IASB SME project - Thinking small

John House reports on progress towards producing simplified international standards for SMEs - a project of keen interest to the UK.

Since the International Accounting Standards Board was set up in 2001 it has been bound by its constitution to write standards for companies that are traded on the world's stock exchanges. The IASB's fundamental objective is to meet the needs of the world's capital markets. However, the board has always been aware that pursuit of this goal distances the IASB from many of its constituents in developing and transitional economies.

The IASB's predecessor, the 50-or-so-strong International Accounting Standards Committee, wrote standards that were adopted partially or wholesale by countries all over the world that lacked the resources to develop their own national GAAP. In July 2003, the IASB appointed Paul Pacter, a veteran standard-setter and partner at Deloitte Touche Tohmatsu, Hong Kong, to write single-handedly a simplified version of existing IFRS for non-listed small and medium-size companies. Pacter is supported by 34 experts who make up the IASB Working Group on Accounting Standards for SMEs.

Cut-down standards

At the end of January, the working group chaired by Pacter met to discuss the first draft of the cut-down standards. By his own admission, Pacter's draft needs a lot of work and it was clear that expectations among constituents vary. The challenge facing Pacter and the working group is to come up with a set of simplified International Financial Reporting Standards that meet the needs of SMEs in the EU as well as the developing countries and the eastern European transitional economies.

In the week before the January meeting, 10 of the group's European members, including UK Accounting Standards Board chairman Ian Mackintosh, urged Pacter to radically rethink the way he is tackling the project. In a letter to Pacter they said they were concerned the draft 'does not achieve the necessary level of simplifications by a very wide margin'.

They asked Pacter to devote more time during the two-day meeting to strategic issues such as the IASB's broad approach to SME standards and the importance of further simplification. However, Pacter refused to allow the meeting to be derailed by the 10 European members and, backed by other non-European members of the working group, focused on technical problems in the draft standards.

One of the 10, Gerhard Prachner, a partner at PricewaterhouseCoopers, Austria, told Accountancy that the SME project is an important issue in Europe at the moment. Last January the EU adopted IFRS for its listed companies. Though Europe is not obliged to adopt the IASB's SME standards for its non-listed companies, the European Commission has indicated that it will adopt the SME standards if it thinks they are an improvement on the Fourth and Seventh Directives.

Prachner says: 'If the IASB produces something that is too complicated, the European Commission will just stick with the directives, or worse, it will step in and say "forget it we'll write our own".' He explains that the draft is 'much too descriptive' in places but in other respects, such as the definition of assets and production costs, it lacks explanation.

Users' needs

Mackintosh says the 10 agree that the direction of the project should be guided by users' needs. However, he says that opinion in Europe is nevertheless divided. 'Some people want to go back to the beginning and have a different conceptual framework to the original IFRS.'

The UK's interest in the SME project is particularly intense. Deloitte partner Isobel Sharp, who is the UK's leading expert on accounting for SMEs and a member of the IASB SME working group, says there is a lot at stake for the UK's non-listed companies. Sharp was responsible for writing much of the UK Accounting Standards Board's Financial Reporting Standards for Smaller Entities (FRSSE) and chairs the UK ASB's committee on accounting for smaller entities (CASE). She says it would be a calamity for UK accounting if the IASB's SME standards fall short of what is required in UK FRSSE.

The UK ASB plays a significant role in the technical activities of the European Financial Reporting Advisory Group (EFRAG) - the EC's committee of technical experts set up to screen IFRS for adoption in Europe and to act as a conduit for communication between the IASB and the European accounting and business communities. What is more, the UK ASB has a special relationship with the IASB by virtue of the fact that chairman Sir David Tweedie is a former chairman of the UK board. Mackintosh and Sharp want Pacter to bring IASB SME standards in line with FRSSE.

EFRAG must take lead

'Europe could live with standards that are based on FRSSE - the UK has to comply with the Fourth and the Seventh Directives after all,' says Prachner. But he emphasises that neither the EC nor the business and finance communities in Europe would be happy with the UK ASB openly taking the lead: 'EFRAG would have to be seen to take the lead.'

Sharp says that both the Sri Lankan and the Hong Kong ASBs are unhappy with the volume and technical detail of Pacter's draft and would also favour SME standards that are based on UK FRSSE. However, despite the enthusiasm of some Commonwealth countries and former British colonies, FRSSE are by no means the universal panacea for Pacter's problems.

Larissa Gorbatova from Russia's Centre for Capital Market Development told Accountancy that 'the UK model proves to be reasonable within the UK, and the format is probably useful but I'm not sure that we will be able to use that (FRSSE-based SME standards) at all'.

During the meeting, some members questioned the relevance of a number of technical issues in the current draft standards, such as whether SMEs should be required to produce consolidated accounts. The banks, the SME sector's primary users, say they do not need to see consolidated accounts, whereas some members of the IASB feel their absence is an invitation to fraud.

Disagreement over conceptual basis and technical treatments that should be included in SME standards is not the only obstacle to writing simplified standards relevant the world over. There is still disagreement over who should be able to use simplified standards.

Working group member Frederic Gielen, senior financial management specialist at the World Bank, told the meeting that in Russia and central Asia there are companies with only two or three shareholders, which would normally meet the IASB's definition of an SME, but because of local economic developments are now traded on a stock exchange. 'They fear that they will be unable to use SME standards even though full IFRSs are not suitable,' he said.

The issue was further complicated when working group member Saim Ustundag, secretary general of the Turkish ASB, pointed out that Turkey plans to set up by the end of the year a national SME market, where SME shares will be publicly traded.

Tom Jones, IASB deputy chairman, is emphatic about the board's position on this: 'All listed companies have to use full IFRS - if local jurisdictions allow them to use SME standards then they cannot say they are in compliance with IFRS.'

The SME working group has representatives from Malaysia, Trinidad, Russia, China, Turkey, the United Arab Emirates, Kenya and South Africa, as well as from the World Bank and the United Nations. The working group members all accept that in reality the final SME standards will probably be used in many countries as a basis for national GAAP rather than adopted wholesale as the IASB would prefer.

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