Definition Of Small And Medium Sized Entities Accounting Essay

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International Financial Reporting Standards are a set of international accounting standards established by International Accounting Standards Board that served as a framework for companies and organisations to follow in preparing the financial statements. IFRS is a principle based approach and is developed to replace the old accounting standards known as International Accounting Standards (IAS). Since the introduction of the first IFRS in the year 2003, it has been used in numerous countries all over the world such as India, Australia, Malaysia and all listed countries under European Union.

Why is it a need to have IFRS

Nowadays, businesses are evolving rapidly and there is a need to have a set of standards in preparing the financial statements that are globally accepted as a means of comparisons. This is due to the fact that investors will always try to look for better investments elsewhere.

International financial reporting standards are developed by the IASB at first to standardise and to harmonise the accounting treatments of financial statements. This is because, in the years back; most countries have their own sets of national standards that governs the way they prepare their accounts.

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The divergence of treatments has serious impacts on investments on the countries concerned as investors cannot make judgement to whether the investment to be made is advisable or not. This problem is resulting from lack of understandibility of the financial reports prepared by the preparer.

This problem can be minimised or eliminated with the help of IFRS as comparison can be made possible as accounts prepared by companies all around the world can be comparable as they were prepared the same way the other companies does and hence removing any confusions in understanding the reports.

The introducer and the regulatory body of this IFRS

The International Financial Reporting Standards (IFRS) are developed by an independent not-for-profit organisation called International Accounting Standards Board (IASB) that consisted of 15 full-time members from different backgrounds from all parts of the world. The members are chosen based on their expertise and experience in the standard-setting, preparing and using accounts and academic work (Wikipedia: IASB). Among the countries that have got their representatives in the board are the United Kingdom, Japan and South Africa.

The process of setting up the standards are being done in the most transparent process as possible where public are given the chance to comment on the exposure draft prepared by the Board as well as any of their discussion papers. This standard-setting body is also responsible for the promotion of the practice and application of the standards.

As time goes by, the financial reporting standards need to be reviewed on a timely-basis to ensure that they are relevant and appropriate to the current financial situation in any given point of time. It is the responsibility of the IFRS Interpretation Committee (IFRICs), a committee set-up by the IASB to be attentive to any accounting issues arose, either the financial reporting issues is a new, not discussed within IFRS or financial reporting issues that has been interpreted in a disagreement of practitioners or in the non-appearance of authoritative supervision. Interpretations made by the committee are made through a transparent due process the same way as the standards are being made. Any interpretations does by the committee is subject to the approval of IASB

IFRS for small and medium-sized entities (SMEs)

Definition of Small and Medium-sized Entities (SMEs)

There is no official definition for SMEs as the definition is different in every country. It may be based on anything such as the numbers of employee, the size of capital employed and annual turnover. However, it is understood that SMEs are entities that has got no public accountability although they do publish their financial statements for the use of the external users. The financial statements published are merely for general purposes.

Why is it a need to introduce specific standards for SMEs

The IFRS for small and medium-sized entities (SMEs) had been introduced in July 2009 by IASB as an effort to ease the burden of this group of companies that made up about 95% of the total companies in the world, in complying with the complete version of IFRS that is more suitable to the public listed companies.

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There are few reasons why IFRS for SMEs is desirable to the small and medium-sized entities. The ultimate desirable reason for applying the standards is that the IFRS for SMEs is designed to be more relevant and appropriate to the nature of transactions of the entity. On top of that, the IFRS for SMEs is less complex as compared to the full version of IFRS.

There are slight changes made to the full IFRS in deriving to the IFRS for SMEs. The changes include omission of irrelevant standards, elimination of certain accounting policy options, and simplification of many of the recognitions and measurement principles as well as substantial reduction of required disclosures.

In the IFRS for SMEs, there are certain standards not relevant for SMEs are made omitted. The topics omitted are concerning the earnings per share, segment reporting and the interim financial reporting.

There is also few accounting policy options eliminated as the simpler method is provided. Among the accounting policy options eliminated are about numerous options for government grant and the revaluation model for property, plant and equipment and for intangible assets.

Last but not least, many recognitions and measurement principles are being simplified in the IFRS for SMEs. The simplification includes measurement for goodwill amortisation and recognition for actuarial gain and losses.

The advantages

The adoption of IFRS for SMEs does bring few advantages that are enjoyed by many groups of stakeholders.

