SME’s are estimated to account for 95% of all companies around the world. The IFRS has created a standard for SMEs which is designed to meet the needs and capabilities of small and medium sized enterprises.
The main goal of IFRS is to improve financial reporting internationally by establishing a single set of high-quality, consistent and comparable reporting standards. The world is now a global village and as such IFRS is expected to provide global opportunities for companies to better access the global capital markets as well as more comparability among sectors and companies. Other benefits supposedly include improved quality of the financial statements and less of a burden on the small business both financial and administratively to comply with the full IFRS Standard. Compared to the local country GAAP (Generally Accepted Accounting Principles) which can be very specific and prescriptive, IFRS promotes a principles-based set of standards that establish broad rules. It does also often dictate specific accounting treatments but it less specific about how to apply and implement the guidance and leaves a good chunk of the standards down to one’s own interpretation.
One of the biggest issues with this standard is that there is no single definition of an SME. The criteria for defining a company as small or medium sized varies from country to country. This can make comparison and compliance challenging. The IFRS for SME’s does not bring much clarity either.
‘IFRS for SMEs is intended to be used by SMEs, which are entities that publish general purpose financial statements for external users and do not have public accountability.’
Practically speaking, IFRS for SMEs is viewed as an accounting framework for entities that are not of the size nor have the resources to use full IFRS.
Most countries have been signed up to converge to IFRS since around 2010. As at 2016 only half the jurisdictions had signed up to the IFRS for SME’s and even within the jurisdictions there has been a low take up particularly in developing nations. Even with training these companies are still struggling with how to go about implementation of the standards
The process of migrating to the IFRS involves expertise that should be developed and nurtured through ongoing training on a continuous and sustainable basis for effective results.
In most developing nations the banking is the only sector to be close to complying due to the nature of their business which is highly regulated and technology based.
Other SME companies meanwhile tend to rely on their external auditors to help them drive the conversion process. In order to ensure full compliance there needs to be stronger regulatory guidance from the IFRS organisation, the government and the professional accountancy bodies.
On first conversion of IFRS, you have to go back 24 months before the cut off day because you need comparative information. Which means if the regulator said the implementation will commence on January 1, 2016, firms will have to go back to January 1, 2014, to start with the closing balance.”
3 likely impacts of the change to IFRS that SME’s should consider
- THE COST
The cost of implementation of IFRS is a big factor that has slowed down the conversion process.
Most of companies have said that they may not be able to meet the cost of implementation particularly in terms of the cost of reviewing their IT systems platform. IFRS is quite expensive and you need to practically train everyone within the organisation to be able to understand and report IFRS effectively..
The transition to IFRS for SME’s involves the overhauling of a lot of things such as staff benefit, budgeting procedure, control, corporate governance, information technology, shareholding, benefit structure amongst others.
Local companies should consider a partnership between their External Auditors and seasoned experienced IFRS Consultants, IT experts, IFRS trainers and accountants to achieve their target of a smooth conversion and quality financial statements. This is the best option to achieve a cost effective implementation
2. THE KNOWLEDGE AND EXPERIENCE GAP.
Several companies we researched were not fully aware or convinced of the impacts of IFRS introduction (both negative and positive impacts). They claimed they could not see the value proposition put forward by IFRS in terms of the global accessibility to capital markets as actually materializing. This belief therefore does not encourage the SMEs to invest much time or money into the IFRS conversion. In addition despite the various training available IFRS for SMEs can be a bit ambiguous in implementation again hindering the take up. Amongst SMEs’, there is a lack of transparency and accountability due to incomplete records and the possibility of abbreviated accounts being filed. As such owners and managers of SME’s in some countries do not necessarily have the knowledge or experience of this sort of compliance and are struggling to keep up with it.
3. RESOURCE INTENSIVE
IFRS will significantly affect practically all areas of an organisation’s business to some extent and therefore require significant resources to implement the changes. In our experience, the best way to run a cost effective IFRS conversion is to first perform a diagnostic assessment of the impact of IFRS on the entire organisation.
Every member of staff needs to be trained on how IFRS will affect their business area. Key personnel will need on-going training including updates on any changes.
Additionally, organisations must communicate the potential business impact of IFRS to investors and other external stakeholders. They should involve finance and IT professionals with the right subject matter relating to the IFRS as well ensure that they test run the IFRS for at least one year making necessary adjustments as required.
This discussion paper was written by: Bizness Training Centre July 2017
We organise consulting, seminars and training on IFRS for SMEs and First Time Adoption. They focus on developing countries and SME capabilities
Our next training on IFRS for SME’s will be running on 11th September 2017 visit www.biznesstrainingifrs.co.uk