International Accounting Standards Board (IASB) chairman David Tweedie has warned the global standard setter will not develop international standards for micro-sized entities despite a growing wave of concerns about the complexity of IFRS for SMEs and its suitability for smaller entities.
The controversial IFRS for SMEs, which has been proposed as an exposure draft, has been labelled too complicated for micro-sized entities by a new International Federation of Accountants (IFAC) Small and Medium Practices (SMP) Committee report. This follows repeated calls by developing nations for the global standard setter to simplify the standard or create another one aimed at micro-sized entities.
In a recent interview, Tweedie told TA he believes the standard is too complicated in some parts, but stressed it is up to national regulators to apply the standard to the size of company they feel is appropriate.
“It’s not up to us to say who is small in your jurisdiction,” he explained. “You apply it to whom you think is small. I think it is still too complicated, but in a way we wanted to just get the thing out, because we’ve been discussing this for two and a half years. So we’ll get comments back and I think it will probably be further simplified.” Drawing the line Although IFRS for SMEs is only 15 percent of the size of full IFRS, Tweedie accepts it is still too large for some smaller entities. He said the IASB cannot set standards for everyone and emphasised there are no intentions to develop IFRS for micro-sized entities.
“If they’re talking about mum and dad chip shops, we’re not setting standards for them. We’re not trying to go all the way down here. They don’t even audit companies here [in the UK] below a certain level,” he said.
“We have no immediate plans [to look at a micro-sized standard]. We got into [developing IFRS for SMEs] because we were asked to. Some of the board didn’t want to do it, they just wanted to focus on multinationals and forget the rest. But there was a lot of demand from emerging economies to do something for them. What they were after was something that is based on international standards, as these are, and slash the disclosures, just put in the new principles, cut a lot of the examples out and the whole thing has shrunk. If some of the countries don’t want to use it, it doesn’t bother us. However, [full] IFRS is different.”
The IFAC report, ‘Micro-Entity Financial Reporting: Some Empirical Evidence on the Perspectives of Preparers and Users’, explores the suitability of the standard for entities with fewer than ten employees by drawing on the feedback of users and preparers of micro-sized entity financial reports in Italy, Kenya, Poland, Uruguay and the UK.
Participants who supported the development of a separate set of accounting guidance for micro-entities felt that two levels should be developed: a concise version that would be easy for business owners to follow and understand; and a more technical version for preparers of financial statements. In addition, there was support for some form of attestation, such as a statement made by a professional accountant, to be attached to the financial reports of micro-entities.
The report found that significant differences emerged between the business environments of the UK and Kenya. In the UK, the Financial Reporting Standard for Smaller Entities meant guidance on the preparation of small listed companies was readily available and these respondents were reluctant to support another, third tier of international regulation. However, in Kenya, IFRS have been the main source of accounting regulation for all entities since 1999 and there is no financial reporting guidance available for small entities, fuelling a need for a new standard for micro-sized entities.
In the other countries, support depended upon the extent to which the standard was accepted by taxation authorities.
IFAC SMP Committee senior technical manager Paul Thompson told TA he isn’t convinced of the need for a micro-sized entities IFRS. “My personal view is that what the micro entities are really looking for is not necessarily a financial reporting standard but some form of financial management package to help the owners better understand the finances of their organisations. I’m not sure whether for a typical micro entity there are not many external users. When you look at the costs and benefits of it, I’m not sure whether the really small fry should be producing general purpose financial statements,” he said.