IFRS for SMEs

Table of contents

1.  Introduction and background  2

2.  Reasons for and benefits of an IFRS for SMEs  3

3.  Range of possible users  3

4.  Cost-benefit relation to SMEs  4

5.  Evaluation of chosen proposals  5

  A. Goodwill impairment  5

  B. Cost method for associated companies  6

  C. Finance leases  6

  D. Research and development expenditure  7

6.  Conclusion  8

7.  References  9

1.  Introduction and background  

In  February 2007 the International Accounting Standards Board (IASB) published for public  

  comment an exposure draft of an International Financial Reporting Standard for Small and  

  Medium-sized Entities (IFRS for SMEs) The aim of the proposed standard is to provide a  

  simplified, self-contained set of accounting principles that are appropriate for smaller, non  

  listed companies and are based on full International Financial Reporting Standards (IFRSs),  

  developed primarily for listed companies. (Pacter, 2007a, p. 3 )  

  But is there a need for this standard? Which benefits does it provide? Which  

  companies is it designed for? What cost-benefit relation does it provide to SMEs?  

  And what are the major differences to full IFRSs?  

  This report will examine the IASB’s reasoning for developing the standard and  

  explain which benefits the board expects (point two) Furthermore, the report will  

  have a look on the SME definition and assess the range of possible users (point  

  three) Afterwards, in point four, the cost-benefit relation to SMEs is examined. In  

  point five a selection of important issues that have been changed in comparison to  

  the full IFRSs are explained and evaluated. The report finishes by giving a conclusion  

  (point six)  

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2. Reasons for and benefits of an IFRS for SMEs

According to the IASB (2007a) it is first and foremost the objective of enhancing the comparability between SMEs worldwide that led to the development of the standalone standard. In the light of globalising markets the ability to compare SMEs becomes even more important for investors. The current situation, with SMEs reporting not at all, according to local GAAPs or to full IFRSs, does not provide the fulfilment of this need.

The following issues demand better comparability (Pacter, 2007a, 2007b):

• granting loans to foreign SMEs and monitor the ability of the payback

• evaluate the financial situation of buyers when selling on credit

• assess the prospective of the relationship to overseas suppliers

• develop credit ratings (banks and agencies)

• providing SMEs with venture capital

• developing benefit plans in development institutions

Nevertheless there are a range of other benefits that are expected from the new standard (Pacter, 2007a, 2007b; ASB, 2007; Macintosh, 2007):

• reduction of “financial reporting burden on SMEs that want to use global standards” (Macintosh, 2007, p. 80)

• better information situation for the other users of financial statements of SMEs

• increased cost-benefit relation in comparison to full IFRS for SMEs

• increased audit quality and auditing efficiency than local GAAPs

• providing countries that have no local GAAPs with an accounting framework

• facilitated education and training

3. Range of possible users

Section 1 of the exposure draft (ED) of the IFRS for SMEs defines the possible group of users: small and medium-sized entities without public accountability which “publish general purpose financial statements for external users.” (IASB, 2007b, p.14) The criterion of public accountability is supposed to restrict the simplifications of the much smaller IFRS for SMEs to only those entities which want to publish general purpose financial statements but cannot be expected to comply with all the requirements of the full IFRSs. All entities that, by having chosen a certain type of company and

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finance (e.g. PLC) or business area (e.g. local power generation), are confronted with a higher demand of information by the public, are not allowed to apply the new reduced standard. In this respect entities trading securities in a public market, financial institutions, SMEs providing an essential public service and SMEs that are economically significant according to their home countries’ jurisdiction have to be mentioned. (IASB, 2007a)

The standard itself does not give special size criteria since it is supposed to have global applicability. A rule of thumb in developing the standard was 50 employees (Morris, 2007) .However, the IASB leaves it to the local jurisdictions to prescribe quantified size criteria and decide which companies are allowed or required to apply to the new standard (IASB, 2007a; Pacter, 2007c).

4. Cost-benefit relation to SMEs

Simplifying the regulations for SMEs is based on the assumption that the investors of SMEs are far less divided and have more expertise in financial issues. Many banks for example even have their own valuation systems which make only little use of the numbers provided by financial statements. Bearing this in mind it makes sense to reduce the reporting burden for the SMEs in order to improve the cost-benefit relation to the companies. The IASB did this by leaving topics without relevance to SMEs out and also included only the simpler option where there is a choice of accounting regulations in full IFRSs. Furthermore recognition and measurement principles were simplified and the disclosures were reduced from 3000 in full IFRS to 400 in the IFRS for SMEs. Eventually those measures lead to time- and cost-savings when it comes to the preparation of the financial statements (FERF, 2007; Pacter, 2007c) Another benefit coming with the new standard and its expected global application is a higher comparability and an easier allocation and pricing of capital for banks and other investors of SMEs. Having to spend less for comparing investment possibilities in SMEs the costs of loans are likely to go down.

Nevertheless a few critics state that the changes do not go far enough. Especially for small entities with less than 10 employees the standard is much too complicated and costly to prepare, some say. Other accounting frameworks like the FRSSE in the UK would be more suitable for this purpose (Macintosh, 2007).

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