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Slimmed down IFRS – but for who?

Everyone will be familiar with the advertising slogan, “It does exactly what
it says on the tin.” But it’s hardly likely to be used by the International
Accounting Standards Board to describe its new exposure draft for an
International Financial Reporting Standard for Small and Medium-Sized Entities.

Just over two years after European listed companies were compelled by the
European Commission to switch from local GAAP to IFRS, a slimmed-down version of
the new rules is being proposed for SMEs. But, remarkably, the new standard
contains no definition and no guidance as to what constitutes an SME – well,
nothing that has anything to do with size.

The IASB defines ‘SME’ as an entity that has no public accountability. This, in
turn, means an organisation that has no share listing and is not a financial
services business. The IASB does not offer any hint as to what might constitute
an unacceptably large organisation to be adopting the SME standard. To call the
exposure draft an IFRS for SMEs is, then, a complete misnomer.

Paul Pacter, the IASB’s director of standards for SMEs, justifies the
decision to offer no size-based guidance. “It’s virtually impossible to have a
global, quantified definition,” he says. “It’s really a jurisdictional issue as
to which organisations use which set of standards.”

In the UK, large but unquoted businesses are not required to adopt full IFRS.
But inadvertently or not, the IASB has left open the possibility that such
organisations might adopt the SME standard, rather than stick with UK GAAP or
switch to full IFRSs.

Pacter concedes that this is possible. “Large, unlisted companies should be
using full IFRS, but our board has no authority to tell anybody to use its
standards,” he says. “Our board has said full IFRS is suitable for any company.
The SME standard is suitable for those that do not have public accountability.
But each country will have to decide how far to push down the full IFRSs and
where to permit the SME standard.”

Pacter adds that it will be several years before the European Commission is
expected to make any decision as to which organisations ought to use the final
SME standard.

Pick and choose
So larger, unlisted businesses that consider the full set of IFRSs to be too
onerous for their purposes could, in theory, adopt the SME standard. But they
will not be allowed to ‘pick and choose’, adopting the SME standard as their
core standards, then dipping into the full set when it suits them to do so,
Pacter says.

Having said that, the SME standard already explicitly points preparers to
certain elements of the full IFRS. For example, where unlisted companies have
share-based payments to account for, the SME standard mandates the use of
certain paragraphs of IFRS 2 which, in turn, contains some simplified rules for
unlisted companies. Such cross-referencing might suggest that the draft SME
standard is ripe for adoption by larger, unlisted organisations.

It’s not even clear yet whether a decision will be made by Brussels or at the
national level, says David Loweth, technical director at the UK Accounting
Standards Board.

While the IASB is consulting far and wide on its new standard, with a view to
getting responses by 1 October 2007, the ASB will be issuing its own
consultation paper, which is currently expected in April. Loweth said that it is
not clear whether the IFRS for SMEs will be “a replacement for our Financial
Reporting Standard for Smaller Entities or whether it will be a standard that
will be used by middle-tier companies that aren’t listed or not publicly
accountable. We’re planning to consult to get views on what people think about
it, whether it might be suitable for medium and larger companies.”

The UK’s FRSSE is intended for companies that meet at least two of the three
size-based criteria (less than £5.6m turnover, £2.8m balance sheet total, 50
employees). So how does the IFRS for SME standard compare? “There’s more in it
than in the FRSSE, put bluntly,” says Loweth. “So even though the IASB have said
the standard would be suitable for micro-entities, we’d like to test that. We
think that it’s too big a document for small companies.” (It weighs in at around
240 pages plus appendices and guidance, versus 110-plus for the FRSSE.)

The Institute of Chartered Accountants of Scotland has already urged the IASB
to rethink its target market for the new SME standard. Instead, it says that the
UK FRSSE should be retained for smaller organisations and that the IFRS for SMEs
should be adopted by medium and large-sized, unlisted companies. Listed and
other publicly accountable organisations should continue to use full IFRS, the
institute recommends.

ICAS senior vice president and Deloitte partner Isobel Sharp said at a recent
conference, “The creation of a three-tier system is the best solution to a
problem that has haunted the UK’s ASB for several years.”

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