Audit firms need to encourage smaller clients to adopt IFRS for SMEs
Author Theunis Schoeman CA(SA)
Theunis Schoeman, is Technical Director at PKF.
Relief has been extended to small and medium enterprises (SMEs) with the introduction of International Financial Reporting Standards (IFRS) for SMEs, yet overburdened businesses are being denied this much-needed respite, as many auditors are not encouraging their clients to adopt the new standard in place of full IFRS.
The release of IFRS for SMEs was due to most companies not having ‘public accountability' statuses and for whom general purpose financial statements for external users would be adequate reporting. Many SMEs should have adopted this simpler standard by now, yet this is not the case.
I believe that audit firms – particularly the smaller audit firms that typically audit SMEs, and who themselves are challenged by reporting against the full IFRS – should take the responsibility of convincing their clients to go the route of IFRS for SMEs. This is undeniably in their best interests, yet many are unaware of the advantages.
To the manager of an SME, onerous accounting standards are just one of an almost insupportable burden of compliance burden, when they really just want to focus on the operational challenges facing their business - which are harsh enough in the present economic climate. Instead they find their time consumed with administration relating to the new Companies Act, incomes tax regulations and indeed all manner of taxes and regulations from VAT to UIF, the Basic Conditions of Employment Act and, in some cases the black economic empowerment scorecard.
IFRS for SMEs was introduced precisely to help smaller companies reduce red tape: it is less complex and tailored to the needs and capabilities of SMEs, which are estimated to account for 95% of all companies in South Africa.
Full IFRS has minimal applicability to SMEs – it was designed to meet the disclosure needs of stakeholders of large and publicly-listed companies, whether shareholders, government or bankers. Those needing to access the financial statements of SMEs seldom need to know more than their liquidity, solvency and short-term cash flows.
With IFRS for SMEs, significantly fewer disclosures are required (approximately 300 compared to 3,000), yet offers enough detail to be useful to bankers, members and suppliers. The emphasis for SMEs is where it should be - accounts can be easily and understandably prepared against simplified IFRS disclosure requirements, with the unnecessary ones completely omitted. In addition, whereas the full IFRS introduces numerous new or amended standards every year, the IASB (International Accounting Standards Board) has provided a stable platform by scheduling amendments to the SME standard only every three years.
Information provided in SME financial statements has to be presented in a way that makes it comprehensible by users who have a reasonable knowledge of business activities, without omitting any relevant information.
IFRS for SMEs standardises accounting treatment wherever possible: while full IFRS boasts options in style of treatment, IFRS for SMEs provides only for the easier option. For example, there is no option to revalue property, equipment or intangibles; the cost-depreciation
model must be implemented for investment property unless a fair value can be readily obtained; and it provides for straight lining of operating leases. Borrowing, research and development costs are to be expensed, and capitalisation is not allowed as an alternative.
Many principles for recognising and valuing assets, liabilities, income and expenses are all simplified. For instance, in IFRS for SMEs, you simply amortise all indefinite life intangible assets, including goodwill.
Certain accounting concepts are omitted altogether, such as calculating earnings per share, providing interim financial reporting or segment reporting.
However, organisations that do have ‘public accountability' have to continue complying with full IFRS. For instance, if it is traded in a public, domestic or foreign stock exchange or an over-the-counter market; or it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.
This standard is available to other entities looking to prepare a set of accounts that can be described as ‘fairly presenting' under an accounting framework. These include companies, close corporations, partnerships, sole traders and trusts, where the trust deeds permit.