Liam McQuaid introduces the exposure draft of the International Financial Reporting Standard for Small and Medium Sized Entities (IFRS for SMEs).
The International Accounting Standards Board (IASB) published an Exposure Draft (ED) on IFRS for SMEs in February 2007. The ED, if implemented, will radically change accounting for SMEs and is, in effect, an acceptance by the IASB that full IFRS are not appropriate for the nonpublicly accountable entity. This is a seismic shift for the IASB and should be wholeheartedly supported by all users.
The IFRS for SMEs ED contains:
-The proposed standard
-The IASB basis for conclusions
-Draft implementation guidance including pro forma financial statements with notes.
Who does IFRS for SMEs Apply To? The IFRS for SMEs will apply to small and medium sized entities that:
(a) do not have public accountability and
(b) publish general purpose financial statements for external users.
An entity has public accountability if it files its financial statements with a securities commission or other regulatory organisation for the purposes of issuing any class of instruments in a public market or it holds assets in a fiduciary capacity for a broad group of outsiders.
Proposed ChangesThe main differences between full International Financial Reporting Standards (IFRS) and the IFRS for SMEs are:
-The IASB has highlighted in the Basis for Conclusions accompanying the ED topics covered in the IFRS that are omitted from the IFRS for SMEs. These include hyperinflation, equity-settled share-based payment, agriculture, interim financial reporting, lessor accounting for finance leases, earnings per share, segment reporting and insurance.
-The Basis for Conclusions also highlights the proposed recognition and measurement simplifications. Topics covered here include financial instruments, goodwill impairment, research and development costs, associates and joint ventures, income taxes, agriculture, employee benefits – defined benefits plan, share-based payment, leases, and transition to the IFRS for SMEs.
-The Basis for Conclusions (Paragraphs BC57-BC65 and BC70- BC93) sets out the full details of the omissions and recognition and measurement simplifications.
The above omissions and proposed simplifications are to be welcomed. The main differences between the Financial Reporting Standard for Smaller Entities (FRSSE) and the proposed IFRS for SMEs are:
Cash Flow Statement
There is no requirement for a cash flow statement in the FRSSE but Section 7 of the proposed IFRS for SMEs would require a cash flow statement.
Share-Based Payment
For equity settled share-based payments, the FRSSE requires a disclosure only approach. For cash-settled share based payments, the FRSSE requires the use of best estimate of the expenditure to settle the liability at the balance sheet date.
The proposed IFRS for SMEs would generally require measurement by reference to the Fair Value of the equity instruments granted.
Fixed Assets
The FRSSE introduces simplified requirements for revaluation and the treatment of revaluation losses with no specific requirement for an annual impairment review.
The proposed IFRS for SMEs requires entities to account for all items in the same class of property, plant and equipment after initial recognition using either the cost model or the revaluation model.
Long Term Contracts
The FRSSE requires long term contracts to be assessed on a contract-by-contract basis and reflected in the Profit and Loss account by recording turnover and related costs as contract activity progresses. The IASB has proposed in the draft IFRS for SMEs not to adopt only the use of completed contract method
for long term contracts.
Consequently, the IASB believes that the percentage of completion method provides information that is more useful than the completed contract method.
Deferred Tax
The FRSSE requires Deferred Tax to be recognised in respect of all timing differences that have originated but not reversed by the balance sheet date; deferred tax will not be recognised on:
-Revaluation gains and losses, unless at balance sheet date the entity has entered into a binding agreement to sell the asset; or
-Taxable gains arising on revaluations or sales if the gain will be rolled over into a replacement asset. The proposed IFRS for SMEs would require deferred tax liabilities to be recognised for the tax consequences of the future recovery or settlement of the entity’s assets and liabilities at their current carrying amounts and for unused tax losses and unused tax credits.
Government Grants
The FRSSE only requires that grants should be recognised in the profit and loss account to match them with the expenditure towards which they are intended to contribute. In the proposed IFRS for SMEs there are specific criteria as to when an entity shall recognise government grants in several circumstances.
Consolidated Financial Statements
The FRSSE requires, where the entity prepares consolidated financial statements, to regard as standard the accounting practices and disclosure requirements as set out in the relevant FRSs. The proposed IFRS for SMEs would require consolidated accounts.
Company Law
The FRSSE contains company law references while the FRS for SMEs does not address company law.
What’s Next?The response date of the exposure draft is the 1st October 2007 which
allows ample time for interested parties to frame their responses. Issues to be considered are:
-Should the IFRS for SMEs apply to medium sized entities only and keep the FRSSE for small or micro entities?
-Should the IFRS for SMEs contain certain derogations which would only apply to micros or small companies?
-Is the IFRS sufficient for large private companies as the scope section anticipates that it will apply to such entities?
-Will the EU endorse the final document and make it mandatory for all non publicly accountable entities within the EU? The jury is still out on the above issues and further discussion is required.
Public SeminarsThe Accounting Standards Board (ASB) is organising a series of public seminars (including one in Dublin on the 14th June) to elicit the views of users and interested parties and assist them in framing their response to the IASB.
ConclusionThe IFRS for SMEs is a courageous attempt by the IASB to simplify accounting rules and disclosures for all non-publicly accountable entities and deserves all our considered responses. It will, I believe, usher in a brave new world for non-publicly accountable entities.
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