Accounting For SMEs The European Debate Goes On
Author:
Ian Mackintosh
The Irish have proved themselves to be progressive when it comes to both accounting standards and the EU’s single market. But a move by the European Parliament may make it difficult for them to reconcile these positions on the proposed international financial reporting standard (IFRS) for small and medium-sized companies (SMEs).
On 24 April, the European Parliament (EP) adopted by a large margin a report drawn up by a German MEP, Alexander Radwan. The report highlights a number of concerns raised by MEPs with IFRS and calls for greater European representation on the body overseeing the International Accounting Standards Board (IASB).
But what might prove most controversial in Ireland is the parliament’s criticism of the IASB’s proposed IFRS for SMEs. The report complains that the standard is ‘far too complicated for SMEs’, although it acknowledges that it could be a useful transitional option for the larger ones. Most importantly, it calls on the European Commission ‘to withdraw its commitment to implementing and adopting an IFRS for SMEs, thus preventing parallel application of standards in the European Union’.
Any action by the Commission to prevent Member States from considering adopting the final IFRS for SMEs in their jurisdictions would, in my view, constitute a retrograde step and run counter to the principle of subsidiarity enshrined in the European Treaty. The UK Accounting Standards Board is conducting an exercise to check that the IFRS for SMEs does not conflict with the legal framework for annual accounts as set out in the Fourth and Seventh Company Law Directives. If this is confirmed, then there can be no justification for the EU to block its adoption in those Members States that want it.
I consider that the Ireland and the UK will be among those Member States. In April 2007 the ASB issued a consultation paper on the IASB's exposure draft of the IFRS for SMEs. It expressed the view, since reaffirmed in the light of the responses from constituents, that the standard would play a central role in the future structure of accounting requirements for both Irish and UK entities.
Irish enthusiastic about IFRS for SMEs
When we held a round-table on the subject with the Institute of Chartered Accountants in Ireland, in Dublin last June, the audience was enthusiastic about the IFRS for SMEs. Indeed, it went further than its counterparts in England and Wales, and Scotland, in supporting a two-tier system of accounting standards: full IFRS for publicly accountable companies and IFRS for SMEs for the rest. Elsewhere the preference was for three tiers, with an updated version of the Board’s Financial Reporting Standard for Smaller Entities (FRSSE) for the smallest entities.
Overall, the responses to the ASB’s consultation exercise have revealed a strong majority in favour of the IFRS for SMEs being available for application, at least for medium-sized companies.
The ASB is currently preparing a Discussion Paper, building on its consultations. This will set out in more detail its latest proposals on a tiered reporting structure. The costs and benefits of this approach will be discussed and further comment invited.
To my mind, this represents a sensible strategy to put to our constituents. The alternative, as suggested in the Radwan report, is that the EU should develop its own ‘independent and comprehensive’ solution for SMEs. That implies the EU setting up its own standard-setting structure, which for many – myself included – would not be an attractive option. My message to the Commission is to allow Member States to adopt the IFRS for SMEs, if they wish, and let’s see how it works out in practice.
Ian Mackintosh is Chairman of the Accounting Standards Board.
Andrew Lennard of the Accounting Standards Board is visiting Dublin in early June to discuss The Financial Reporting of Pensions. For details, see page 74 of the June issue.