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International Financial Reporting Standard for SMEs

ArticleID 125  
Writer Isaac Thuku
Category Personal Article

Majority of companies in emerging and developed economies are small and medium-sized and are privately owned. The international accounting standards board issued an international financial reporting standard for SMEs in July 2009.

The standard incorporates accounting principles based on existing IFRSs which have been simplified to suit the entities that fall within its scope. It is in recognition of the fact that there are a number of accounting practices and disclosures that may not provide useful information for the users of financial statements for SMEs. SMEs have many dimensions which include employees, balance sheet total or annual turnover.

National regulatory authorities and standard –setters are the ones which determine which entities qualify as SMEs, therefore should apply the standard when preparing their financial statements. The two bodies are responsible for eligibility criteria.

International Accounting Standards Board describes an SME as an entity that does not have public accountability. Entities with public accountability are ones which file or are in the process of filling their financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market. They hold assets in a fiduciary capacity for a broad group of outsiders such as banks, insurance entity and securities broker or dealer. They mostly comprise of pension funds, mutual funds or investment banking entities.

The prime users of IFRSs are the capital markets. This means that IFRSs are primarily designed for quoted companies and not SMEs. Separate SME accounting standards have issues with undue cost burden of reporting, which is proportionately heavier for some smaller firms. The cost of applying the full set of IFRSs may simply not be justified on the basis of user needs. Much of the current reporting framework is based on the needs of large businesses.

Many companies in the world are small and privately owned. SMEs use financial statements for a narrower range of decisions, as they have less complex transactions and therefore less need for a sophisticated analysis of financial statements reducing disclosure requirements. The IFRS for SMEs has incorporated accounting principles based on existing IFRs which have been simplified to suit the entities that fall within its scope.

IFRS simplify areas in relation to recognition, measurement and disclosure requirements. A simplifies calculation is allowed if measurement of defined benefit pension plan obligations involve undue cost or effort.

There are some practices which have not been included in the SMEs financial statements. They include earnings per share, interim financial reporting, segment reporting, assets held for sale, hyperinflation, lessor accounting for finance leases and agriculture.

Accounting treatments disallowed under the standard include the revelation model foe property and equipment and proportionate consolidation for investments in jointly controlled entities. SMEs use financial statements for a narrower range of decisions and the standard reduces the disclosure requirements hence reduction in compliance cost. Disclosure requirements contained in the IFRS are intended to assist users in making forecasts which users of financial statements of SMEs don’t make as they only have goals on survival and stability rather than growth and profit making.

International Financial Reporting Standard for SMEs
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