In July this year the IASB (International Accounting Standards Board) published its long awaited IFRS for SMEs standard. The standard is a result of a five-year development process with extensive consultation of SMEs worldwide. The new standard is a cut down and simplified version of the full IFRS standard designed to reflect the nature of small businesses which do not have public accountability. Nevertheless it still runs to 230 pages! Like full blown IFRS, the new standard is designed to create common reporting of financial statements across the globe, but as Gary Simon, FSN’s managing editor explains, it will when introduced, present many of the same systems, process and organisational challenges.
IFRS has been in force since 2005 when it was widely adopted and implemented in Europe and elsewhere for listed companies. Furthermore there is a Memorandum of Understanding which sets out the roadmap for convergence of US GAAP to IFRS.
Companies which do not have public accountability (broadly non-listed companies) have had the choice of implementing IFRS or local GAAP. The precise timing of the introduction of IFRS for SMEs is a matter for each country but in the UK, local GAAP is expected to be replaced by the new IFRS for Small and Medium-Sized Entities from 2012 – which is quite soon.
The title IFRS for SMEs is something of a misnomer. Since any company that does not have public accountability can prepare financial statements under the new standard. This is likely to be of particular relevance to listed companies who already produce IFRS accounts but have subsidiaries that use local GAAP.
The new standard is greatly simplified in content, maintenance and presentation. Although 230 pages long it contains around one tenth of the disclosure requirements of IFRS and unlike the full standard will only be updated every 3 years. Furthermore, the new standards are filed more logically by topic area. Content wise the main simplifications are that some topics which do not apply to SMEs are left out and some policy options in the full IFRS are not allowed because a more simplified method is available in the new standard. Recognition and measurement principles have also had the simplification treatment in the new standard.
Nevertheless, despite the overall appearance of simplification the new standard will produce challenges just as demanding as the full standard when it was first introduced. Uppermost in most companies’ minds will be the cost and time involved in transitioning to yet another reporting standard, especially when nobody appears to have suffered under the current local GAAP regime. The pressure for change will be particularly unwelcome in the current economic climate. Furthermore, there will be the training burden as all parties involved in the preparation and use of financial statements strive to grasp the finer points of detail in the standards.
As in 2005 the main challenges will be around systems, training, tax and external communications. Systems will have to cope with modified charts of accounts and potentially multi-GAAP reporting during any transition in which comparatives will have to be reported in local GAAP and IFRS for SMEs. There will also be the impact on reporting systems and performance measures skewed by the unexpected impact of a change in the basis of measurement. The same goes for taxation and cash flow forecasts. All of these factors taken together will force companies to analyse and communicate why results formerly reported in local GAAP are different in the new standard.
But is this a change too far. What benefits will companies receive for all of the cost and effort of introducing new standards. The case for listed companies is fairly easy to make – global access to sources of capital requires global standardisation of approach and sophisticated investors, fund managers and other users of financial statements need a level playing field to comare investment opportunities across the globe. But with private companies the business case is arguably less compelling. For example, will the cost of using the simplified IFRS be less than local GAAP? Will companies using the new standard be able to reduce their borrowing costs?
Unless the regulators and standard setters can come up with a good story management teams may be justified in baulking at the cost and effort of implementing IFRS for SMEs.
