This report analyses the benefits and the costs of Australia adopting International Financial Reporting Standard (IFRS) for Small and Medium sized Entities (SMEs). In July 2009, IASB published the accounting standard for IFRS for SMEs. The standard consists of 230 pages of text, arranged into chapters that cover all of the recognition, measurement, presentation and disclosure requirements for SMEs and has no cross reference to the full IFRS. The standard is intended for use by SMEs, defined in the standard as small and medium-sized entities that do not have public accountability and which also publish general-purpose financial statements for external users. An entity has public accountability if its debt or equity instruments are traded in a public market. The IFRS for SMEs includes a set of illustrative financial statements and a presentation and disclosure checklist to assist entities with preparing their financial statements. In this report, there are arguments discussing priority issues like as the cost-benefit consideration, cost implications, reduction in disclosures, simplifications of full IFRS, differences between the full IFRS and IFRS for SMEs; and its implications. The adoption and applicability of the standard are further discussed considering some practical issues involved by converting to the SMEs standard. Finally it is concluded that the IFRS for SMEs should be adopted because the application of this standard is expected to reduce the compliance costs for many SMEs and help make the financial statements of such entities less complex.
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The IASB issued IFRS for SMEs on July 9, 2009, the development took five years in processing and involved extensive consultation worldwide (Jermakowicz & Epstein, 2010). The purpose of this is to create provisions and requirements that meet SMEs users' different needs and lead a balance between cost and benefits from its adoption. The IFRS for SMEs is a self-contained standard of about 230 pages tailored for the needs and capabilities of smaller businesses (Bohusova, 2010). A number of the full IFRS principles for recognising and measuring the assets, liabilities, income and expenses have been simplified in the standard. The IFRS for SME is designed to meet the financial reporting needs of entities that (a) do not have public accountability and (b) publish general purpose financial statements for external users (Bohusova,2010). An entity that has public accountability uses full IFRS, if it meets either of the conditions (a) it has issued debt or equity instruments in a public market or (b) it holds assets in a fiduciary capacity, as it primary purpose of business, for a broad group of outsiders (Jermakowicz & Epstein, 2010). Compared to full IFRS the length of the standards on IFRS for SMEs are substantially reduced as certain accounting standards were eliminated and irrelevant topics were omitted to simplify the methods of recognition and measurement and to reduce disclosure requirements. "The AASB has not adopted this standard; taking one size fits all approach to the accounting standards". A number of significant differences can be found between the full IFRS and IFRs for SMEs, creating confusion and comparability issues. There are also both cost implications and benefits that are involved in adoption of the standard.
Reduction in disclosures
The disclosure requirements in IFRS for SMEs are substantially reduced when compared with those in full IFRS. IFRS for SME is a self-contained standard of about 230 pages based on full IFRSs but tailored for the needs and capabilities of smaller businesses (KPMG, 2009). The disclosure checklist in the full IFRS has more than 3000 items but IFRS for SMEs disclosures have been reduced to around 300. Few disclosure requirements have been omitted for SMEs and one reason is that they relate to recognition and measurement principles in full IFRS which have been replaced by simplifications in the IFRS for SMEs. The other reason is that they are not considered appropriate based on users' needs and/or cost-benefit considerations (Jermakowicz & Epstein, 2010). The reduction in disclosures, low volumed text and the commitment to stability for that text represent significant gains for users (Kemp, 2009). The standard's structure also benefit users as they organised topic by topic in a logical order which can be read more like a manual for accounting than an accounting standard.
