Key aspects of IFRS for SMEs
Published:Friday | October 8, 2010 | 12:00 AM
Alok Jain, Guest Writer
There is a global trend towards countries and business entities adopting directly or converging their local standards to International Financial Reporting Standards (IFRS).
This focus has greatly increased the complexity of financial reporting and the extent of disclosure requirements - and for small- and medium-sized entities (SMEs), the requirements appear onerous. Globally, SMEs have voiced their concerns about the complexity of the standard and about the burden of compliance with IFRS.
IFRS were designed to meet the requirements of investors in companies whose securities are traded in public capital markets.
As such, a significant need existed for an accounting standard for SMEs that would consider appropriately their financial statement users, while balancing the costs and benefits in terms of financial statement preparation.
To meet that need, the International Accounting Standards Board (IASB) issued the International Financial Reporting Standard for Small- and Medium-sized entities in July 2009.
It is a standard geared specifically for the needs and capabilities of smaller businesses and represents the culmination of a five-year process which began in 2004 with the issue of a discussion paper by the IASB.
The key aspects of the standard are discussed below in Q&A format.
1. What is meant by small-and medium-sized entities ('SMEs')?
IFRS for SMEs is intended to be used by entities that do not have public accountability. Under the IASB's definition, an entity has public accountability if:
Its debt or equity instruments are traded in a public market (essentially, a listed company).
The entity holds assets in a fiduciary capacity, for a broad group of outsiders, as one of its primary businesses (essentially, a financial institution).
Examples of entities that hold assets in a fiduciary capacity include banks, insurance companies, brokers and dealers in securities, pension funds and mutual funds.
Entities that hold assets in a fiduciary capacity for reasons incidental to their primary business - for example, travel agents, utilities, charities - are not precluded from using the IFRS for SMEs.
There is no size threshold set by the IASB for use of the standard. In that respect, the name of the standard may be somewhat misleading.
A more descriptive name may have been 'IFRS for Non-Publicly Accountable Entities'.
In fact, the IASB did consider this as an alternative along with others such as 'IFRS for Private Entities' and 'Simplified IFRS', but finally decided in favour of 'IFRS for SMEs'.
Individual jurisdictions adopting IFRS for SMEs are, however, free to add a size threshold if they deem it appropriate.
2. Can Jamaican entities use the IFRS for SMEs?
The applicability of the standard in Jamaica will be determined by the Institute of Chartered Accountants of Jamaica (ICAJ). Until the ICAJ does so, the standard is not available for use by Jamaican companies.
However, we understand that the ICAJ views the standard favourably and is in the process of considering adoption in Jamaica.
3. Can subsidiaries of listed companies use the IFRS for SMEs?
The fact that the shares of an entity's parent are listed on a stock exchange does not, by itself, make the entity publicly accountable. Therefore, a subsidiary of a listed company that is not publicly accountable in its own right would qualify as an SME, under the IASB's criteria, and could use the standard.
Of course, Jamaican companies will have to await the adoption of the standard in Jamaica by the ICAJ.
4. Can companies listed on the Jamaica Stock Exchange junior market use the IFRS for SMEs?
The junior market is a public capital market. Therefore, companies listed on the junior market would be considered publicly accountable and ineligible to use the standard.
5. Is the standard stand-alone or linked to full IFRS?
The IFRS for SMEs is a completely stand-alone standard. IFRS for SMEs and full IFRS are separate frameworks and eligible entities will only be able to apply one of them, that is, no mix and match. The only exception is that entities are allowed to apply IAS 39 in full instead of the financial instruments accounting requirements of IFRS for SMEs.
6. What are the key differences between the IFRS for SMEs and full IFRS?
While the IFRS for SMEs is based on the same framework as full IFRS, it contains various simplifications. For one, IFRS for SMEs is much shorter (approximately 230 pages compared with over 3,000 for full IFRS) and has been drafted using much simpler language than full IFRS. The main differences can be summarised as follows:
Omission of irrelevant topics: The IFRS for SMEs omits a number of topics that are not considered relevant to SMEs. Examples include earnings per share, interim financial reporting, segment reporting and special requirements for assets held for sale.
Simpler options only: Where full IFRS allow accounting policy choices, the IFRS for SMEs allows only the simpler option. Examples include no option to revalue property, plant and equipment or intangibles, no fair value option for financial instruments, and all borrowing costs and research and development costs are expensed.
Recognition and measurement simplifications - The IFRS for SMEs simplifies a number of recognition and measurement requirements of full IFRS. Examples include no 'corridor approach' for recognition of actuarial gains and losses, no available-for-sale and held-to-maturity classes of financial assets, and goodwill is amortised over its estimated life - presumed to be 10 years in the absence of a reliable estimate.
Reduced disclosures: Full IFRS contain over 3,000 disclosures; IFRS for SMEs contains approximately 300.
7. How often will the IFRS for SMEs be revised?
The IASB has indicated that it will undertake an initial review of the standard to consider the implementation experience of SMEs after two years of financial statements have been published using the standard.
After that initial implementation review, the IASB expects to propose amendments approximately once every three years.
This will be very attractive for SMEs, as it will reduce the burden of keeping up with constant changes to full IFRS.
8. How has the IFRS for SMEs been received globally?
South Africa was the first country to adopt the standard. In fact, the demand for the standard was so overwhelming that South Africa actually adopted the Exposure Draft that preceded the standard in 2007.
A number of other countries are in the process of considering adoption of the standard. Based on a brief survey by the IASB of the invitees to its World Standard Setters meeting in September 2009, some 31 out of 51 respondents planned to require or permit the use of the IFRS for SMEs during the next three years.
Alok Jain is a partner with PricewaterhouseCoopers Jamaica.