Firstly, the Malaysia Accounting Standards Board (MASB) can reduce the cost incurred from maintaining standards on national basis. This is because if they adopt the IFRS for SMEs, the cost incurs during the process of reviewing, implementing and promoting the standards would lies on the back of the International Accounting Standards Board (IASB)

Private companies can enjoy the decrease of reporting workload, internally or externally especially for the multinational company. This is contributed by the fact that the parent's account and the subsidiaries' accounts are prepared in the similar way, causing the process for comparison and consolidation between them easier. The process of comparing and consolidating the financial reports are getting easier as there is no need for national accounting treatments reconciliation as what as required before the IFRS for SMEs is introduced.

The ease of preparing consolidated account also will eventually help to promote cross-border trades. This is because investors can now make more informed decisions to whether the investment to be made is viable or not. This resulted by the fact that the IFRS makes it is possible for everyone to understand a financial report for any companies in the world.

Small and medium-sized companies are also benefit from the IFRS as the standard is made to suit the needs of the companies at the highest level as possible. This is because the standard is made to provide only the relevant accounting treatments and that is why there is omission of treatments and also some disallowable accounting treatment from the full IFRS. Here we can say that quality of information can be improved as financial reports are prepared based on the best and useful methods that eventually helps decision making process, either for internal and management purposes.

This specific standard for SMEs can also increase the level of confidence of the account's users as the aim of this standard is to meet the financial reporting needs of the non-public accountability companies such as to the suppliers, future investors and creditors.

The simplification in presentations and disclosures provide by the standard is also contributing towards reducing the financial statements' preparation costs. Besides that, time consumed to prepare the financial statements can also be minimised as the requirements to be followed is now getting lesser and simplified.

The disadvantages

Despite the benefits the IFRS for SMEs brought to the industry, there are also few drawbacks associated to the implementation of the new standards.

In order to apply the new standards, a company and its key personnel would have to restructure its internal process and need to provide trainings to the staff on how to deal with the changes. These efforts are definitely going to increase the cost of the company concerned.

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Sometimes in a case where company has got less expertise in-house, there will be a need for professionals' engagement from outside the firm to assist them in adopting the IFRS for SMEs. This will increase the cost of the company even more as professionals' fees are expensive.

For small-sized entities, this addition of cost can sometimes outweigh the benefits they enjoyed from applying the standards.

It is also argued that the adoption of IFRS for SMEs may not be worth it for small-sized company that has got no intentions of making investments overseas. This is because one of the objectives of the adoption of the standards is to make it possible for financial statements of companies from all over the world to be comparable and consolidated.

Introduction - The definition of SMEs in Malaysia

On the date of 9 June 2005, a common definition for SMEs had been approved by National SME Development Council (NSDC) of Malaysia. The definition is introduced to make a process of identifying SMEs more easy so that the intended companies can have better understanding on what accounting treatments they have to adopt with. This is because, Malaysia has had introduced a specific standards to be used only by the SMEs. The standards are closely related to the one developed by the International Accounting Standards Board. The bases laid out for such definition is based on two focal criteria, the number of full-time employees and the annual sales turnover. A company can only be categorised as a SME if it satisfy either one of the listed main criteria above and need to be involved in only these industries; manufacturing, manufacturing-related services, agro-based industries, services, primary agriculture and information and communication technology (ICT) industry. Basically, there are 3 types of SMEs in Malaysia namely micro, small and medium company.

The specific definitions for the SMEs are well defined in the illustration below. The definition is divided into two main criteria which are:

The number of full-time employees.

(Source: MCA Innovation Resource Centre)

Sector

Size

Primary

agriculture

Manufacturing

(including agro-based)

And manufacturing-related services

Services sectors

(including information and communication technology)

Micro

Ë‚ 5 employees

Ë‚ 5 employees

Ë‚ 5 employees

Small

Between 5 - 19 employees

Between 5 - 50 employees

Between 5 - 19 employees

Medium

Between 20 - 50 employees

Between 51 - 50 employees

Between 20 - 50 employees

The annual sales turnover.

