International accounting standards for SMEs

THE IFRS FOR SMES – WHAT YOU NEED TO KNOW

Written by Peter Herbert

In July 2009, the IASB issued the IFRS for SMEs. This article explores the broad impact that the standard is likely to have in the UK and the likely timetable for implementation.

What is the IFRS for SMEs?

The standard is a 230 page version of full IFRS. It is much shorter and more straightforward than full IFRS, which runs to almost 3,000 pages. The SME standard includes 300 disclosure points, compared to 3,000 in full IFRS. [View]

Who will have to apply it?

Individual jurisdictions will be able to choose whether or not to apply the IFRS for SMEs. Some countries (for example Germany and France) will almost certainly not. Some countries (such as South Africa) already do.
In the UK, the ASB is keen to make the IFRS for SMEs a central plank of UK GAAP in the future. An August policy proposal, “The Future of UK GAAP” proposed the following three tier system:

• Tier 1 - Full IFRS for entities which have public accountability – this will include listed parent companies, banking and insurance companies, cooperatives and credit unions
• Tier 2 - The IFRS for SMEs for the middle tier - this will include subsidiaries of listed parent companies and all private companies, other than those defined as small
• Tier 3 - The FRSSE for small companies, as at present

Such a three-tier system would result in the new standard applying to many companies which are not small or medium-sized – Thames Water and Virgin Group to name but two. Under the proposals a company in any tier could opt to use the accounting rules in a higher tier.

The ASB’s press release and a link to the policy proposal can be downloaded from [Download]

How does it differ to UK GAAP?

Although it will represent a major challenge for practitioners, accounting treatments may not be as different as some people fear. In particular there is much less additional focus on fair value accounting than many people think.

For relatively simple, owner-managed business, significant differences are likely to arise in respect of deferred tax, amortisation of intangibles, government grants, investment properties and leases. Other key differences are as follows:

• Unlikely the FRSSE in UK GAAP, the IFRS for SMEs is completely standalone. Where the standard does not include a rule, fallback is to fundamental concepts and principles’ not full IFRS.
• IFRS terminology is very different to UK GAAP. A profit and loss account is an ‘income statement’; a balance is a ‘statement of financial position; debtors are ‘receivables’. However alternative descriptions can be used. Accordingly more familiar UK terminology may remain.
• Full UK GAAP currently changes very regularly, largely to keep pace with IFRS. The IFRS for SMEs will be updated only every three years, with the first revision expected in 2011.
• In certain respects the IFRS for SMEs is more prescriptive than UK GAAP. For example, where UK GAAP allows companies to revalue tangible fixed assets, this is not allowed by the IFRS for SMEs.

Articles in the July 2009 and November 2009 editions of Accountancy summarise the key changes arising from the standard’s implementation.

For members of the ICAEW’s financial reporting faculty an informative webcast can be viewed here [View]

When will it apply from?

The likely date of adoption for the IFRS for SMEs in the UK is periods commencing 1 January 2012. Implementation will require an opening balance sheet to be prepared at 31 December 2010. It is possible that early adoption will be allowed.

This implementation date is subject to the results of the ASB’s consultation (the closing date is 1 February 2010) and European Union intervention, if the standard is seen to conflict with the EU’s 4th Directive on annual accounts.

What about the FRSSE?

There are no plans in the UK to change the FRSSE, or who can apply it, in the short term. Changes to the FRSSE to increase consistency with the IFRS for SMEs are possible in the medium term.

Any future change to FRSSE requirements may coincide with proposals to remove micro entities (turnover< €1M, balance sheet total < €500,000, <10 employees) from the scope of the 4th and 7th EU accounting directives in the future. The UK is currently keen to adopt these proposals, though other EU members may block them.

The EU proposals can be downloaded from [Download]

Other links

[IAS Plus from Deloittes]

[IASB]

[IASB Checklist, illustrative accounts]

[ACCA global CPD disc]

[Short article designed for students]

Books

A Student’s Guide to International Financial Reporting Standards
By Clare Finch
Publisher: Kaplan Publishing UK
Price: £25
ISBN: 978 1 84710 476 2

Book on courses

The May / June Accountancy updates will include a brief guide, about 45 minutes, on the standards for SMEs [Accountancy update courses]

If you would like an in-house course on the International Accounting Standards please contact us.
There is a course on the full International Accounting Standards on 6 May in Wilmslow
[Check course details]

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