International Financial Reporting Standard for Small & Medium Entities

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Table of Contents

Executive summary
Introduction
Literature review
Conclusion
Bibliography

Executive summary

This report is prepared and presented to the top level executives of the firm. The report studies in detail about the application and effects of simplified IFRS or SMEss. IFRS is a very standardized accounting practice developed by the International Accounting Standards Board (IASB). Since IFRS is a very detailed form of accounting its application in a Small Enterprise can cost much on the firm’s accounting expenditures.

Therefore IASB has decided to develop an IFRS that is simplified and which is applicable for small enterprises. As a result of this they developed simplified IFRS which is applicable for small enterprises. This report analyzes the applicability of simplified IFRS in a small enterprise. The literature review of the report clearly analyses the concept of simplified IFRS and its influence on various factors of the enterprise.

Introduction

Simplified International Financial Reporting Standards was developed by IASB for firms that are not publicly accountable or small enterprises. This method was developed for small firm’s inorder to enable them to make a proper reporting of accounts. The users of the accounts of small and larger listed firms differ from each other. The normal accounting method adopted by the smaller firms did not communicate all the relevant data to the users. IASB found that IFRS is a better method of accounting as this will report all the relevant data to the users. But employing such a method in small firms is uneconomical for the firms. To solve this problem they developed a simplified method of IFRS for application in smaller firms. Even though it is simplified it incorporated all the relevant concepts.

Literature review

Simplified IFRS is an alteration of IFRS. Simplified IFRS is developed inorder to make it suitable for application in Small and Medium scale enterprises. Small and Medium enterprises have adopted a separate system of accounting. This is very unsystematic compared to the large firms. Adoption of such a simplified system has made the small enterprises incomparable with those of other firms. This has also made the small firms focus less on certain technical aspects in accounting. Therefore, inorder to make them comparable and competent enough among other firms IASB developed a simplified form of IFRS. Adoption of this method will help the small firms to become comparable with other larger firms that use IFRS. In this portion the need for IFRS for SMEs and the benefits of its application in small enterprises are studied.

Need of IFRS for SMEs

IFRS is the abbreviation of International Financial Reporting Standards. This system was developed by International Accounting Standards Board (IASB). The accounting needs and purpose of SME’s is a bit different from that of larger firms. Publishing the accounting results is not mandatory for the SME’s as per the statute. The major users of the accounting data of SME’s are the owners of the business and other parties who have monetary interest in the company.

The financial statements of SME’s are also used by certain bodies for economic purpose. SME’s have very less public accountability when compared to larger firms. Even though the financial statements of SME’s have limited usage the accounting method must be clear and standardized so that it serves the users in a good way. Understandability of the accounting data is the basic quality of a good accounting data. If the accounts of the company are vague then the purpose of then data is not met. Moreover the data provided should be relevant to the purpose. The data should be relevant so that it is able to serve the needs of the users properly.

All the material statements are to be incorporated in the financial data so that it delivers proper results. The information must be free from errors and other immaterial information so that it is highly useful for its end users. Completeness is required for the financial statements so that all the data needed for decision making is available in it. The financial statements must be according to the predetermined methods and principles. Even though SME’s are small in size the accounting data must be properly prepared and kept by them inorder to make it useful for the needful person. IFRS is costly to employ in an organization’s accounting system.

In such a case adopting International Financial Reporting Standards is highly important for SME’s. Usually the SME’s maintain accounting data on the basis of Generally Accepted Accounting Principles (GAAP). “The stated aim of the proposed standard is to provide a simplified, self-contained set of accounting principles derived from the full IFRS to be used by smaller, nonlisted companies” (Epstein & Jermakowicz 2008).

This method will enable the SME’s to maintain a standardized form of accounting data. By adopting this method reliable data is clearly mentioned and analyzed in the financial statements. When an unorganized method of accounting system is used the economic decisions based on the data cannot be made. Therefore, the use of IFRS incorporates all the needed data in the reports and it can be used by the necessary persons for making the decisions.

That is one of the major benefits of using IFRS in SME’s. For the purpose of comparing the financial performance of one SME with that of the other very SME should use similar kind of accounting methods. Therefore usage of IFRS will enable a uniform accounting method in SME’s and also this will help better comparison of SME’s with each other.

Another benefit of usage of IFRS is that the accounting statements of the company are properly maintained and there for proper decisions regarding the company management can be made by the officials by using the past and present financial data of the company. Usage of IFRS will enable easier and proper maintenance of data compared to GAAP. Usage of GAAP does not enable comparability of the financial data. Therefore the benefits of using IFRS have been clearly seen.

