The Exposure Draft of an IFRS for SMEs published in February 2007 is supposed to enhance the comparability between worldwide SMEs, and therefore meet the user needs, by concentrating on regulations that play a role for SMEs.
Furthermore it is expected to reduce the financial reporting burden of the preparers, reporting SMEs without public accountability, of the financial statements. Another benefit, in case of widespread application of the standard, is expected to be the falling costs of capital of SMEs. This is because the allocation and pricing of capital is easier with a higher comparability of the financial statements of SMEs. Major issues of change were the impairment of goodwill, the cost method for associated companies, finance leases as well as the expense of research and development costs.
Goodwill is unlike in full IFRSs, tested for impairment losses on indication and impaired only to the fair value. This reduces the workload spent on annual impairment testing but may lead to dilutions of expenses. Associated companies can, also in the consolidated statements, be accounted for with the cost method and the fair value model through profit or loss, which are much easier than the equity method.
However, since intra-company transactions are not cancelled out, the new regulations might lead to higher profits.
The accounting of finance leases changed in two respects: The regulations of lessor accounting was totally left out of the standard and has to be looked up in full IFRSs.
The lessee accounting was simplified by allowing the preparers of the financial statement to determine the cost of the lease by only calculating the fair value of the leased property. This also leads to smaller expenses over the total lease period. When it comes to the research and development expenditure only minor changes were introduced. The IASB decided for providing SMEs with a choice in accounting treatment between expending both research and development cost or, on the other hand, to capitalize the development cost if certain criteria are met. Although it means a further simplification it has to be doubted that many entities decide against the possibility to capitalize the development cost but to expense them.
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
Objectives and Core Themes
The primary objective of this report is to analyze the IASB's proposed International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), evaluating its potential to enhance financial comparability and reduce reporting burdens while assessing the suitability of its simplified accounting regulations for smaller entities.
- The rationale behind the development of a stand-alone IFRS for SMEs.
- Identification of the target user group and the criterion of public accountability.
- Analysis of the cost-benefit implications for small and medium-sized enterprises.
- Evaluation of specific accounting treatments including goodwill, associated companies, leasing, and R&D.
- Critical assessment of the standard's effectiveness for the smallest business entities.
Excerpt from the Book
C. Finance leases
Taking a look on finance leases, it first strikes that the principals of lessor accounting were totally left out of the standard and, if needed, have to be looked up in full IFRSs. The reason for this decision is that the ones that fall into this category, e.g. financial institutions, most likely have to adopt full IFRSs. (IASB, 2007a, 2007b) However, by deciding to use cross-references to full IFRSs the IASB undermines its objective of creating a stand-alone IFRS. Having to look up regulations in the full IFRSs may produce confusion. (Lindsell, 2007)
When it comes to the accounting for lessees the board decided to simplify the regulations. The full IFRSs demand the determination of the costs of the lease by finding the lower of the fair value of the leased property and the present value of the minimum lease payments. In the new standard for SMEs for measuring the costs of the lease only the former has to be calculated. (IASB, 2005, 2007b)
The reason for this decision was to improve the cost-benefit relation of the regulation and only adopt those accountancy policies that are beneficial for the users and easy to handle for the preparer of the financial statements (IASB, 2007a). Another impact on the SMEs is a lower charge to the income statement over the whole leasing period since (in most cases) the method using the present value of the minimum lease payments causes a higher sum of expenses. This is due to the fact that it recognizes, besides depreciation, a finance charge in the income statement.
Summary of Chapters
1. Introduction and background: This chapter introduces the IASB's exposure draft for SMEs and outlines the report's structure in examining the proposed accounting standard.
2. Reasons for and benefits of an IFRS for SMEs: This section details the objectives of the standard, focusing on global comparability and the reduction of financial reporting burdens.
3. Range of possible users: This chapter defines the intended audience for the standard, specifically focusing on entities without public accountability.
4. Cost-benefit relation to SMEs: This section evaluates the economic impact of the simplified regulations, highlighting both the time-savings and the potential criticisms regarding complexity for very small firms.
5. Evaluation of chosen proposals: This chapter provides a detailed analysis of specific changes to goodwill, associated company accounting, lease agreements, and R&D expenditures.
6. Conclusion: The final chapter summarizes the benefits of the IFRS for SMEs and assesses its potential as a helpful tool for growing companies.
Keywords
IFRS for SMEs, International Accounting Standards Board, Financial Reporting, Small and Medium-sized Entities, Accounting Standards, Goodwill Impairment, Cost-Benefit Analysis, Finance Leases, Research and Development, Comparability, Public Accountability, Financial Statements, IASB, Global Standards.
Frequently Asked Questions
What is the fundamental purpose of the IFRS for SMEs?
The standard aims to provide a simplified, self-contained set of accounting principles for non-listed companies, enhancing global comparability and reducing the financial reporting burden.
What are the core thematic areas covered in this report?
The report focuses on the rationale for the new standard, the definition of its target users, the analysis of cost-benefit relationships, and specific evaluations of changes in accounting treatments.
What is the primary research objective?
The primary objective is to evaluate whether the IASB's proposals effectively meet the needs of SMEs while providing a simplified yet sufficient accounting framework compared to full IFRSs.
Which scientific or analytical method is applied?
The author employs a comparative and descriptive research approach, analyzing the differences between existing full IFRS regulations and the proposals for SMEs to assess their impact on reporting practices.
What subjects are addressed in the main body of the document?
The main body examines the SME definition, the arguments for the new standard, the cost-benefit balance, and technical evaluations of goodwill, associated companies, finance leases, and R&D treatment.
Which keywords best characterize this work?
Key terms include IFRS for SMEs, financial reporting, comparability, IASB, accounting standards, cost-benefit analysis, and small and medium-sized entities.
How does the standard handle goodwill impairment compared to full IFRS?
The IFRS for SMEs simplifies the process by omitting annual impairment tests, instead utilizing an indicator-based method, which is faster but carries the risk of "dead" balance sheet positions.
What simplified approach is proposed for lease accounting?
For lessees, the standard simplifies the determination of lease costs by requiring only the calculation of the fair value of the leased property, rather than the more complex present value method required by full IFRS.
- Quote paper
- David Wagener (Author), 2008, International Financial Reporting Standard for Small and Medium-sized Entities, Munich, GRIN Verlag, https://www.grin.com/document/113426
