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The International Accounting Standards Board had published International Financial Reporting Standard specially designed to be used by the small and medium-sized entities (SMEs) in 2009 (IASB, 2009). This IFRS for SMEs was issued with the purpose of reducing the burden of private entities that is not accountable to the public. The IFRS for SMEs is a self-contained standard of 230 pages, and is less complex in a number of ways compared to the full IFRSs (IASB, 2009)
The project started in 2003, where IASB had published the discussion paper (DP) Preliminary Views on Accounting Standards for Small and Medium-sized Entities. After five year of development process, on July 2009, IASB had published the full set of IFRS for SMEs. There are many arguments on the publication of the IFRS for SMEs, whether it will give benefit or burden the SMEs. In fact, before the IFRS for SMEs is published by IASB, comments from the public through round-table and recommendation from working group had been taken into consideration.
One of the advantages of this IFRS for SMEs is that it is simpler than the full IFRS (Yusoff, 2009). The IFRS for SMEs is a subset of the full IFRS where it is simplified to meet the needs of users of SMEs financial statement. As a result, using IFRS for SMEs can reduce the reporting burden of SMEs (IFRS Conference, 2010) and provide a platform for growing business to prepare in entering public capital market (Yusoff, 2009). Price Waterhouse Coopers (2009) explains the introduction of the framework to SMEs can reduce time and cost of preparing statutory filings annually since it is less specific in many areas. With the increasing of number of SMEs in many countries, the framework can help global companies or shared service centres to centralise the accounting expertise, create efficiency and reduce cost. Besides, with the adoption of IFRS for SMEs, SMEs are able to improve the access to capital (IFRS Conference, 2010). As IFRS for SMEs is now accepted by the worldwide, it can provide improved comparability for users of the accounts especially for capital providers to make well-informed decisions (Bertoni and De Rosa, 2013). SMEs are able to enhance the confidence in the accounts especially to the banks and financial institution.
There are some arguments against the adoption of IFRS for SMEs. The adoption of the IFRS for SMEs involve huge amount of cost especially in training cost (Masca, 2012). Since the IFRS for SMEs is still new, training need to be given to the preparer as well as to the users. However, inadequacy of training provided to the accounting personnel and lack of training programs arrange by the professional bodies is another obstacle for implementing IFRS for SMEs (Uyar and GüngörmüÅŸ, 2013). This will result in preparer and users do not aware or understand the different between full IFRS and IFRS for SMEs. Besides, the adoption of new accounting framework will have an impact on the tax law. Regulators need to modify the tax law to cater the changes in the financial reporting framework. This could be excessively costly for SMEs to fulfil the new tax requirement (Bertoni and De Rosa, 2013).
History of financial reporting framework for SMEs in Malaysia
The financial reporting practices in Malaysia are governed by the Companies Act 1965, the Securities Commission Act 1993, Companies Commission of Malaysia and Kuala Lumpur Stock Exchange (KLSE) Listing Requirements. The standard setting responsibility lies solely with the Malaysian Accounting Standard Board (MASB).
SMEs in Malaysia can be classified into three categories which are micro, small and medium and can be decided based on two criteria either the numbers of people a business employs or the total sales or revenue generated by a business in a year (SME Masterplan 2012 - 2020, 2012). The categories and criteria of SMEs are as below:
Less than 5 employees
Less than 5 employees
Between 5 & 50 employees
Between 5 & 19 employees
Between 51 & 150 employees
Between 20 & 50 employees
Table 1: Criteria based on number of employees
Less than RM250,000
Less than RM200,000
Between RM250,000 & less than RM10 million
Between RM200,000 & less than RM1 million
Between RM10 million & RM25 million
Between RM1 million & RM5 million
Table 2: Criteria based on annual sales turnover
Businesses that fulfil either one of the criteria will be classified as SME in Malaysia. According to the Annual Report 2011/12 of SME Corporation, SMEs constitute of 97.3% of total business establishment which provide 57.3% of employment in 2011. Besides, SMEs also contribute 32.5% of GDP. This shows clearly that SME sector is the backbone of Malaysia's economy. Currently SMEs in Malaysia are reporting using the Private Entities Reporting Standard (PERS) which is similar to the old International Accounting Standard (IAS) (Yusoff, 2009).
The Malaysian Accounting Standard Board (MASB) had decided to change its financial reporting framework from single tier to a two-tier financial reporting framework in 2006. Under this two-tier financial reporting standard, private entities have an option to choose whether they want to apply Malaysian Financial Reporting Standards (MFRS) or PERS Framework whichever is appropriate for them. The issuance of the PERS Framework via exposure draft (ED) 52 served as temporary standards to be used by the private entities while waiting for the IASB to develop a set of new standards for SMEs. PERS Framework is a comprehensive set of accounting standards for private entities and it has remove certain disclosure requirements which are burdensome for private entities (MASB, 2006).
When IASB had issued IFRS for SMEs in July 2009, MASB jointly with Malaysian Institute of Accountants (MIA) issued ED 72 Financial Reporting Standards for Small and Medium-sized Entities in March 2010. The exposure draft received positive feedback from the result of the survey while ED 52 received the least feedback. Subsequent to the issuance of ED 72, MASB had issued ED 74 Amendments to Financial Reporting Standards arising from Reduced Disclosure Requirements in December 2010. This exposure draft serves as a response to address the concern of those private entities that does not have public accountability such as non-publicly accountable subsidiaries, associates or jointly-controlled entities whose parent, investor or venture that is not a private entity (MASB, 2010).
In March 2012, MASB had issued Roadmap for Private Entities Financial Reporting Framework which explains MASB's plan to ensure that private entities which meet certain criteria to adopt FRS for SMEs which was issued as MASB ED 72. According to the Roadmap, private entities with annual revenue of RM500,000 and above which is referred to as "medium-sized PE" will adopt the FRS for SMEs as their financial reporting framework. Those private entities with revenue below RM500,000 can choose to continue applying PERS Framework.
Malaysia is still in the transition process where MASB has targeted to issue the FRS for SMEs during the first half of year 2013. The FRS for SMEs shall be mandatory for medium-sized PE with annual periods beginning on or after 1 January 2016. However, any private entity who decided for an early adoption is encouraged.
Relevance and appropriateness of the IFRS for SMEs in Malaysia