A recent call by a House of Lords committee to scrap plans to introduce international financial reporting standards (IFRS) for the UK’s small and medium-sized enterprises (SMEs) is a blow to standard-setters but a boost for critics of the proposed shake-up.
March’s report by the House of Lords Economic Affairs Committee into the audit market and banking crisis was dismissive of plans to extend a version of IFRS to all but the smallest UK companies. Peers claimed IFRS for smaller companies, developed by the Accounting Standards Board (ASB), was inferior to UK accounting rules (Generally Accepted Accounting Practice, or UK GAAP) because the international rules limited auditors’ ability to exercise “prudent judgement”.
The UK’s largest publicly listed companies switched to IFRS in 2005, but smaller companies have continued to use UK accounting rules. Supporters of IFRS say the rules make company accounts more transparent and easier to compare.
The ASB has produced a simplified version of the standards for mid-sized companies, but it is still consulting on the rules. However, the current plan is to introduce IFRS for accounting periods starting on or after 1 July, 2013.
Scrapping plans to extend IFRS to SMEs would be humiliating for the ASB. But many finance directors would welcome a decision to stick with UK accounting rules.
Eva Bogowicz, head of finance for SilverDoor International Serviced Apartments, says introducing IFRS for SMEs would have its downsides, but carries benefits such as making it easier for investors to understand a company’s finances and compare company accounts.
“Long-term benefits might be the harmonisation of accounts and comparability,” she says. “This could improve things for SMEs who are looking to obtain capital. Investors could make an informed decision if they could compare financial statements of SMEs. However, the benefits of implementing IFRS for small businesses might not offset the costs.”
But for some FDs, IFRS for SMEs has even fewer redeeming features.
Bob Eastoe, finance director of Hypnos, a bed manufacturer, disputes the claim that IFRS would make financial statements easier to understand. “You have to be a finance professional to understand them,” he says. “There can be more subjectivity in applying the principles behind IFRS.”
So is IFRS for SMEs a waste of time? “Until Europe, the US, Japan and China agree on a common set of reporting standards, the whole thing should be taken off the accounting agenda,” claims Eastoe.
Like it or not, however, IFRS for SMEs is still likely to be made mandatory – although further delays are possible.
Isobel Sharp, audit partner at Deloitte, says UK GAAP needs a “serious refresh”.
It might be an option to give SMEs some leeway when they move to IFRS, she says. One company, for example, could leave conversion for three years, while another may prefer to switch to international accounting rules more quickly.
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