(Source: MCA Innovation Resource Centre)

Sector

Size

Primary

agriculture

Manufacturing

(including agro-based)

And manufacturing-related services

Services sectors

(including information and communication technology)

Micro

Less than RM200,000

Less than RM250,000

Less than RM200,000

Small

Between RM200,000 - RM1 million

Between RM250,000 - RM10 million

Between RM200,000 - RM1 million

Medium

Between RM1 million - RM5 million

Between RM10 million - RM25 million

Between RM1 million - RM5 million

SMEs History

In the recent years, SMEs have been given additional attention by the government of Malaysia as this group of companies make up about 99% of total businesses established in the country and do provide about 56% of the total employability.

These huge influence brought by the entity could be said as one of the determinant factors for the economic growth of Malaysia as it is the backbone of Malaysia economy.

Malaysia government tries to increase its gross domestic product (GDP) contributed by this sector from 36 % to 56% by remodelling its economy through the New Economic Model (NEM) under the Government Transformation Programme (GTP) and Economic Transformation Programme (ETP) so as to change its title from medium-income nation to high-income nation by the year 2020.

Aids have been put in place wherever possible by the government to help the industry through lots of government ministries and agencies like Malaysia External Trade Development Corporation (MATRADE), Standards & Industrial Research Institute of Malaysia (SIRIM) and SME bank to assist the development of SMEs in Malaysia.

Malaysia has announced its plan to adopt IFRS for SMEs real soon. The standard is expected to be issued during the first half of the year 2013 and fully effective for annual periods beginning on or after 1 January 2016. Following the announcement, a new roadmap for private entities financial reporting framework has been developed by the Malaysia Accounting Standards Board (MASB). The new framework is crucial for the transition of SMEs' financial reporting standards to the MASB's Financial Reporting Standards for Small and Medium-sized Entities (FRS for SMEs) as the roadmap does provide suggestions as to what MASB and other stakeholders could do to assist any entities affected during the time of migration from the current Private Entity Reporting Standards (PERS) to the FRS for SMEs. This FRS for SMEs is said to be identical to the IFRS for SMEs designed by the International Accounting Standards Board (IASB) apart from slight changes made to reflect Malaysian local law.

Prior to this, in the year 2006, Malaysia Accounting Standards Board (MASB) had introduced the two-tier financial reporting framework where Private Entity Reporting Standards (PERS) were created with the aim to ease the burden of private entities in complying with financial reporting framework. However, private entities are given the options not to apply PERS and instead applying the Malaysia Financial Reporting Standards (MFRS or MFRS Framework) that is mandatory to other entities except private entity if they believed the MFRS Framework are more suitable and appropriate for their businesses.

Subsequently, after reviewing the needs for better standards to reflect the current financial reporting situation, MASB had issued three exposure drafts to replace the existing Private Entity Reporting Standards (PERS). The three exposure drafts are:

Exposure Draft 52 Private Entity Reporting Standards (issued in June 2006)

Exposure Draft 72 Financial Reporting Standards for Small and Medium-sized Entities (issued in March 2010)

Exposure Draft 74 Amendments to Financial Reporting Standards arising from Reduced Disclosure Requirements (issued in December 2010)

The Exposure Draft 52 and 74 were issued in the year 2006 and 2010 by MASB with the intention of selecting one of them to substitute the Private Entity Reporting Standards (PERS) as there were increasing concerns that the standards outlined in the framework may be already outdated and not relevant to the current business transactions. This is due to the fact that it was developed based on the 2003-version of International Accounting Standards (IAS). Among the things that were not given much attention by the framework is the Small and medium-size entities (SMEs) issues.

In the year 2010, a survey was carried out by the Board to see which set of standards is more applicable to private entities which favoured to the Exposure Draft 72 (ED 72). The reasoning behind this result is probably due to the perception that international-oriented standards are seem as more robust than national accounting standards and ED 72 was regard to be similar with the International Financial Reporting Standards for small and medium-sized entities (IFRS for SMEs).

Nevertheless, ED 72 were not finalised by MASB as the board is aware that IASB plans to review the IFRS for SMEs where implementation issues are to be dealt with. MASB do not want to proceed with finalising ED 72 as they may need to change their accounting policies again after IASB issued a revised IFRS for SMEs.

Later, Exposure Draft 74 was issued. This issuance was in accordance to the Reduced Disclosure Requirements Framework (RDR) made by Australia. The RDR allows entities with no public accountability to prepare less complex financial statements by providing them certain disclosure exemptions. The ED 74 were not proceeded to be finalised by MASB as the RDR may be subject for a review by IASB, the same reason for not applying ED 72.

Relevance and Appropriateness to have this specific standards