Definition Of Small Medium Enterprises Accounting Essay

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International Financing Reporting can be referred to as a set of accounting standards developed by the International Accounting Standards Board which is applied when preparing the Financial Statement and Balance Sheet of a company. According to Ball (2006), listed companies of European Union countries are required to consolidate and prepare their financial statements according to IFRS in 2005. In providing a global framework, IFRS has its own specific goals of how public companies organize and disclose their financial statements

Definition of Small Medium Enterprises (SMEs)

A small and medium sized enterprise (SME) is managed by self-employed people either in partnership or on their own. It tends to be companies that are independent. The definition of SME is different from one country to another, depending on how many employees the companies have. For example, in Malaysia a medium enterprise is a company with 51 to 150 employees while for a small enterprise, the number of full time employees employed is usually fewer than 50. Chelliah et al. (2010) indicated that a company that has less than 50 full time employees with an annual turnover of not more than RM 10 million is a small enterprise and a company with 51 to 150 employees and a turnover of between RM 10 million and RM 25 million is a medium enterprise company. Hence, the definition of SME in Malaysia is based on the revenue the companies make and the number of people the companies employ. In contrast, according to Saleh (2006), Malaysia's SME can be represented based on the turnover, size and activity of the company.

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In comparison, the definition of SME in the UK differs slightly as a medium company is a company that employs 50 to 249 employees while a small company has between 10 to 49 employees (Clear et al., 2005).

What is IFRS for SME

IFRS for a SME is based on the existing full set of IFRS, but it is customised to match the requirement of reporting and accounting in SMEs. It can also be defined as entities that publish general purpose financial statements for external users. Examples of external users include potential creditors, owners who do not participate in the running of the business, and credit rating agencies. Besides that, IFRS for SMEs also do not have public accountability. However, they do have public accountability if the entity has debt or equity instruments traded in a public market or the instruments for trading is in the process of issuing, for example, foreign stock exchange.

The advantages and disadvantages of IFRS for SMEs

The advantages of the IFRS for SMEs are it will reduce the compliance costs, making financial fewer complexes, enhancing the comparability of financial statements and improving access to international funding. Under IFRS for SMEs it uses different accounting method. As stated by (KPMG, 2010) the different in accounting treatment that IFRS for SMEs have which leads to less comparable than those that applying full IFRS and it can reduce the time as more entities adopt the standard thus the interpretation of the requirement in the standard become standardised.

IFRS also can strengthen the SMEs position when negotiate with the credit institutions and when it has a positive effect that have on a credit ratings so this will reduce the cost of borrowing. For instance, the adoption of IFRS leads to a revaluation of fixed assets and thus it can increase the equity ratio. This is because IFRS information can help the SMEs in buying and selling goods or services in internationally to get new relationship with customers and suppliers.

Besides that, IFRS for SMEs also has less complex that has been simplified from the full IFRS. According to (Jayakumar, n.a), IFRS for SMEs has been simplified through the fundamental principles of full IFRS to make the accounting requirement less complex and also reduce the effort to produce the financial statements which International Accounting Standards Board (IASB) has removed some number of accounting option that have in full IFRS.

In contrast, Accounting Standards Committee of German (2008) supported that the preparation of financial statement in IFRS for SMEs is time, effort and cost intensive that not all requirements and issues in the ED (Exposure Draft) IFRS for SMEs were carefully understood and correctly applied by the participants. This is because German is a tax driven in the financial statement rather than economically relevant values.

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Furthermore, some people suggest that IFRS for SMEs is not applicable to adopt and it should be rejected. For instance, based on Samujh (2007), New Zealand is not appropriate to adopt IFRS for SMEs because of balancing principles, practicality and politics might be difficult of trying to converge with the global standards. The adoption of IFRS for SMEs will affect the current reporting regulation in New Zealand.

Other than that, IFRS for SMEs especially in developing countries is difficult to manage. As mentioned by Bohusova et. al (2011), SMEs for developing countries is difficult to cope with typical SMEs challenges such as limited human resources and limited financial and the decision to adopt the IFRS is based on their economic growth, existence in the capital market and others.

The disadvantage of IFRS for SMEs is it can create a possible confusion in the marketplace. For instance, in adopting IFRS for SMEs there is a relevant regulation that some country must to follow before or after the adopting. For example, in German they are using tax accounting in their financial statement prepared by German GAAP. However, as stated by Kemp (2009), in Australia there are many issues that should be considered from the lawmakers in measuring the appropriate IFRS for SMEs that create two versions of GAAP which are full IFRS and IFRS for SMEs which make additional training, and transition issues between these two versions.