Differences and Simplifications
As stated earlier, IFRS for SMEs represents a significant simplification of IFRS requirements and is based on full IFRS and the framework. Compared to the full IFRS, the length of the standards has been reduced by more than 90% (Jermakowicz & Epstein, 2010). However, the length of the standards of 230 pages seems daunting and is misleading. There is also no cross references to the full IFRS while the standard appears to be a stand-alone document. IFRS for SMEs does not provide the same provisions and requirements as full IFRS. There are a lot of differences that can be found and the financial statements does not equal to the financial statements prepared in accordance with full IFRS. Following are some of the areas where the differences can be identified: Financial Statements, Expense recognition - Research and development costs, Non-financial assets and goodwill, Financial Instruments and Business combinations and more (Vasek, 2011). This could create a potential confusion in the market place and complicate the standard's interpretation (Ernst &Young, 2009a). Also, may result in a lack of comparability of financial statements of entities reporting under the IFRS for SMEs with those of entities applying full IFRSs. Comparability may suffer because IFRS for SMEs, like full IFRSs, has more flexibility, less-specific rules and more opportunities to apply professional judgment. Therefore there is a possibility that the same type of transaction entered into different companies could be reported differently in their financial statements (Fitzpatrick & Frank, 2009).
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Adopting the IFRS for SMEs may have various cost implications to consider. IASB stated that it will only update the IFRS for SMEs once there have been two years of broad adoption and, thereafter, once every three years (Mackay, 2009). As a result, the ongoing training costs may be less than those incurred under a rapidly and constantly changing financial reporting framework. Many complex accounting areas in full IFRSs are simplified in the IFRS for SMEs, potentially reducing the need for experts in some areas. The extent of disclosures in financial statements prepared under the IFRS for SMEs is significantly less than in those prepared under full IFRSs, thereby resulting in lower costs to prepare financial statements under the new standard.
At the same time, businesses and their advisers have to learn new terminology and accounting techniques and make changes to their information systems and accounting software; system changes, reformatting the financial statements and training costs requires an upfront investment (Ikäheimo, 2010). The standard provides less guidance than the full IFRSs in some areas and does not address certain topics, those requiring additional consultation with experts (KPMG, 2010); the process of updating the standard may increase costs if the IFRS for SMEs reporter reports to an entity using full IFRSs.
It is often thought that small business managers perceive the cost of compliance with accounting standards to be greater than their benefit. As IFRS have gained greater acceptance around the world, many jurisdictions have adopted them or have developed national GAAP based on IFRS. According to IASB, at the date on which the standard was published, nearly 30 jurisdictions required full IFRSs for all unlisted (private) companies, another 20 jurisdictions required them for some, while another 36 jurisdictions permitted private entities to use full IFRSs; many other jurisdictions that did not require IFRS directly were increasingly converging their national standards with IFRS. These means that IFRS are being 'pushed down' to private entities, which often do not have the expertise or ability to bear the costs of complying with full IFRSs (IASB, 2009). In this context, many private entities denounce that full IFRSs impose a burden on small private entity preparers, a burden that has been growing as IFRSs have become more detailed and more countries have begun to use them.
Under these circumstances, the main argument for a separate SME accounting standard is the undue cost burden of reporting, which is proportionately heavier for smaller firms, as the cost of applying the full set of IFRS may not be justified comparing to users' needs. Thus, in developing the IFRS for SMEs, IASB is to meet users' needs while balancing costs and benefits from a preparer perspective. Application of this standard reduces the compliance costs for many smaller entities and helps make the financial statements of such entities less complex (Ernst & Young, 2009b). Still, there is the opinion that the IFRS for SMEs is not suitable for internal management, and would increase the cost of preparation and audit of individual company accounts.
AASB have not adopted the IFRS for SMEs at the current time but based on the arguments, it can be derived that the benefits outweigh the costs. Reviewing the potential benefits of adopting IFRS for SMEs, it can be noted that the standard focuses on the needs of users of SMEs' financial statements, offers the stability of accounting framework and eases burden where full IFRS has previously been required. IFRS for SMEs is based on the fundamental principles of full IFRS and have a lot of difference between them, but in many cases, it has been simplified to make the accounting requirements less complex and to reduce the cost and effort required to produce the financial statements. Therefore Australia should adopt the IFRS for SMEs as this framework provides greater certainty, clarity and cost-effectiveness (Luckins, 2007).