IFRS for SMEs, a welcome measure

The application of this standard is expected to reduce the compliance costs for many smaller entities and help make their financial statements less complex.

The publication of a simplified form of International Financial Reporting Standards (IFRS) for private entities has been long awaited by national standard setters and small and medium-size entities (SMEs), which have been required to apply full IFRS in the past.

The International Accounting Standards Board (IASB) has issued its International Financial Reporting Standard (IFRS) for SMEs.

The standard consists of 230 pages of text, arranged into 35 chapters that cover all of the recognition, measurement, presentation and disclosure requirements for SMEs. There is no cross reference to other IFRS (with one exception relating to financial instruments discussed below). This underscores the fact that IFRS for SMEs is viewed by the standard setters as independent from the full IFRS.

The standard is intended for use by SMEs. They are defined in the standard as SMEs that do not have public accountability and which also publish general-purpose financial statements for external users. An entity has public accountability if its debt or equity instruments are traded in a public market, or it holds assets in a fiduciary capacity for a broad group of outsiders.

While this definition is necessary for an understanding of the entities to which IFRS for SMEs is applicable, the preface to the standard indicates that the decision as to which entities are required or permitted to apply the standard will lie with the regulatory and legislative authorities in each jurisdiction.

However, if a publicly accountable entity uses the standard, it may not claim that the financial statements conform to IFRS for SMEs even if its application is permitted or required in that jurisdiction, as the entity would not meet the definition of an SME.

Define SME

In India, various regulatory authorities such as the Ministry of Corporate Affairs, the Reserve Bank of India, the Insurance Regulatory & Development Authority, the Securities & Exchange Board of India, etc., will have to define the term SME.

Considering the manner in which the term SME is defined in the standard, these would include entities other than listed companies, banks, financial institutions, insurance companies, etc.

IFRS for SMEs is based on the fundamental principles of full IFRS, but in many cases, it has been simplified to make the accounting requirements less complex and to reduce the cost and effort required to produce the financial statements.

To achieve this, IASB has removed a number of accounting options available under full IFRS and attempted to simplify accounting for SMEs in certain areas.

To cite an example, in the case of share-based payments, the fair value of shares in equity-settled share-based payment transactions can be measured using the directors’ best estimate of fair value if observable market prices are not available.

Another example of simplification is investment property which can be accounted as fixed assets, if fair valuing them involves undue cost or effort or does not provide a reliable measure.

Cutting compliance costs

The IFRS for SMEs includes a set of illustrative financial statements and a presentation and disclosure checklist to assist entities while preparing their financial statements.

The application of this standard is expected to reduce the compliance costs for many smaller entities and help make the financial statements of such entities less complex.

As the standard is very principles-based, interpretation issues are likely to arise, which will require a globally consistent resolution.

To ensure this standard achieves international consistency and comparability of financial reporting, it is important that interpretations are not developed by each jurisdiction. It would appear logical that the International Financial Reporting Interpretations Committee could be approached to provide any interpretative guidance that users may require.

In India, one major criticism against the full implementation of IFRS was that it would impose an unnecessary burden and hardship on SMEs. With the issuance of the SME standard, one of the major hurdles for the implementation of IFRS in India has been removed.

The ICAI and the MCA should now take appropriate and swift measures to legalise the adoption of full IFRS by public interest entities and IFRS for SMEs by SMEs from 2011. As a first step, the ICAI and other regulatory bodies should define an SME.

Article by Dolphy D'souza, National IFRS Leader, Ernst & Young . The article was earlier published in the hindu business line.