Additionally, the accounting software is not consistent so the users should be educated in the new standard because it keeps changing. The financial statement must be comparable and clearly understandable so that it would be easier for the user to compare the performance. According to Miller (2010), the changes for accounting software and lending agreement will be required such as the changes in the new standard which need the users of financial statements to be educated and some company want to change their accounting firm that the company needs to find a firm that know how to apply of IFRS for SMEs.

Overall, IFRS for SMEs is easier for the user to use instead of applying full IFRS. This is because, full IFRS will give a burden for the users because full IFRS is too complex to use for the small companies. The full IFRS is too complex because they have many standards that the company must follow, thus it is more suitable for the large companies.

The debates and arguments in adopting IFRS for SMEs.

Based on IASB, there is more than 50 jurisdictions decided in full IFRS must be compulsory by all the entities in the SMEs and when the full IFRS is adequate for all entities, then the IFRS for SMEs will be appropriate. In contrast with Neag,R. et al. (2009) suggested that IFRS for SMEs is not compulsory for all entities. This has been proved by Deloitte (2009) that not all jurisdictions have adopted the full IFRS, the full IFRS is adopting only for the jurisdictions that do not have their own accounting systems.

Other than that, as stated by Reilly (2009), IFRS for SMEs has more simplified standard that is appropriate for the bigger unlisted companies to follow and by adopting IFRS for SMEs can save amount of money for those who in unlisted companies that have adopted full IFRS. He also suggest that some argue that unlisted companies that are preparing the financial statement should be applied for IFRS for SMEs and the debate on this issues is the IFRS for SMEs standard needs some cost to adopt but it is too complex for small unlisted entities. As mentioned by Stokdyk (2010), he recommended that IFRS for SMEs was best suitable for the large and medium sized entities reporting under full IFRS.

Moreover, some people argued that no one want an option in the IFRS for SMEs. This is because the countries not often to have an option in financial reporting. For instance, in German about 80 percent German companies do not want to adopt IFRS for SMEs in their present draft form because they encountered difficulties when asked for the financial information for the German manufacturer that exports to the US and would produce information that prepared by German Commercial Code (Canham, 2008).

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There is the other debate about the differential reporting that was an important issue in Australia. According to Faux (2005), in early 1980s, the differential reporting was an importance issue that the country should be considered when the accounting regulators were developing a framework for their financial reporting. The regulators focus on financial reporting that should be provide the general purpose information to the needs of wide-ranging of users who are unable to knowledge the preparation of the financial reports that was tailored to their own needs.

As a conclusion, IFRS for SMEs is more appropriate for international demand especially from the developed and emerging economies a common set of accounting standards in the smaller and medium sized enterprises which is easier for the user to use than the full set of IFRS.

Why choosing Malaysia in IFRS for SME

SME companies have an important position in the economy, most importantly in developed and developing economies. According to Neag et al. (2009), IFRS for SMEs is a common set of accounting standards for SME that is much easier to use than the full set of IFRS as more response from the international demand in both the emerging and developed economies. Malaysia is an emerging economy in Asia. Thus, Malaysia want to adopt the IFRS for SMEs in order to improve confidence in the accounts of SMEs, to reduce the cost that is involved in maintaining the standards since full IFRS is more cost effective to produce, and to improve the comparability for users of accounts of financial statements across different industries. As stated by Bohusova (2011), based on the IASB information, Malaysia is one of the countries that have adopted the IFRS for their SMEs.

History and regulations of accounting for SMEs in Malaysia

In June 2005, the definition of SME across the economic sectors was approved by the National SME Development Council with endorsement from all the Government Ministries and Agencies as well as financial institutions that are involved in SMEs in Malaysia (National Development Council, 2005).

SMEs play an important role in the economy of Malaysia in generating economic growth for the country. In Malaysia, the SME sector contains 99.2 per cent of all businesses in Malaysia (Ministry of International Trade and Industry, 2005).

Other than that, in August 2008, Malaysia had brought the Financial Reporting Standards (FRSs) into full conjunction with IFRS. As stated by (Malaysian Institute of Accountants, n.a), in 1 August 2008 the Financial Reporting Foundation (FRF) and MASB announced a plan to bring full convergence with the IFRS which is the full compliance with IFRS for the financial reporting system in Malaysia by 1 January 2012.

