Peter Holgate.

One of the tricky questions in financial reporting is when higher and lower standards of accountability should be imposed on companies. There is general agreement that the reporting requirements for a listed company should be greater than those for a small private company. Beyond that, the details are difficult. Should we distinguish by reference to size alone - and, if so, should the reference point be turnover, assets, employees or what? Or by factors such as ownership (public or private)? And how does a listed company taken over by private equity fit into this? Or by industry - for example, by imposing more requirements on banks and others that have custody of public funds? In the UK, there have been differential requirements imposed, mostly by the Companies Acts, though this has given rise to a complex regime.

A new actor on this stage is the International Accounting Standards Board's proposal for small and medium-sized entities ('IFRS for SMEs'). This is, in principle, a welcome addition: International Financial Reporting Standards are increasingly complex, reflecting their global capital markets focus, including the effects of convergence with US GAAP. The result is that IFRS is now too complex for smaller entities, so the IASB is to be congratulated for developing the new draft. One can quibble over the details - for example, there should probably be further simplifications - but that is not the purpose here.

My question here is: who is it for? Despite its title, it is not for SMEs but entities that are not publicly accountable. By 'publicly accountable' the IASB means listed companies and banks and similar financial institutions. So a (non-financial) private company - however large - would be an 'SME' under this approach.

By this definition, companies in the private equity (PE) sector and other large private companies are not publicly accountable and hence are 'SMEs'. For many such companies this is not controversial. They are privately held, and if they are not that large, a lower level of disclosure is unexceptional. But some companies taken private have been listed companies in the FTSE mid-250 or even in the FTSE 100. To regard such companies as SMEs is surely to stretch the meaning of the term too far.

There is already recognition in the private equity industry that greater accountability is needed to respond to public concerns, and the Walker Committee has recently brought out proposals in this area.

As the IASB acknowledges, the degree of accountability that various entities should have is a matter of public policy, to be decided by national governments. Clearly, national standard-setters should also be involved. The UK needs to establish to whom the IASB's 'SME' proposals should be allowed to apply. We should avoid a knee-jerk reaction that imposes reporting requirements on a sector solely because it is currently receiving a lot of political and press attention. But there is also a wider point. A company that is, was or could be in the FTSE 100 or mid-250 is of a size such that it plays a significant part in the economy as an employer, supplier, taxpayer, polluter or other stakeholder.

Size thresholds are never very satisfactory. Especially if they are based on turnover, they can catch companies in different industries in a rather random way; and inflation erodes them. But if the largest private and PE companies are to be treated like the big public companies that they might be or once were, there will need to be a threshold below which other privately-held companies can be treated as what the IASB would call 'SMEs' - and thereby benefit from the simplifications and reduced disclosures that properly reflect their private status.

Peter Holgate is senior technical partner with PricewaterhouseCoopers LLP.