Financial Reporting - SMEs - Setting out the approach

The IASB's discussion paper on standards for SMEs identifies the issues, and sets out the board's preliminary and tentative views, reports Paul Pacter.

The International Accounting Standards Board (IASB) has begun a project to develop accounting standards suitable for small and medium-sized entities (SMEs). At the board's public meetings during the second half of 2003 and early 2004, it developed some preliminary and tentative views about the basic approach it will follow in developing those standards.

It has also tested that approach by applying it to several existing International Financial Reporting Standards.

In June 2004, the IASB published a discussion paper identifying the issues, setting out the board's preliminary and tentative views, and raising questions about them. (An electronic version of the full discussion paper may be downloaded, free, from A summary of the key issues is shown in the box.

The discussion paper does not include proposals for financial reporting standards for SMEs. That will come later. The paper focuses on the board's approach to the project. Comments are requested by 24 September 2004.

IASB work plan

The IASB envisages the following work plan for the project:

•   Analyse and consider the responses to the discussion paper.

•   Publish a single exposure draft of the 'SME versions' of all existing IFRSs (including IASs and interpretations), rather than separate exposure drafts of individual IASB standards for SMEs.

•   Subsequently, issue a volume containing the definitive 'SME versions' of all IFRSs (including IASs and interpretations), with a single effective date.

•   Thereafter, concurrently with each exposure draft of an IFRS and each draft interpretation, and most likely as part of those documents, propose the related IASB standard or interpretation for SMEs. The effective dates of the new or revised IASB standards for SMEs would probably be the same as the effective date of the new or revised IFRSs (including interpretations).

•   The timing of these steps will depend on, among other things, the responses to the discussion paper and decisions on possible field testing by SMEs of the IASB's proposed standards for SMEs.

Why is the board taking on this project?

In most countries, many or even all entities have a legal obligation to prepare financial statements that conform to a required set of accounting principles that are generally accepted in that country (national GAAP).

Those statutory financial statements are normally filed with a government agency and thus are available to creditors, suppliers, employees, government and others. The great majority of those entities are small or medium-sized entities (SMEs) - no matter how one might define 'small' or 'medium-sized'.

Few countries require these entities to prepare financial statements that comply with the full requirements of the IASB's standards developed primarily for use in international capital markets.

The IASB believes that IFRSs are suitable for all entities, listed and unlisted, large and small. Nonetheless, the board recognises that in most developed countries where IFRSs are used, the primary adopters are entities whose securities are publicly traded.

In Europe, where all listed companies will be adopting IFRSs in 2005, only two or three small EU and European Economic Area (EEA) member states (out of 28 total) will require IFRSs for SMEs. Many of the others will permit IFRSs, but they will also permit SMEs to follow national GAAP.

Most of those countries are moving to align their national GAAPs with IFRSs, but no two are doing it in the same way. And most of those countries already include, either in their national GAAPs or national laws and regulations, accounting exemptions and simplifications for SMEs. In some cases, there is a separate body of accounting standards for SMEs.

There is a real possibility, in Europe alone, that there could be two-dozen or more sets of national standards that purport to be adaptations of IFRSs suitable for SMEs. This is true not only in Europe, of course, but also elsewhere in the world. The problems that the IASB sees in that event include:

•   Claims of extraction from, convergence with, alignment with, or similarity with IFRSs are often somewhat exaggerated.

•   National standards for SMEs would not necessarily be consistent with the IASB's Framework or standards.

•   National standards for SMEs would not necessarily address the needs of external users of financial statements (which is the IASB's objective).

•   Financial statements of SMEs would lack comparability across national boundaries or even within a country.

•   National standards for SMEs would not necessarily allow for an easy transition to full IFRSs for entities that wish to enter the public capital markets.

Simply put, in Europe it makes more sense to have one 'IAS light' developed by the IASB rather than 28 'IAS lights'. The same is true globally.

National standard-setters' views

National standard-setters around the world strongly support an IASB initiative.

In September 2003, the IASB hosted a meeting of 40 of the world's national accounting standard-setters. In preparation for that meeting the IASB surveyed them about standards for SMEs. With near unanimity, the 30 standard-setters that responded said that the IASB should develop global standards for SMEs. And nearly all indicated that their own national accounting requirements, in one way or another, already provided exemptions or simplifications for SMEs (see Accountancy, January 2004, p118).

The IASB has developed a list of some 25 disclosure and presentation simplifications and another 25 recognition and measurement simplifications already in place at the national level for SMEs in those 30 countries.

IFRSs already provide several - such as exemption of unlisted companies from providing segment information and earnings per share data.

Of the 30 countries that responded to the survey, 29 said that IASB standards for SMEs should include disclosure and presentation simplifications. And 24 of the 30 said that recognition and measurement simplifications are needed as well.

•   Vive la difference? p76

•   Paul Pacter is director of standards for small and medium-sized entities at the International Accounting Standards Board. He is also a director with Deloitte in Hong Kong.

Issues raised in the IASB's discussion paper on standards for SMEs

1. Should the IASB develop special financial reporting standards for SMEs?

2. What should be the objectives of a set of financial reporting standards for SMEs?

3. For which entities would IASB standards for SMEs be intended?

4. If IASB standards for SMEs do not address a particular accounting recognition or measurement issue confronting an entity, how should that entity resolve the issue?

5. May an entity using IASB standards for SMEs elect to follow a treatment permitted in an IFRS that differs from the treatment in the related IASB standard for SMEs?

6. How should the board approach the development of IASB standards for SMEs? To what extent should the foundation of SME standards be the concepts and principles and related mandatory guidance in IFRSs?

7. If IASB standards for SMEs are built on the concepts and principles and related mandatory guidance in full IFRSs, what should be the basis for modifying those concepts and principles for SMEs?

8. In what format should IASB standards for SMEs be published?

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