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IFRS for SMEs: Update

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8th Sep 2009
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Steve Collings outlines the key proposals in the ASB’s consultation on reporting standards for small and medium enterprises and what it will mean for UK SMEs going forward.

As accountants are now aware, financial reporting in the UK is about to undergo a substantial overhaul as the UK Accounting Standards Board (ASB) has issued a consultation paper on the future of UK GAAP, or perhaps more accurately, the consignment of UK GAAP as we know it to the history books.

In July 2009, the International Accounting Standards Board (IASB) issued its ‘IFRS for SMEs’ which aims to provide a financial reporting framework to enable high quality and appropriate standards for SMEs that fall within its scope.

IFRS for SMEs is a ‘stand-alone’ standard which incorporates the principles laid down in existing IFRS but in this case they have been simplified for SMEs. On 11 August 2009, the ASB started a six month consultation process which will end in February 2010. These proposals suggest a three-tier structure for financial reporting in the UK, which is as follows:

  • Full-listed and AIM listed PLCs will report under EU adopted IFRS
  • Companies who currently apply FRSSE could choose to report under IFRS for SMEs
  • Small entities could choose to continue to apply FRSSE

Key concerns

IFRS for SMEs is specifically tailored for small and medium enterprises, but under IFRS there is no definition of what constitutes a small or medium. Currently the UK has size limits that determine whether a company is small or medium-sized (comprising a turnover test, balance sheet total test and number of employees test). IFRS does not have such determinations but instead states that IFRS for SMEs is intended for companies who are not publicly accountable. It would be up to the regulatory bodies in the UK to specify eligibility criteria.

As a result of the target audience for IFRS for SMEs, the standard itself does not address the following areas:

  • Earnings per Share (IAS 33)
  • Interim Financial Reporting (IAS 34)
  • Segment Reporting (IFRS 8)
  • Assets which are held for sale (IFRS 5)
  • Insurance (IFRS 4)

When the IASB issued the IFRS for SMEs, it did not specify an ‘effective from’ date. This is because it is up to the UK whether (or not) it adopts the standard; although since the intention by the UK was to always adopt an international framework for financial reporting (for reasons which will be discussed later in the article), it is pretty much clear cut that the UK will adopt it.

There have been arguments in various jurisdictions saying that a two-tier system of financial reporting subjects different entities to different accounting rules. Conversely, practitioners have also expressed concerns about the undue cost in actually implementing the new standard.

Speaking the same language

The intention is that a system is achieved that enables countries around the world to apply IFRS so that, globally, everyone ‘speaks the same language’. Professional institutes have welcomed IFRS for SMEs on the basis that it will achieve consistent accounting between countries. IFRS for SMEs is particularly welcome in some developing nations who have difficulty in developing and interpreting their accounting standards. By adopting IFRS for SMEs these inconsistencies will be ‘ironed out’.

The ASB has also said that adopting IFRS for SMEs will improve financial reporting in the UK because it will be more targeted and simplified. In addition, the ASB has said that IFRS for SMEs will reduce the burden of interpreting accounting principles and complying with differences in reporting requirements. The ability to improve the comparability of financial statements and make them more understandable will also build investor confidence.

The proposal mentions that the ACCA field tested five practitioners who prepared accounts for one of their FRSSE clients using the IFRS for SMEs. The results of the field test were that 23 out of the 25 companies were FRSSE companies. The practitioners involved in the field test said that they did not encounter any major problems in applying the IFRS for SMEs together with the restatement of prior year comparatives, and in light of this it could be that IFRS for SMEs might eventually replace FRSSE.

Full IFRS versus IFRS for SMEs

Full IFRS spans some 2,800 pages and quite clearly would be inappropriate for a company that falls within the ambit of a SME. IFRS for SMEs is 230 pages long, so it’s considerably shorter and would also enable a company adopting IFRS for SMEs to take advantage of the substantial disclosure exemptions than a company reporting under full IFRS would not be eligible to apply for.

Looking at the IFRS for SMEs it does seem to simplify certain areas – especially where goodwill is concerned. Lots of SMEs have goodwill in their balance sheet and under full IFRS this would have to be tested for impairment on an annual basis. Impairment calculations can be complicated and it is simply far too burdensome to have a SME undertaking annual impairment reviews on their goodwill. The IFRS for SMEs removes the need for annual impairments and instead states that it can be amortised over its estimated useful life or 10 years, whichever is longest.

FRSSE

Under the current proposals, the much-loved FRSSE is being kept, although it will only be eligible to be applied by the very small companies. Much of the SME sector will report under IFRS for SMEs and the plans are to review the FRSSE in the future to either dispense with it in totality or make it more compliant with the international framework. The ASB may decide to amend FRSSE so that it is more aligned to IFRS for SMEs depending on the current proposals by the EU regarding the financial reporting requirements of what it terms ‘micro-entities’.

Implementation timetable

The new standard will take effect for accounting periods commencing on or after 1 January 2012.

Consultation

It has always been the intention that IFRS for SMEs will take place. Comments on the ASB consultation paper should be sent by 1 February 2010. If you want to have your say, lodge your comment by visiting www.asb.org.uk.

At the moment the UK reports under IFRS and current GAAP (FRS/UITF/SSAP). Understandably the ASB wants to dispense with two different reporting frameworks and IFRS for SMEs is the future for financial reporting in the UK.

Steve Collings FMAAT ACCA DipIFRS is audit and technical manager at Leavitt Walmsley Associates Ltd and a partner in AccountancyStudents.co.uk. He is also the author of ‘The Core Aspects of IFRS and IAS’ and lectures student accountants on financial reporting and auditing issues

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