurement. All financial instruments definition of an SME. No
¤ interim financial reporting are measured at amortised cost using single definition can capture all
¤ segment reporting the effective interest method except the dimensions of a small or
¤ insurance (because entities that issue that investments in non-convertible and medium‑sized business, or cannot
insurance contracts are not eligible to non‑puttable ordinary and preference be expected to reflect the differences
use the standard) and shares that are publicly traded or whose between firms, sectors, or countries at
¤ assets held for sale. fair value can otherwise be measured different levels of development.
reliably are measured at fair value Most definitions based on size
through profit or loss. All amortised use measures such as number
cost instruments must be tested for of employees, net assets total,
impairment. At the same time the or annual turnover. However, none
standard simplifies the hedge accounting of these measures apply well across
and derecognition requirements. national borders. The IFRS for SMEs
However, SMEs can choose to apply is intended for use by entities that
IAS 39 in full if they so wish. have no public accountability (ie its
debt or equity instruments are not
publicly traded).
student accountant issue 05/2010
02
Studying Paper P2?
Performance objectives 10 and 11 are linked

Ultimately, the decision regarding ¤ a simplified calculation is allowed considerations. Many disclosures
which entities should use the IFRS for if measurement of defined benefit in full IFRSs are more relevant to
SMEs stays with national regulatory pension plan obligations (under the investment decisions in capital
authorities and standard setters. These projected unit credit method) involves markets than to the transactions
bodies will often specify more detailed undue cost or effort undertaken by SMEs.
eligibility criteria. If an entity opts to use ¤ the cost model is permitted for There are arguments against different
the IFRS for SMEs, it must follow the investments in associates and reporting requirements for SMEs in
standard in its entirety – it cannot cherry joint ventures. that it may lead to a two-tier system of
pick between the requirements of the reporting. Entities should not be subject
IFRS for SMEs and those of full IFRSs. The main argument for separate to different rules, which could give rise
The International Accounting SME accounting standards is the to different ‘true and fair views’.
Standards Board (IASB) makes it clear undue cost burden of reporting, One course of action could have been
that the prime users of IFRSs are the which is proportionately heavier for for GAAP for SMEs to be developed on
capital markets. This means that IFRSs smaller firms. The cost burden of a national basis, with IFRSs focusing on
are primarily designed for quoted applying the full set of IFRSs may accounting for listed company activities.
companies and not SMEs. The vast not be justified on the basis of user The main issue here would be that the
majority of the world’s companies are needs. Further, much of the current practices developed for SMEs may not
small and privately owned, and it could reporting framework is based on have been consistent and may have
be argued that IFRSs are not relevant to the needs of large business, so lacked comparability across national
their needs or to their users. It is often SMEs perceive that the full statutory boundaries. Also, if a SME wished to
thought that small business managers financial statements are less relevant list its shares on a capital market, the
perceive the cost of compliance with to the users of SME accounts. SMEs transition to IFRSs may be more difficult.
accounting standards to be greater than also use financial statements for a There were a number of approaches
their benefit. narrower range of decisions, as they that could have been taken to
To this end, the IFRS for SMEs have less complex transactions and developing standards for SMEs. Under
makes numerous simplifications to therefore less need for a sophisticated one approach, the exemptions given to
the recognition, measurement and analysis of financial statements. Thus, smaller entities would be prescribed in
disclosure requirements in full IFRSs. the disclosure requirements in the the mainstream accounting standard.
Examples of these simplifications are: IFRS for SMEs are also substantially For example, an appendix could have
¤ goodwill and other indefinite-life reduced when compared with those been included within the standard
intangibles are amortised over their in full IFRSs partly because they detailing those exemptions given to
useful lives, but if useful life cannot are not considered appropriate for smaller enterprises. Another approach
be reliably estimated, then 10 years users’ needs and for cost-benefit would have been to introduce a
separate standard comprising all the
issues addressed in IFRSs, which are
the decision regarding which entities should relevant to SMEs.
use the IFRS for SMEs stays with national The IFRS for SMEs is a
self‑contained set of accounting
regulatory authorities and standard setters. principles that are based on full IFRSs,
If an entity opts to use the IFRS for SMEs, it but that have been simplified so
that they are suitable for SMEs. The
must follow the standard in its entirety – it standard has been organised by topic
cannot cherry pick between the requirements with the intention that the standard
would be user-friendly for preparers
of the IFRS for SMEs and those of full IFRSs. and users of SME financial statements.
03 technical

The IFRS for SMEs and full IFRSs The IFRS for SMEs should provide improved
are separate and distinct frameworks.
Entities that are eligible to apply the comparability for users of accounts
IFRS for SMEs, and that choose to do whilE enhancing the overall confidence
so, must apply that standard in full
and cannot chose the most suitable in the accounts of SMEs, and reducing the
accounting policy from full IFRS or IFRS significant costs involved of maintaining
for SMEs.
However, the standard for SMEs is standards on a national basis.
naturally a modified version of the full
standard, and not an independently
developed set of standards. They are The stewardship function is often There will be some important tax
based on recognised concepts and absent in small companies, with the issues arising from the change. Tax
pervasive principles and they will allow accounts playing an agency role between has been one of the reasons why
easier transition to full IFRS if the the owner-manager and the bank. some SMEs have not switched to IFRS.
SME decides to become a public listed Where financial statements are Since 2005, listed groups in the UK
entity. In deciding on the modifications prepared using the standard, the basis have been required to prepare their
to make to IFRS, the needs of the users of presentation note and the auditor’s consolidated financial statements in
have been taken into account, as well as report will refer to compliance with accordance with IFRS. Almost all other
the costs and other burdens imposed the IFRS for SMEs. This reference may groups and companies have had a
upon SMEs by the IFRS. Relaxation improve access to capital. The standard choice to follow IFRS or UK GAAP. From
of some of the measurement and also contains simplified language and 2012, it seems that the options will
recognition criteria in IFRS had to be explanations of the standards. change with UK GAAP being replaced
made in order to achieve the reduction The IASB has not set an effective date by IFRS for SMEs.
in these costs and burdens. Some for the standard because the decision The IFRS for SMEs is a response to
disclosure requirements are intended to as to whether to adopt the IFRS for international demand from developed
meet the needs of listed entities, or to SMEs is a matter for each jurisdiction. and emerging economies for a rigorous
assist users in making forecasts of the In the absence of specific guidance and common set of accounting
future. Users of financial statements on a particular subject. An SME may, standards for smaller and medium-sized
of SMEs often do not make such but is not required to, consider the businesses that is much simpler than
kinds of forecasts. Small companies requirements and guidance in full full IFRSs. The IFRS for SMEs should
pursue different strategies, and their IFRSs dealing with similar issues. The provide improved comparability for
goals are more likely to be survival IASB has produced full implementation users of accounts while enhancing the
and stability rather than growth and guidance for SMEs. overall confidence in the accounts of
profit maximisation. The Accounting Standards SMEs, and reducing the significant costs
Board (ASB) in the UK has set the involved of maintaining standards on a
ambitious target of 1 January 2012 national basis.
for implementing the new accounting
framework for SMEs. With comparatives Graham Holt is examiner for Paper P2
needed from 1 January 2011, there
is little time for businesses to get
new systems in place. Businesses will
also need to evaluate carefully the
tax impact of transitioning to IFRS
for SMEs.