• Date:01 Oct 2007
  • Type:CompanyDirectorMagazine

A look at why full IFRS isn’t suited to SMEs.

Battling the IFRS burden on SMEs

The transition to International Financial Reporting Standards (IFRS) has caused concern for many Australian companies. There are new accounting mandates to comply with and, in general, the application of IFRS for small companies is both costly and highly complex. For Australian non-listed entities and relatively small listed companies that have been made to comply with IFRS, there is also little tangible benefit to the entities themselves or report users.

Most countries which have adopted IFRS have applied the standards to main board-listed companies only. In Australia, however, many other types of entities that prepare financial statements – but have entirely different reporting objectives – have been forced to apply the detailed requirements outlined by full IFRS.

The Exposure Draft of A Proposed IFRS for Small and Medium-sized Entities (SMEs), released earlier this year for consultation by the International Accounting Standards Board (IASB) with additional invitation for comment by the Australian Accounting Standards Board (AASB), proposes that a simplified version of IFRS be generally made available to SMEs.

The application of the proposed IFRS for SMEs is also undesirable for many smaller companies because the costs of compliance and implementation would be inequitable with the benefits provided in return.

Many smaller businesses are typically already stretched for resources – both people and financial. Time and money spent on unnecessary and onerous compliance measures means even fewer resources are available to develop the business.

Instead of taking a ‘top down’ approach and simplifying IFRS for the purpose of adoption by SMEs, due consideration should be given to the actual needs of Australian SMEs.

Unless the draft IFRS for SMEs changes materially, the development of a basic set of standards for unlisted SMEs would be an effective way to alleviate the concerns of many Australian non-listed companies, which have been ‘shoehorned’ into IFRS compliance.

Relief for unlisted Australian SMEs would also be in line with the Federal Government’s stated objective to reduce red tape on business.

At present, while a company may be required to produce financial reports under the Corporations Act, it is only where those reports are considered to be ‘general purpose financial reports’ that the company is defined as a ‘reporting entity’ – a concept unique to the Australian reporting landscape. These entities are obliged to comply with full IFRS.

In comparison, companies regarded as producing only ‘special purpose’ as opposed to ‘general purpose’ financial reports, are defined as ‘non-reporting entities’. These companies need only comply with the recognition and measurement requirements of the standards – that is, they are not required to make the same detailed level of disclosure as ‘reporting entities’.

Under the proposed revisions to the current reporting framework, the application of full IFRS will depend on whether a company can be said to be ‘publicly accountable’*. Companies that have a ‘public accountability’ will need to follow full IFRS. Other companies that lodge financial reports under the Corporations Act will be able to avail themselves of IFRS for SMEs.

The removal of the ‘reporting entity’ concept – as presently proposed by AASB – is likely to bring about significant associated changes to the exposure levels of both directors and auditors. Entities currently producing ‘special purpose financial reports’ will also be exposed to more stringent disclosure requirements and resourcing issues. Retaining the existing ‘reporting entity’ concept can therefore be said to bear the benefit of acting as a ‘brake’ for excessive reporting obligations on certain SMEs.

*According to the draft standards, entities captured by this definition include those that essentially raise funds from the public or that hold assets in a fiduciary capacity for a broad group of outsiders.

AICD has lodged a submission in response to the AASB’s Exposure Draft on an Australian differential reporting regime and the proposed IFRS for SMEs issued by the IASB. For more information on this submission, visit AICD’s Policy & Advocacy section online at: www.companydirectors.com.au