It has been a bumpy five-year journey, but the International Accounting Standards Board (IASB) has finally released a simplified version of IFRS designed for use by SMEs and non-publicly accountable entities.
IFRS for SMEs has 230 pages, compared with the 2,800 page IFRS and 17,000 page codified US GAAP.
The new standard has so far met with considerable acclaim. Stakeholders have been particularly pleased with how the standard has improved since the exposure draft.
IASB director of standards for SMEs Paul Pacter said the standard has come a long way from the concept that was proposed five years ago.
“The standard has been whittled down to a much more simple form than was initially proposed. For example, the initial discussion paper suggested there should be no recognition and measurement simplifications at all. What a dramatic change it has been,” Pacter observed.
The standard is also far simpler than last year’s exposure draft. One major change has been the removal of all but one of 23 cross references to full IFRS.
A number of complex options have also been removed. For example, the draft said property plant and equipment, and intangible assets can be revalued at mark-to-market. The final standard says a cost depreciation model must be used.
Another example is that while the exposure draft said goodwill cannot be amortised and should be annually tested for impairment, the final standard says to amortise goodwill over its useful life. If the life is uncertain a measure of ten years should be used.
The number of disclosures has also been reduced significantly. Pacter said there are more than 3,000 disclosures in full IFRS. In the IFRS for SMEs exposure draft there were more than 300 disclosures as well those in cross references to full IFRS. In the final standard this has been trimmed to about 250.
The removal of cross references to full IFRS in the final standards is one of the most lauded moves.
David Cox, a partner with UK mid-tier firm Haysmacintyre, said the exposure draft looked too onerous for most of the firm’s clients.
“It basically referred you back to the big IFRS, which isn’t really practical for most private companies,” Cox said.
Pacter agreed, saying the cross references made it tougher for small companies as it essentially meant they had to follow both IFRS for SMEs and full IFRS.
It is too early to gauge the level of uptake of IFRS for SMEs but there have been some high level advocates.
The World Bank supports the standards as a tool to improve accounting in developing countries and as relief from the use of full IFRS. The bank said it has constantly recommended simplified financial reporting requirements for SMEs in its reports on the observance of standards on accounting and auditing in various countries.
A welcome relief
Pacter explained that in a number of jurisdictions that adopted full IFRS, the standards have been pushed down to small companies.
“They say not only can’t we handle it, the users of our financials don’t need it. It’s overkill,” Pacter said.
South Africa is one prime example where all companies must prepare reports using South African GAAP. When IFRS was adopted as the local GAAP the burden on small business was so severe that regulators took the unusual step of adopting the IFRS for SMEs exposure draft. South Africa’s Accounting Practices Board will meet in August to vote on whether to adopt the final IFRS for SMEs.
Another jurisdiction where the standards have received a warm welcome is Turkey. The local accounting standards body has already translated the standard into Turkish and will consider adoption in the next few weeks.
In the UK, IFRS for SMEs will almost certainly become the main private entity reporting standards. The UK Accounting Standards Board (ASB) plans to release a consultation paper on the future of UK GAAP early next month.
“We will be consulting both on publicly accountable and non-publicly accountable, and size criteria for determining who should use full IFRS and IFRS for SMEs,” ASB chair Ian Mackintosh said.
The local Financial Reporting Standard for Smaller Entities (FRSSE) will probably be retained as an option for the smallest entities.
Pacter said he doesn’t think the difference between IFRS for SMEs and the FRSSE is so significant that it will need to be retained beyond the next three to five years. Cox agrees that IFRS for SMEs could easily replace the FRSSE. He said retaining the FRSSE would be an added burden for Haysmacintyre because staff are trained under IFRS.
One possible hurdle to IFRS for SMEs adoption in EU member states is the standards’ compliance with European accounting laws – the Fourth and Seventh Directives. Both the ASB and Grant Thornton UK have identified a few instances where there may be conflicts.
The EC could decide to allow member states to use the standards regardless but it is unlikely the commission will mandate the use of IFRS for SMEs.
The reception for the standards has been mixed in Europe. There has been no vocal criticism from any parties yet, but some silences.
Proponents have included the Federation of European Accountants and Pacter said a number of Scandinavian and Eastern European nations are working towards adopting the standards.
When the exposure draft was released there was significant criticism from the European Parliament and the EC, saying it was still too complex. But Pacter said he has heard from EC staff that the attitude is warming.
Alex Finn, who leads the Pricewaterhouse-Coopers UK (PwC) accounting advisory practice, said some of his colleagues in continental Europe think IFRS for SMEs could stimulate quite a lot of movement towards IFRS on the continent.
While there are doubts about the legality of the standards in Europe, their use is already permitted for private companies in the US, the inverse of the situation with full IFRS.
Prior to May last year, private entities in the US were only allowed to use US GAAP as produced by the US Financial Accounting Standards Board or other comprehensive basis of accounting, which is essentially cash or tax basis.
But following an American Institute of Certified Public Accountants (AICPA) resolution in May last year, they can now also follow standards produced by the IASB.
AICPA senior technical advisor Bob Durak said he is not sure what the pick up will be in the US, but the AICPA is making its members aware of the new alternative. The institute is also working on a detailed technical comparison between IFRS for SMEs and US GAAP.
Some high level differences already identified include IFRS for SMEs has far fewer disclosures in areas including pensions, leases and financial instruments.
Another important difference is LIFO (last-in, first-out) accounting for inventories is prohibited under IFRS for SMEs but allowed under US GAAP. This could potentially have tax repercussions.
“It will be a matter of each individual company deciding for themselves what best suits their purposes,” Durak said.
“We think it is going to come down a lot to the users of financial statements becoming comfortable with IFRS for SMEs and being willing to accept financial statements under that framework.”
While most stakeholders welcome a standard that is as simple as possible, Finn would have liked to have seen one more complex option.
He has a reservation about a number of areas where the measurement basis in IFRS for SMEs is different from full IFRS.
“While that is understandable in some ways because in general the measurement bases are simplified over mainstream IFRS… the problem is if you are a subsidiary of a company you potentially have a different measurement basis from your parent. That is a real disincentive,” Finn said.
The ideal situation would be a standard with the measurement bases of full IFRS and the disclosures of IFRS for SMEs, Finn said, adding that he believes the ASB is considering such an option for the UK.
Finn is keen to emphasise that the effect of the standard will be felt far beyond SMEs and large companies cannot afford to ignore the implications.
Finn explained the potential implications could be quite significant both in terms of tax computations in the UK and opportunities for more streamlined global accounting operations.
In 2005, few countries outside Europe used IFRS. Therefore, the introduction of IFRS did not encourage large international groups to restructure their business or change how they managed accounting functions.
“Now that many countries outside of the UK and Europe have adopted IFRS there is much greater capacity to harmonise your accounting infrastructure,” Finn explained.
“I think it is starting to become more of a reality that you can pull your finance functions into certain locations and try and streamline your operations and get some savings out of it.”