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.
Inhaltsverzeichnis (Table of Contents)
- Introduction and background
- Reasons for and benefits of an IFRS for SMEs
- Range of possible users
- Cost-benefit relation to SMEs
- Evaluation of chosen proposals
- Goodwill impairment
- Cost method for associated companies
- Finance leases
- Research and development expenditure
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
The primary objective of this report is to examine the International Accounting Standards Board’s (IASB) reasons for developing the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). The report also explores the expected benefits, potential users, cost-benefit analysis, and major differences compared to full International Financial Reporting Standards (IFRSS).
- The need for a simplified IFRS for SMEs to enhance comparability globally.
- The benefits of the standard, including reduced reporting burdens and improved information for users.
- The definition of SMEs and the range of companies that the standard aims to cover.
- The cost-benefit analysis for SMEs, considering the balance between simplification and informative financial statements.
- Key changes in accounting practices compared to full IFRSS, specifically regarding goodwill impairment, cost method for associated companies, finance leases, and research and development expenditure.
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction and background: This chapter provides an overview of the IFRS for SMEs, its purpose, and the motivations behind its development. It also outlines the key questions and areas of investigation explored in the report.
- Reasons for and benefits of an IFRS for SMEs: This chapter focuses on the IASB's objective in creating a simplified standard for SMEs. It highlights the growing need for comparability among SMEs worldwide, driven by globalization and the importance of financial information for investors, lenders, and other stakeholders. The chapter also discusses the anticipated benefits, including reduced reporting burdens for SMEs and increased transparency in financial reporting.
- Range of possible users: This chapter defines the target audience for the IFRS for SMEs, specifying that it is intended for small and medium-sized entities without public accountability. The criteria for excluding certain companies, such as those with significant public market presence or essential public services, are explored. This chapter also addresses the lack of specific size criteria and the delegation of defining these to local jurisdictions.
- Cost-benefit relation to SMEs: This chapter examines the rationale behind simplifying the regulations for SMEs, highlighting the assumption that investors in SMEs have a different level of expertise and needs compared to those in larger companies. It discusses the benefits of reduced reporting burdens, improved cost-benefit relations for SMEs, and the potential for lower borrowing costs due to increased comparability and easier capital allocation.
- Evaluation of chosen proposals: Goodwill impairment: This chapter focuses on the specific changes proposed for goodwill impairment accounting under the IFRS for SMEs. It contrasts the full IFRSS approach with the proposed simplification, which omits annual impairment testing and relies on the indicator method. The chapter examines both the potential benefits of a simplified impairment process and the potential risks associated with the new approach.
Schlüsselwörter (Keywords)
The core keywords and focus areas of this report include IFRS for SMEs, simplified accounting standards, comparability, cost-benefit analysis, goodwill impairment, cost method for associated companies, finance leases, research and development expenditure, global accounting standards, and financial reporting for small and medium-sized entities.
- 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
