ADDITIONAL RELIEF FOR SMES
The long-awaited amendments to IFRS for SMEs have finally been published. With numerous changes being made, the amended standard provides an improved foundation for financial reporting for companies without public accountability, writes Bruce Mackenzie
The year 2007 was a landmark one for our country. Not only did we win the Rugby World Cup (for a second time), but South Africa was the first and only country to adopt the exposure draft of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) as a South African Statement of Generally Accepted Accounting Practice for Small and Medium-sized Entities (Statement of GAAP for SMEs). I’m sure memories of both these events bring tears to your eyes …
In adopting the exposure draft, issued by the International Accounting Standards Board (IASB) as a Statement of GAAP for SMEs, South Africa provided relief from the requirements of International Financial Reporting Standards (IFRS) / Statements of Generally Accepted Accounting Practice (Statements of GAAP) for limited-interest companies as defined in the Corporate Laws Amendment Act of 2007. At the time, South Africa realised this was only an interim measure given that the Statement of GAAP for SMEs was based on an exposure draft, but it was a first step towards changing the financial reporting landscape for SMEs. In July 2009, the IASB issued the final IFRS for SMEs standard – which was adopted by South Africa. The final standard provided even more relief for SMEs.
Since then, financial reporting has continued to develop. With the continual changes to IFRS being introduced by the IASB, companies reporting under IFRS have to deal constantly with the complexities of new IFRSs. This has not been the case for SMEs, who have had the same standard since 2009. But change is inevitable, and IFRS for SMEs has now also been amended.
But not all change is bad. In fact, this change is for the better. In May this year, the IASB issued the revised IFRS for SMEs (2015). The amended IFRS for SMEs is a result of a review process that began in 2012 and a process in which South Africa has played an active part. Not only are we represented on the IASB’s SME Implementation Group (SMEIG), but the IASB board member responsible for the project is our own Darrel Scott, giving us a strong voice for the South African issues.
IFRS for SMEs applies to entities with no public accountability and that do not publish general purpose financial statements (that is, not tailored to the needs of any one group). In terms of IFRS for SMEs, an entity has public accountability if its debt or equity is listed or it is in the process of listing its debt or equity, or if it holds assets in a fiduciary capacity for a broad group of outsiders as one if its primary businesses. The scope of the amended IFRS for SMEs has not changed from the 2009 standard. Whereas many entities lobbied the IASB to allow smaller listed entities the option of preparing their accounts under IFRS for SMEs, the IASB was of the view that the standard was developed with non-publically accountable entities in mind, and was still inappropriate for listed entities.
The main changes introduced to IFRS for SMEs are in response to issues raised by preparers, users and auditors of SME financial statements around the application of certain provisions in the 2009 standard. Some of the key changes include the introduction of an option to revalue property, plant and equipment, the introduction of an undue cost or effort exemption from the measurement of investments in equity instruments at fair value, the addition of an undue cost or effort exemption to the requirement to recognise intangible assets separately in a business combination, and the alignment of the section on taxation with the IFRS requirements in IAS 12, Income Taxes. These, along with the other changes, should result in it being easier for SMEs to prepare their financial statements under the revised standard.
One thing to note is that the IFRS for SMEs is not a light version of IFRS. In fact, as IFRS continues to develop, the gap between the IFRS and the IFRS for SMEs will continue to grow. This was a concern for a number of entities who saw this as a stepping stone to IFRS compliance. It should be noted that if an SME believes it will list debt or equity in the near term, or is looking to sell out to a listed entity, then it would be best for them to remain on IFRS. The IASB made this decision on the basis that, as stated earlier, the approach to SME reporting is very different to publically accountable entities reporting. IFRS is designed with a publically accountable entity in mind, and such entities would be expected to disclose more information to the markets than would be expected of an SME with a limited user base for its financial statements. As a result, IFRS requires a lot more disclosure than IFRS for SMEs. In addition, where new standards are being introduced into IFRS, the IASB will wait until these have been used in practice under IFRS for a period before deciding if these are appropriate for SMEs. Even then there is no guarantee that the IASB will align the requirements in IFRS for SMEs with that of the new IFRSs.
The amended IFRS for SMEs is effective for annual periods beginning on or after 1 January 2017. However, the standard does allow for early adoption. This is a real option companies should consider in preparing their financial statements. The amendments introduce additional relief from some of the more burdensome provisions in the 2009 version of the IFRS for SMEs, and early adoption can only result in this relief being available earlier.
The amended IFRS for SMEs will be around for the next five years without any changes. Unless the IASB finds a fatal flaw in the standard, the intention is not to revisit the standard, but rather keep it as a stable platform for SME preparers. One of the key responsibilities of the SMEIG is to consider implementation questions raised by users of IFRS for SMEs, decide which ones merit published implementation guidance, and reach a consensus on what that guidance should be and develop proposed guidance in the form of questions and answers (Q&As). These are, however, are published infrequently and are not mandatory, so do not result in continual changes to the standard.
In my view, adopting IFRS for SMEs is an absolute necessity for companies that are within the scope of this standard. With the new IFRSs on revenue recognition (IFRS 15, Revenue from Contracts with Customers) and financial instruments (IFRS 9, Financial Instruments) requiring adoption in the next few years, the burden of reporting under IFRS will continue to grow. IFRS for SMEs provides a high-quality alternative for companies lucky enough to be within its scope.
Author: Bruce Mackenzie CA(SA) is a Director at W Consulting, a JSE-accredited IFRS advisory and training company