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<h2>IFRS for SMEs – Update</h2>

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As accountants are now aware, financial reporting in the UK is about to undergo a substantial overhaul as the UK Accounting Standards Board (ASB) issues a consultation paper on the future of UK GAAP, or should I say, the consignment of UK GAAP as we know it to the history books.

In July 2009, the International Accounting Standards Board (IASB) issued their ‘IFRS for SMEs’ which aims to provide a financial reporting framework to enable high-quality and appropriate standards for SMEs that fall within its scope.

IFRS for SMEs is a ‘stand-alone’ standard which incorporates the principles laid down in existing IFRS but which have been simplified for SMEs.  On 11 August 2009, the ASB started a six-month consultation process which will end in February 2010.  These proposals suggest a three-tier structure for financial reporting in the UK, which is as follows:
<ul>
<li>Full-listed and AIM-listed PLCs will report under EU adopted IFRS.</li>
<li>Companies who currently apply FRSSE could choose to report under IFRS for SMEs.</li>
<li>Small entities could choose to continue to apply FRSSE.</li>
</ul>

The IFRS for SMEs is specifically tailored for SMEs but under IFRS there is no definition of what constitutes ‘small-medium’.  Currently the UK has size limits that determine whether a company is small or medium sized (turnover test, balance sheet total test and number of employees test).  IFRS does not have such determinations but instead states that IFRS for SMEs is intended for those companies who are not publicly accountable.  It would be up to the regulatory bodies in the UK to specify eligibility criteria.

As a result of the target audience for IFRS for SMEs, the standard itself does not address the following areas:

1.Earnings per Share (IAS 33). 
2.Interim Financial Reporting (IAS 34). 
3.Segment Reporting (IFRS 8). 
4.Assets which are held for sale (IFRS 5). 
5.Insurance (IFRS 4).

When the IASB issued the IFRS for SMEs, it did not specify an ‘effective from’ date.  This is because it is up to the UK whether (or not) it adopts the standard; though as the intention by the UK was to always adopt an international framework for financial reporting (for reasons which will be discussed later in the article), it is pretty much clear cut that the UK will adopt the IFRS for SMEs.

There have been arguments in various jurisdictions saying that a two-tier system of financial reporting subjects different entities to different accounting rules.  Conversely practitioners have also expressed concerns about the undue cost in actually implementing the new standard.

The intention is that a system is achieved that enables countries around the world to apply IFRS so that, globally, everyone ‘speaks the same language’.  Professional institutes have welcomed the IFRS for SMEs given that it will achieve consistent accounting between countries.  IFRS for SMEs is particularly welcome in some developing nations who have difficulty in developing and interpreting their accounting standards. By adopting IFRS for SMEs these inconsistencies will be ‘ironed out’.

The ASB have also said that adopting IFRS for SMEs will improve financial reporting in the UK because it will be more targeted and simplified.  In addition, the ASB have said that the IFRS for SMEs will reduce the burden of interpreting accounting principles and complying with differences in reporting requirements.  The ability to improve comparability and understandability of financial statements will also build investor confidence.

In the proposal it is mentioned that the ACCA field tested five practitioners and these practitioners prepared accounts for one of their FRSSE clients using the IFRS for SMEs.  The results of the field test were that twenty three out of the twenty five companies were FRSSE companies.  The practitioners involved in the field test said that they did not encounter any major problems in applying the IFRS for SMEs together with the restatement of prior year comparatives and in light of this it could be that IFRS for SMEs might eventually replace FRSSE.

Full IFRS vs. IFRS for SMEs 
Full IFRS spans some 2,800 pages and quite clearly would be inappropriate for a company who falls within the ambits of a SME.  IFRS for SMEs is 230 pages long so is considerably shorter and would also enable a company adopting IFRS for SMEs to take advantage of the substantial disclosure exemptions than a company reporting under full IFRS would not be eligible to apply.

Looking at the IFRS for SMEs it does seem to simplify certain areas – especially where goodwill is concerned.  Lots of SMEs have goodwill in their balance sheet and under full IFRS this would have to be tested for impairment on an annual basis.  Impairment calculations can be complicated and it is simply far too burdensome to have a SME undertaking annual impairment reviews on their goodwill.  The IFRS for SMEs removes the need for annual impairments and instead states that it can be amortised over its estimated useful life or 10 years ,whichever is longest.

FRSSE 
Under the current proposals, the much-loved FRSSE is being kept, though it will only be eligible to be applied by the very small companies.  Much of the SME sector will report under IFRS for SMEs and the plans are to review the FRSSE in the future to either dispense with it in totality or make it more compliant with the international framework.  The ASB may decide to amend FRSSE so that it is more aligned to IFRS for SMEs depending on the current proposals by the EU regarding the financial reporting requirements of what they term ‘micro-entities’.

Implementation Timetable 
The new standard will take effect for accounting periods commencing on or after 1 January 2012.

Conclusion 
It has always been the intention that IFRS for SMEs will take place and comments on the ASB consultation paper should be received by the ASB by 1 February 2010 by going to <a href="http://www.asb.org.uk">http://www.asb.org.uk</a>.  So if you want to have your say on the proposal then you should lodge your comment.

At the moment the UK reports under IFRS and current GAAP (FRS/UITF/SSAP).  Understandably the ASB wants to dispense with two different reporting frameworks and the IFRS for SMEs is the future for financial reporting in the UK.

Steve Collings FMAAT ACCA DipIFRS is Audit and Technical Manager at Leavitt Walmsley Associates Ltd and a partner in AccountancyStudents.co.uk.  He is also the author of ‘The Core Aspects of IFRS and IAS’ and lectures student accountants on financial reporting and auditing issues.

