IFRS for SMEs in brief

IFRS for SMEs in brief

IFRS for SMEs in brief

Global convergence of accounting standards has been an aim of the International Accounting Standards Board for many years. The ASB want to consign UK GAAP (i.e. UK generally accepted accounting principles) to the past as they have become a mix of International Financial Reporting ("IFRS") and UK GAAP, thus complex for use by a typical UK entity or users of those accounts.

IFRS for Small and Medium Sized Entities ("IFRS for SMEs") is a standalone internationally acceptable standard that will certainly help many companies improve access to capital markets and gain credibility in today's marketplace.

Size is no barrier, any company of any size is eligible to use it provided it is not already publicly accountable (meaning whose debt/equity instruments are publicly traded, a financial institution or a bank).

Thus it is an option for small companies. In the UK, small companies are defined as those that satisfy 2 out of the 3 following criteria:- annual turnover of less than 6.5M, assets less than 3.6M and less than 50 employees. They have the option of adopting this or continuing to use FRSSE (Financial Reporting Standard for Smaller Entities) which runs in conjunction with mainstream UK GAAP standards. In the UK we have 4.7M private sector enterprises, with 97% having less than 100 employees so it clearly is a choice for many companies.

Based on full IFRS, the standard has been simplified to suit the entities within its scope. By removing some accounting treatments, narrowing topics covered and some disclosure requirements this reduces the volume of accounting requirements applicable to SMEs by more than 90% (versus full IFRS).

Entities that are eligible to apply the IFRS for SMEs and that choose to do so, must apply that Standard in full. The ASB want this to be adopted for all accounting periods beginning on or after 1 July 2013 (thereby coming into play in 2012 for the Balance Sheet comparatives to tally).

The impact of a move from UK GAAP to full IFRS or IFRS for SMEs will depend on a number of factors, such as size and complexity of an entity. Measurement differences will arise, which could impact taxation, distributable reserves and banking covenants. The measurement differences and potential changes in the balance sheet presentation may lead to a breach of bank covenants and the need to renegotiate existing arrangements.

Entities will clearly need to understand the implications of a choice of GAAP. Indeed, for entities adopting IFRS for the first time, there will be a substantial amount of work to convert the accounting records and support systems, as well as to prepare the financial statements. Entities will also need to prepare a cash flow statement in their annual accounts, a key difference for many small entities that take advantage of current exemptions and do not do so.

As the focus for the majority of these companies in the marketplace turns from rationalisation to growth and seizing new opportunities, better accountability and improved access to finance will be key. Hence the need to be aware / adopt the standard.

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