(We recommend that this is read in conjunction with the earlier FSN white paper “The challenges facing companies migrating from U.S. GAAP to IFRS using Agresso ERP”)
The guiding principle behind the global IFRS initiative was to achieve consistency and harmonisation in financial reporting across the world. Arguably, this has been achieved with more than 110 jurisdictions adopting full IFRS or planning to converge with it in the foreseeable future. In the first instance IFRS applied mainly to listed companies. Plainly the motivation was to ensure that investors and other readers of financial statements could compare the performance of companies on a like-for-like basis regardless of where they were located. So shouldn’t the same logic apply to privately held companies? Gary Simon, FSN’s managing editor looks at the issues.
IFRS for SMEs- an introduction
There are estimated to be 21 million SMEs in Europe and a further 20 million in the United States alone. In fact over 99% of companies world-wide have fewer than 50 employees. However, IFRS has been complex and costly to implement and the pressures on large quoted companies are materially different from small businesses. For example, private companies, especially family and owner managed businesses do not have to report to capital markets and rarely tap into international sources of finance. So although the answer on the appropriateness of adoption is “Yes”, regulators and standards setters have sought to simplify IFRS for SMEs where feasible and exclude companies altogether that are regarded as too small.
The definition of what is “too small” has been left up to individual countries, as have the precise timescales for implementation. Nevertheless, many countries have elected to implement IFRS for SMEs and although the accounting principles have been simplified and superfluous requirements removed, many of the systems and process issues pertaining to full IFRS remain. This is especially true for Group companies reporting under full IFRS who now have the option for their smaller subsidiaries (depending on country) of implementing full IFRS, IFRS for SMEs or local GAAP.
How has IFRS for SMEs been simplified?
IFRS for SMEs was issued by the IASB (International Accounting Standards Board) in July 2009 and is widely regarded as having overcome some of the complexities of full IFRS. The main simplifications are that certain topics in IFRS are omitted because they are not relevant to SMEs (for example, earnings per share, interim financial reporting and segment reporting). Additionally some accounting policy treatments in full IFRS are not allowed because a simplified method is available to SMEs. Furthermore many of the recognition and measurement principles that are in full IFRS have been simplified. For example, under IFRS for SMEs, goodwill is amortized and only tested for impairment when there is a triggering event, instead of being subject to a full impairment test each year. In addition, development costs are expensed under IFRS for SMEs while they are capitalised under full IFRS.
The language of the SME version of IFRS has also been greatly simplified. In total it is estimated that IFRS for SMEs is roughly 10 percent of full IFRS and contains roughly 10 percent of the disclosure requirements of full IFRS.
So how does this affect systems and processes?
For the most part the systems and process issues around full IFRS remain relevant in the context of the related SME standard. The key issue is that the move to another accounting standard introduces change and although the impact is less severe than full IFRS and there is limited external scrutiny, the accounts prepared under IFRS for SMEs are different from local GAAP. It is this difference, however slight, that needs to be planned for and implemented.
If a group company elects to adopt full IFRS then of course the full panoply of change is relevant. But even where IFRS for SMEs is adopted a company can expect changes to all or some of its data collection, the Chart of Accounts, dimensions, consolidation structures, reporting, business intelligence and dashboards. However, the absence of segmental reporting will be a welcome simplification for most companies.
The dilemma for Group companies will be whether to adopt full IFRS regardless of size of entity or whether to implement IFRS for SMEs. In this context there are no half measures, i.e. if a company chooses to implement full IFRS it must do so completely – it cannot pick and choose the bits it likes.
So for large entities the implementation of IFRS for SMEs in its smaller subsidiaries can be viewed as yet another multi-GAAP requirement, with all of the familiar demands that this places on core financial reporting processes. (see earlier IFRS white paper).
What are the timescales?
The timescales and requirements, for example the definition of companies too small for IFRS for SMEs varies between countries. In the UK the adoption of IFRS for SMEs is a high priority and is likely, subject to final confirmation, to be mandatory for fiscal years beginning on or after January 1st 2012. This means that affected companies will need to prepare an IFRS opening balance sheet on 1st January 2011. This in turn implies that conversion decisions will need to be taken this year. In the UK companies’ that do not exceed two of the following criteria (Revenue £6.5m, Total Assets £3.26m and Employees 50) can continue to report under Local UK GAAP.
But matters are moving rapidly in other jurisdictions. Translations of the IFRS for SMEs have recently been completed in Chinese, Spanish, Italian and Romanian and the following countries are adopting IFRS for SMEs; Argentina, Botswana, Brazil, Cambodia, Ethiopia, Hong Kong and Mauritius. Interestingly, in Mauritius there is currently a consultation on a proposal to extend the option to use the IFRS for SMEs to all non-state-owned companies with turnover of less than 200 million rupees (roughly US$6 million).This will expand the scope of the IFRS for SMEs to the majority of companies based in Mauritius that are required to prepare financial statements.
Globally the position on adoption is changing daily but it is likely to be the dominant standard within a short space of time. Additionally, the recent release of the XBRL taxonomy for IFRS for SMEs is likely to further encourage accelerated adoption.
Summary
The implementation of IFRS for SMEs has many similarities with full IFRS in terms of systems and process requirements. At the core of the challenge is the need to accommodate change and companies that employ versatile ERP systems will be at a distinct advantage. Agresso Business World is particularly accommodating to IFRS changes because of its unified information warehouse, process engine and reporting capability. Unlike traditional ERP systems it means that changes made in one area are automatically reflected in another, saving time, cost and the necessity to call in specialised IT resource. Group companies or individual small companies regardless of size will welcome this flexibility when facing the challenge of IFRS for SMEs.
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About FSN |
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FSN Publishing Limited is an independent research, news and publishing organisation catering for the needs of the finance function. The report is written by Gary Simon, Group Publisher of FSN and Managing Editor of FSN Newswire. He is a graduate of London University, a Chartered Accountant and a Fellow of the British Computer Society with more than 23 years experience of implementing management and financial reporting systems. Formerly a partner in Deloitte for more than 16 years, he has led some of the most complex information management assignments for global enterprises in the private and public sector. His bestselling book, “Fast Close to the MAX” was published in 2008. Whilst every attempt has been made to ensure that the information in this document is accurate and complete some typographical errors or technical inaccuracies may exist. This report is of a general nature and not intended to be specific to a particular set of circumstances. FSN Publishing Limited and the author do not accept responsibility for any kind of loss resulting from the use of information contained in this document. |