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IFRS for SMEs – Update

As accountants are now aware, financial reporting in the UK is about to undergo a substantial overhaul as the UK Accounting Standards Board (ASB) issues a consultation paper on the future of UK GAAP, or should I say, the consignment of UK GAAP as we know it to the history books.

In July 2009, the International Accounting Standards Board (IASB) issued their ‘IFRS for SMEs’ which aims to provide a financial reporting framework to enable high-quality and appropriate standards for SMEs that fall within its scope.

IFRS for SMEs is a ‘stand-alone’ standard which incorporates the principles laid down in existing IFRS but which have been simplified for SMEs. On 11 August 2009, the ASB started a six-month consultation process which will end in February 2010. These proposals suggest a three-tier structure for financial reporting in the UK, which is as follows:

Full-listed and AIM-listed PLCs will report under EU adopted IFRS.
Companies who currently apply FRSSE could choose to report under IFRS for SMEs.
Small entities could choose to continue to apply FRSSE.

The IFRS for SMEs is specifically tailored for SMEs but under IFRS there is no definition of what constitutes ‘small-medium’. Currently the UK has size limits that determine whether a company is small or medium sized (turnover test, balance sheet total test and number of employees test). IFRS does not have such determinations but instead states that IFRS for SMEs is intended for those companies who are not publicly accountable. It would be up to the regulatory bodies in the UK to specify eligibility criteria.

As a result of the target audience for IFRS for SMEs, the standard itself does not address the following areas:

1.Earnings per Share (IAS 33).
2.Interim Financial Reporting (IAS 34).
3.Segment Reporting (IFRS 8).
4.Assets which are held for sale (IFRS 5).
5.Insurance (IFRS 4).

When the IASB issued the IFRS for SMEs, it did not specify an ‘effective from’ date. This is because it is up to the UK whether (or not) it adopts the standard; though as the intention by the UK was to always adopt an international framework for financial reporting (for reasons which will be discussed later in the article), it is pretty much clear cut that the UK will adopt the IFRS for SMEs.

There have been arguments in various jurisdictions saying that a two-tier system of financial reporting subjects different entities to different accounting rules. Conversely practitioners have also expressed concerns about the undue cost in actually implementing the new standard.

The intention is that a system is achieved that enables countries around the world to apply IFRS so that, globally, everyone ‘speaks the same language’. Professional institutes have welcomed the IFRS for SMEs given that it will achieve consistent accounting between countries. IFRS for SMEs is particularly welcome in some developing nations who have difficulty in developing and interpreting their accounting standards. By adopting IFRS for SMEs these inconsistencies will be ‘ironed out’.

The ASB have also said that adopting IFRS for SMEs will improve financial reporting in the UK because it will be more targeted and simplified. In addition, the ASB have said that the IFRS for SMEs will reduce the burden of interpreting accounting principles and complying with differences in reporting requirements. The ability to improve comparability and understandability of financial statements will also build investor confidence.

In the proposal it is mentioned that the ACCA field tested five practitioners and these practitioners prepared accounts for one of their FRSSE clients using the IFRS for SMEs. The results of the field test were that twenty three out of the twenty five companies were FRSSE companies. The practitioners involved in the field test said that they did not encounter any major problems in applying the IFRS for SMEs together with the restatement of prior year comparatives and in light of this it could be that IFRS for SMEs might eventually replace FRSSE.

Full IFRS vs. IFRS for SMEs
Full IFRS spans some 2,800 pages and quite clearly would be inappropriate for a company who falls within the ambits of a SME. IFRS for SMEs is 230 pages long so is considerably shorter and would also enable a company adopting IFRS for SMEs to take advantage of the substantial disclosure exemptions than a company reporting under full IFRS would not be eligible to apply.

Looking at the IFRS for SMEs it does seem to simplify certain areas – especially where goodwill is concerned. Lots of SMEs have goodwill in their balance sheet and under full IFRS this would have to be tested for impairment on an annual basis. Impairment calculations can be complicated and it is simply far too burdensome to have a SME undertaking annual impairment reviews on their goodwill. The IFRS for SMEs removes the need for annual impairments and instead states that it can be amortised over its estimated useful life or 10 years ,whichever is longest.

FRSSE
Under the current proposals, the much-loved FRSSE is being kept, though it will only be eligible to be applied by the very small companies. Much of the SME sector will report under IFRS for SMEs and the plans are to review the FRSSE in the future to either dispense with it in totality or make it more compliant with the international framework. The ASB may decide to amend FRSSE so that it is more aligned to IFRS for SMEs depending on the current proposals by the EU regarding the financial reporting requirements of what they term ‘micro-entities’.

Implementation Timetable
The new standard will take effect for accounting periods commencing on or after 1 January 2012.

Conclusion
It has always been the intention that IFRS for SMEs will take place and comments on the ASB consultation paper should be received by the ASB by 1 February 2010 by going to http://www.asb.org.uk. So if you want to have your say on the proposal then you should lodge your comment.

At the moment the UK reports under IFRS and current GAAP (FRS/UITF/SSAP). Understandably the ASB wants to dispense with two different reporting frameworks and the IFRS for SMEs is the future for financial reporting in the UK.

Steve Collings FMAAT ACCA DipIFRS is Audit and Technical Manager at Leavitt Walmsley Associates Ltd and a partner in AccountancyStudents.co.uk. He is also the author of ‘The Core Aspects of IFRS and IAS’ and lectures student accountants on financial reporting and auditing issues.

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