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FDs lambast Lords’ SME IFRS about-turn

Finance directors are scratching their heads in dismay after even more conflicting messages from their audit overlords.

In March, the House of Lords’ investigation into the audit market recommended that UK SMEs do not adopt International Financial Reporting Standards (IFRS) but instead continue using UK Generally Accepted Accounting Practice (UK Gaap). It calls IFRS an “inferior system”, adding that it curbs the auditor’s ability to exercise prudent judgement, offers less assurance on company reports, and lacks provision on accounting for expected losses.

The Association of Chartered Certified Accountants (ACCA) immediately hit back, calling the recommendation “a backwards step” that would impose even more cost and bother on already overloaded SMEs. Meanwhile, the Accounting Standards Board has been touting FRSME, its IFRS-lite replacement of UK Gaap, and outgoing International Accounting Standards Board chief David Tweedie has spent much of his high-profile tenure campaigning hard for British business to join the movement to international standards.

Rather than worrying about the cost issues, members of the Financial Director LinkedIn group take a dim view of the Lords’ recommendation, preferring to move to IFRS in order to get the “one global version of the truth” that the project was supposed to promote.

“We need one simple set of rules that are self-contained – no cross-referring to other sources,” says Charles Keene, an adviser to SMEs. “The proposed IFRS for SMEs is just such a set of rules, in plain language, allowing for transition to some American terminology, that is a single source.”

Jeff Jeffries, partner at accounting firm PKF, agrees that SMEs need common standards. “While IFRS may not be ideal, the level playing field is,” he says.

Neil Morling, CFO at EC Harris, says that the Lords’ recommendation is in danger of forcing UK SMEs to operate “in a vacuum” for the purposes of reporting rigour and comparability. “And dare I ask how many in the House of Lords have even heard of IFRS?” he adds.

Former FD Edward Beale, who is now chief executive of City Group, a company that provides outsourced regulatory compliance and head office finance services to small listed companies, cites the Financial Reporting Committee which has said that it is “not sensible” for regulators to ask companies to reformat disclosures for different users in only slightly different ways. He believes that FDs must use the window opened by the Lords’ comment to make their voices heard in favour of revising current standards and complexity.

“I do not see any point in asking SMEs to prepare accounts that are not useable by management or understandable by users,” he says. “We all need to move to one language of accounting – which will have to be IFRS rather than UK Gaap, as that is the language of full IFRS – and IFRS for SMEs is a good starting point.

“We have a once-in-a-generation opportunity to significantly revise UK accounting standards, and I think that we should be prepared to take this opportunity to roll back some of the complexity that has recently been introduced into accounts.”

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