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.
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By GlobalDataA 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.
Further simplification
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.
Mixed reactions
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.
Wide-ranging effects
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.”
