International Financial Reporting Standard for Small and Medium-sized Entities

Table of contents

1. Introduction and background

2. Reasons for and benefits of an IFRS for SMEs

3. Range of possible users

4. Cost-benefit relation to SMEs

5. Evaluation of chosen proposals
A. Goodwill impairment
B. Cost method for associated companies
C. Finance leases
D. Research and development expenditure

6. Conclusion

7. References

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).

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 stand- alone standard. In the light of globalising markets the ability to compare SMEs be- comes 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 pur- pose 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 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.

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