Application of IFRS

The IFRS project of IASB is applicable to unlisted companies of the segment. The unlisted companies are those that are accountable to some external users of the financial data of that company. The external users mainly include stakeholders of such companies. The system is applicable to those unlisted companies that are accountable for some specific users. “The IASB SME project is aimed at unlisted companies that still need to be publicly accountable to external stakeholders, and therefore produce general-purpose financial statements for these external users” (IASB project for SME’s. 2007).

The company gets a public accountability when it serves the public in one or another form. Certain companies are highly important for the economy of the country where it is incorporated. This importance makes them publicly accountable. Usually this method is adopted for those companies in which there is more number of public interest. The method is implemented to meet the needs of such shareholders of publicly listed companies.

Compared to the users of such public companies the users of SME’s are not much concerned about the detailed financial information. They mostly rely on Cash flow statements and other statements that assess the short term profitability of the business. as mentioned earlier application of IFRS involves more cost when compared to the application of GAAP. Since the SME’s cannot afford such higher cost the IASB has developed the plan that minimizes cost of application of the method. Another reason for application of the IFRS principles in the SME’s is that many countries use different forms of GAAP for SME’.

This makes the accounting methods differ from the SME’s of the same country making an un-systematical method of accounting. Therefore, the application of IFRS in SME’s will make the accounting system highly standardized.

The application of IFRS is not much complicated when it is simplified in accordance with the SME standard. “I support the proposal to develop simplified IFRS for small and medium-sized entities (SMEs) because compliance with current IFRS is too burdensome for such entities” (Cairns 2004). Thus the simplified IFRS has greater demands as they are required by many enterprises to employ in their accounting system. Therefore, the IFRS for SME’s is applicable to those companies that are not publicly accountable but are accountable to some external users of the financial data.

Cost benefit analysis of IFRS for SME’s to the SME’s

As mentioned in the above chapters of the report IFRS for SME is a simplified form of IFRS principles. This is aimed at providing a better accounting standards for certain companies. The IFRS is a global accounting standard. The SME’s are highly benefited when they use this method of accounting. Since this is a globally accepted accounting method the comparability of the company with others is highly possible.

The benefit is that the company that uses this principle becomes comparable not only with the companies of that particular country but also with the companies that are located all over the world. Since this method is simplified it will consume less cost for the company. The needs of the users of the accounting data are the primary consideration while preparing the accounting data. The full IFRS considers many aspects of accounting.

This information is sometimes not at all required by the users of the data. But the simplified IFRS considers only relevant points in the company accounting. This ensures clarity of the data because only required data is provided to the users. The cost of application is thus minimized as the accounting does not consider irrelevant data. The simplified IFRS is designed in such a way that it meets all the requirements of a good accounting system with necessary cost-benefit consideration. “The proposed standard is based on full IFRSs with modifications to reflect the needs of users of SMEs’ financial statements and cost-benefit considerations” (ED IFRS, for small and medium. 2007. p. 2).

Effect of the proposal

The proposal of a simplified IFRS has great influence on the company and the various factors related to it. Here the effect of IFRS can be examined on the basis of goodwill impairment, cost methods for associated companies and treatment of research and development expenditure.

Goodwill impairment may be referred as how much the book value of goodwill differs from that of the fair value. “Goodwill impairment is defined as the difference between the book value of goodwill and the implied fair value of goodwill” (Goodwill impairment. 2007). Modifications in the IFRS is made on the basis of careful consideration of many factors. Therefore, the effect of such practice to the goodwill of the company is also carefully considered. The goodwill impairment is not adversely affected by the simplified IFRS since the method has been drafted after careful analysis of all the effects. “An indicator approach would supersede the mandatory annual impairment calculations in IFRS 3, Business Combinations” (Epstein & Jermakowicz2008).

The research and development cost will be accounted as soon as it is incurred. There is not much complication in the accounting of the research and development expenditure. Research and development expenditures are one of the most expenditure that is incurred in a company. The cost methods for associated companies are also treated fairly in this method.

Conclusion

From the literature analysis in the previous chapter it is clearly seen what a simplified IFRS refer to and how it can be applied in a Small Enterprise. Since simplified IFRS is a simplified version of IFRS this can be very easily and economically implemented in a small enterprise. The analysis has shown clearly that this method is of highly beneficial to small enterprises as this will enable the small firms to maintain accounts in a very standard format like the larger firms.

Bibliography

EPSTEIN, Barry Jay & JERMAKOWICZ, Eva K (2008). International Standards for Small and Medium-Sized Entities. Analyzing the IASB Exposure Draft. [online]. CPA Journal. Web.

The IASB project for SME’s. (2007). Which companies is the project aimed at? Web.

CAIRNS, David (2004). Accounting standards for small and medium sized entities. Web.

ED IFRS, for small and medium entities. (2007). Foreword. P. 2. Web.

Goodwill impairment. (2007). what is goodwill impairment? Appraisal economics incorporate. Web.

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