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October 14, 2007

South Africa adopts controversial SME standard

South Africa adopts controversial SME standard

 

Legislation that forces all companies in South Africa to produce financial reports using full IFRS has led the country to become the first to adopt the International Accounting Standards Board’s (IASB) draft form of IFRS for SMEs. South Africa’s Accounting Practices Board, which is administratively supported by the South African Institute of Chartered Accountants (SAICA), approved the proposal as a Statement of GAAP for SMEs in South Africa earlier this month.

SAICA project director for accounting Sue Ludolph said the South African Companies Act, which has been in place since 1973, states that all companies, including micro-entities, must comply with South African GAAP, which has fully converged with IFRS.

“We’ve only got 467 listed companies, about 3,600 public interest companies and about 425,000 private companies that now have to comply with IFRS,” Ludolph said. “IFRS has become increasing complex over the years because it has needed to be as it is designed for… complex transactions for multi-nationals, so our poor SMEs in this country are struggling to comply with such onerous accounting standards.”

Insufficient resources In April this year, the South African government passed amendments to the Companies Act that allow for differential reporting. Ludolph said SAICA considered writing its own simplified standards. “But in a country like South Africa, with our skills shortage, we don’t have the resources to write standards any more,” she said.

Another reason SAICA chose the IASB framework was because is it based on IFRS. “This is important for us because these companies in South Africa still have to be audited. And we also adopted the International Auditing Standards, so it has to be a robust framework for the auditors to audit against,” Ludolph said.

The final form of the international SME standard is due to be released by the end of 2008, which Ludolph said would be too long to wait for South African SMEs, especially since the international standard setter might not meet the deadline.

Any changes that are made to the IASB’s draft will be adopted by South Africa. SAICA said it plans to be very active in the consultation process and has already submitted a 33-page comment letter. Ten South African companies are participating in IASB field tests of the standards.

Paul Pacter, the IASB director of standards for SMEs, said that when SAICA was in the process of deciding whether to adopt the IASB draft, it approached him to ask if there would be significant changes in the final stages that would mean two transitions, that is, a transition from the existing South African GAAP to the exposure draft standards, and then from the exposure draft to the final IFRS.

“Certainly there will be changes in the final IFRS,” Pacter said. “But most likely, based on the comment letters we have already received, they will be in the direction of further simplifications, so it will not be very burdensome for the little companies to adopt our standard now and then do a second set of changes.”

Criticism of complexity

The IFRS for SMEs draft has been widely criticised for being too complex and Ludolph said that South African micro-entities are “still screaming that it’s not enough”. Additional amendments to the Companies Act are expected within the next couple of years, which will allow for further differentiation and the possibility of a three-tier financial reporting system. “When we’ve got that third tier, we will need to look at what we can give them, which is even lower than IFRS for SMEs,” Ludolph said.

Ludolph said that in some ways it is “quite daunting” being the pioneers of IFRS for SMEs. “What we are having to do is develop our training material ourselves now, so we are working a lot on that,” she said. “We have got to have implementation workshops and seminars for our people so we are going to do full-day workshops to explain to them how to implement it and then we are probably going to come up with some further accounting guidance, and so by the time the IASB gets there, they might be able to use our material.”

Pacter said he is not aware of any other country that plans to adopt the exposure draft as its SME standard. However, he added, a number of countries are working to pave the way for the standard, including enabling legislation that might be required to let them adopt the final version.

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