Therefore, the plan that made by MASB and FRF create an exposure draft issued by MASB. MASB Exposure Draft (ED) 75 IFRS-compliant Financial Reporting Standards that was issued by MASB on 28 June 2011 result in the Malaysian financial reporting framework being standard with IFRS-compliant financial reporting framework (MIA, n.a).

While in 2010, ED 72 FRS for SMES has been issued by MASB. According to (MIA, n.a), MASB issued MASB ED 72 FRS for SMEs in 26 March 2010 for the SMEs in Malaysia to use by users that required to publish general financial statement purpose for the external users and do not have public accountability. Thus, ED 72 is identical with the IFRS for SMEs that was issued by IASB. IASB issued the IFRS for SMES in July 2009 (MASB, 2010).

Is the IFRS for SMEs in Malaysia is relevant?

SMEs in Malaysia consist of three key economic factors which are manufacturing, services and agriculture.

The performance in SMEs will change Malaysia to be knowledge-based economy and high income because of their national Gross Domestic Products (GDP). In Malaysia, the important contribution of SMEs is in terms of its economic growth, employment and exports. According to Ministry of International Tarde and Industry (2013), SMEs contribute to the economy in terms of GDP for 30%, for the total work force is 56.4% and in terms of total exports is 19%.

Financial reporting framework can be different from one country to another. Malaysia is currently having two financial reporting frameworks for their private entities and non-private entities. For instance, as stated by IAB editorial (2010), there are two financial reporting frameworks in Malaysia of which the non-private entities have to apply the FRSs while the private entities have to apply either the FRSs or Private Equity Reporting Standards (PERs).

Furthermore, the adoption of IFRS for SMEs has been issued by Malaysia's Accounting Standards Board (MASB) and IFRS for SMEs can provide growing business which they required to apply full Malaysian FRSs. However, in 2011, MASB approved another framework for accounting in IFRS for SMEs. According to Farmer (2011), Malaysia has agreed to have a new accounting framework based on the Malaysian Financial Reporting Standards (MFRS Framework) approved by MASB on 19 November 2011 and it is applicable from 1st January 2012. Therefore, Malaysian SMEs can choose either to continue to apply PERS or the new MFRS Framework.

Therefore, the IFRS for SMEs in Malaysia is relevant since its accounting framework in IFRS for SMEs is separate from the International Financial Reporting Standards. Based on (MASB, 2010), at the international level, International Financial Reporting Standards is separate with the accounting framework in IFRS for SMEs thus it is not affect MASB's IFRS convergence with policy in 2012 since Malaysia have the decision on whether to adopt the standard or not.

In contrast with New Zealand, the IFRS for SMEs is uncertainty relevant in their countries because this country must bear the cost for implementing and maintaining in both full IFRS and IFRS for SMEs (Samujh, 2007).

The impact of when adopting IFRS for SMEs in Malaysia.

As mentioned above, Malaysia has two frameworks which are PERs and MFRs. The problems occur when comparing these two frameworks according to current documentation and its interpretations. Since IFRS for SMEs is new to the reporting entities, the practices and interpretation of it must be develop from time to time. Thus, this will result in determination of additional impacts that the entities should be considered in adopting this standard. For example, the entities must considered for cost intensive when they want to change PERs to adopt IFRS for SMEs which they have to pay more to adopt a new standard in the entities.

Since the IASB issued the IFRS for SMEs, this would need a further simplification or interpretation of the financial reporting obligations and rules that give a burden for the SME in Malaysia when the government in Malaysia wish to move their SMEs up to the value chain.

Other than that, SMEs have to face with tough competition in a liberalized environment and they need to produce quality goods at a competitive price in order to compete in the market. by having the changes to IFRS for SMEs would give SMEs in Malaysia to have more capabilities to face stiff competition in the market by having rational strong external financial reporting to make sure it access to capital is not compromised (Yusoff, 2009). He also added that, if Malaysia's SMEs is to react quickly of their global competitors, they will encourage the innovation and the regulation would change.

The other impact when adopting the IFRS for SMEs in Malaysia, as stated by Yusoff (2009), the Companies Commission will come out with advance with some of the recommendations that have been made by Company Law Reform Committee in Malaysia including the introduction of a threshold before an audit is required. Normally, most countries do not have across the board audit requirements except for Malaysia. In Malaysia, the foreign investors and dormant companies must be audited because the auditors to SMEs would be valuable because this forces them to be independent and could refuse the business advice to fulfil the professional requirements.

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