International Financial Reporting Standard for Small and Medium-sized Entities

An Evaluation of chosen Proposals

Term Paper , 2008 , 9 Pages , Grade: 1,3

Business economics - Accounting and Taxes

The Exposure Draft of an IFRS for SMEs published in February 2007 is supposed to enhance the comparability between worldwide SMEs, and therefore meet the user needs, by concentrating on regulations that play a role for SMEs.

Furthermore it is expected to reduce the financial reporting burden of the preparers, reporting SMEs without public accountability, of the financial statements. Another benefit, in case of widespread application of the standard, is expected to be the falling costs of capital of SMEs. This is because the allocation and pricing of capital is easier with a higher comparability of the financial statements of SMEs. Major issues of change were the impairment of goodwill, the cost method for associated companies, finance leases as well as the expense of research and development costs.

Goodwill is unlike in full IFRSs, tested for impairment losses on indication and impaired only to the fair value. This reduces the workload spent on annual impairment testing but may lead to dilutions of expenses. Associated companies can, also in the consolidated statements, be accounted for with the cost method and the fair value model through profit or loss, which are much easier than the equity method.

However, since intra-company transactions are not cancelled out, the new regulations might lead to higher profits.
The accounting of finance leases changed in two respects: The regulations of lessor accounting was totally left out of the standard and has to be looked up in full IFRSs.

The lessee accounting was simplified by allowing the preparers of the financial statement to determine the cost of the lease by only calculating the fair value of the leased property. This also leads to smaller expenses over the total lease period. When it comes to the research and development expenditure only minor changes were introduced. The IASB decided for providing SMEs with a choice in accounting treatment between expending both research and development cost or, on the other hand, to capitalize the development cost if certain criteria are met. Although it means a further simplification it has to be doubted that many entities decide against the possibility to capitalize the development cost but to expense them.

Table of contents

1. Introduction and background

2. Reasons for and benefits of an IFRS for SMEs

3. Range of possible users

4. Cost-benefit relation to SMEs

5. Evaluation of chosen proposals
A. Goodwill impairment
B. Cost method for associated companies
C. Finance leases
D. Research and development expenditure

6. Conclusion

7. References

1. Introduction and background

In February 2007 the International Accounting Standards Board (IASB) published for public comment an exposure draft of an International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). The aim of the proposed standard is to provide a simplified, self-contained set of accounting principles that are appropriate for smaller, non- listed companies and are based on full International Financial Reporting Standards (IFRSs), developed primarily for listed companies. (Pacter, 2007a, p. 3)

But is there a need for this standard? Which benefits does it provide? Which companies is it designed for? What cost-benefit relation does it provide to SMEs? And what are the major differences to full IFRSs?

This report will examine the IASB’s reasoning for developing the standard and explain which benefits the board expects (point two). Furthermore, the report will have a look on the SME definition and assess the range of possible users (point three). Afterwards, in point four, the cost-benefit relation to SMEs is examined. In point five a selection of important issues that have been changed in comparison to the full IFRSs are explained and evaluated. The report finishes by giving a conclusion (point six).

2. Reasons for and benefits of an IFRS for SMEs

According to the IASB (2007a) it is first and foremost the objective of enhancing the comparability between SMEs worldwide that led to the development of the stand- alone standard. In the light of globalising markets the ability to compare SMEs be- comes even more important for investors. The current situation, with SMEs reporting not at all, according to local GAAPs or to full IFRSs, does not provide the fulfilment of this need.

The following issues demand better comparability (Pacter, 2007a, 2007b):

- granting loans to foreign SMEs and monitor the ability of the payback
- evaluate the financial situation of buyers when selling on credit
- assess the prospective of the relationship to overseas suppliers
- develop credit ratings (banks and agencies)
- providing SMEs with venture capital
- developing benefit plans in development institutions

Nevertheless there are a range of other benefits that are expected from the new standard (Pacter, 2007a, 2007b; ASB, 2007; Macintosh, 2007):

- reduction of “financial reporting burden on SMEs that want to use global standards” (Macintosh, 2007, p. 80)
- better information situation for the other users of financial statements of SMEs
- increased cost-benefit relation in comparison to full IFRS for SMEs
- increased audit quality and auditing efficiency than local GAAPs
- providing countries that have no local GAAPs with an accounting framework
- facilitated education and training

3. Range of possible users

Section 1 of the exposure draft (ED) of the IFRS for SMEs defines the possible group of users: small and medium-sized entities without public accountability which “publish general purpose financial statements for external users.” (IASB, 2007b, p.14)

The criterion of public accountability is supposed to restrict the simplifications of the much smaller IFRS for SMEs to only those entities which want to publish general pur- pose financial statements but cannot be expected to comply with all the requirements of the full IFRSs. All entities that, by having chosen a certain type of company and finance (e.g. PLC) or business area (e.g. local power generation), are confronted with a higher demand of information by the public, are not allowed to apply the new reduced standard.

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• College: University of the West of England, Bristol (Bristol Business School (University of the West of England))
• Course: Externes Rechnungswesen/ Corporate Reporting
• Grade: 1,3
• Author: David Wagener (Author)
• Publication Year: 2008
• Pages: 9
• Catalog Number: V113426
• ISBN (eBook): 9783640142378
• Language: English
• Tags: IFRS, SMEs, Externes, Corporate, Reporting, Accounting, Rechnungswesen, Buchhaltung, Buchführung, Unternehmen, klein