The IFRS For Small And Mid-Sized Entities
Maxim Grishin, Fellow of the Association of Chartered Certified Accountants (FCCA),
Senior Audit Manager, Alinga Consulting Group
On 9 July 2009 the IASB published an International Financial Reporting Standard (IFRS) designed for use by small and medium-sized entities (SMEs). IASB had been developing this standard for the past five years with the help of SME representatives.
According to Sir David Tweedie, the IASB Chairman, "the publication of IFRS for SMEs is a major breakthrough for companies throughout the world.” The standard may be applicable to some 95% of companies across the globe.
We hope that small and medium sized enterprises in Russia will also now more readily adopt these accounting techniques. While businesses are still be legally required to maintain their tax accounting in RAS (Russian Accounting Standards), these new techniques will make IFRS more accessible to SMEs hoping to attract foreign capital.
This article will help you understand:
- How the standard defines small and medium-sized entities;
- What the differences are between the original version of IFRS in comparison to the new;
- How and when the new standard can be applied.
Small and Medium-Sized Entities
According to the new standard, a SME is a company that: (a) does not have public accountability, and (b) publishes general purpose financial statements for external users. In other words they are companies:
- whose debt or equity is not traded on public markets, or that do not hold assets entrusted to them by third parties such as banks, insurance companies, mutual funds and security brokers.
- which do not publish their financial statements for creditors, shareholders who are not involved in managing the business, and credit rating agencies.
What is IFRS for SMEs?
The new standard is a vastly slimmed down version of IFRS, consisting of just 230 pages, or less than 10% of the full IFRS. The new standard contains 35 sections, each of which addresses a different element of financial reporting (inventory, fixed assets, investments, etc.), reporting forms (statement of financial position, statement of comprehensive income, statement of cash flows, etc.), and types of transactions or operations (borrowing costs, leasing, related party transactions, etc.).
The new IFRS standard does not include sections on earnings per share, segment reporting, special accounting for assets held for sale, etc., since as a rule these are not applicable to SMEs.
The new standard holds to the same ideals as the full IFRS, including prudence, substance over form, reliability, timeliness, materiality, comparability, reliability, and completeness.
For applying the standard, IASB also published a guide with illustrative financial accounting and a checklist for reporting information in the financial records. A summary of this guide is below.
While most standards indicate that they must be implemented within a certain time frame, the new SME standard does not. This means that the company can choose any period to start applying IFRS for SMEs. Just like the full version, the new one specifies the methodology for its adoption and offers several exceptions (such as on recalculation or estimations) that can be used upon its adoption. For example, such exceptions can include using the fair or revalued price of fixed assets and intangible assets according to local standards on the date of adopting the new IFRS, or reducing the accumulated exchange rate difference in the capital to zero.
Changes to IFRS have complicated it over the past 10-15 years to the point that they were only applicable to 5% of companies. For instance, the growing demand of external users and market regulators resulted in additional requirements for disclosure.
SMEs applying IFRS have had to prepare statements and disclosures that have little value to end users, such as estimating the size of goodwill for each balance sheet date or disclosure of financial instruments by class. The new standard allows more attention to be paid to disclosure of information that is more useful for the user (such as quantitative and qualitative characteristics of revenues, expenses and assets) when preparing the financial statements.
We are predicting that this new standard will be popular with SMEs in Russia who are interested in attracting new capital. The standard has extended the practical application of IFRS to a broad range of businesses that may have before avoided adopting it because of what may have seemed time consuming and impractical requirements. Furthermore, by encouraging a wider use of IFRS, we hope that this new standard will serve to catalyze the convergence of IFRS with US GAAP and RAS and give a more inclusive base from which to do so and by making the convergence a more pertinent, pressing issue because so many more businesses will be using IFRS.
In my view, this new standard is a good omen for IFRS and its users.
The International Accounting Standards Board (ISAB) has made several resources for the IFRS for SMEs available for free online.
Download the fact sheet on the new standard here (PDF).
You may also register with the site for free and download the full set of standards here.
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