Small and Medium Entities (SMEs) operate in simpler and less complex environments compared to larger companies. Although SMEs are small in size and capacity, they account for around 95% of all companies around the world. The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) is the simplification of the IFRS standards and is designed to meet the needs and capacities of SMEs. The standard was created to meet the financial reporting needs of entities that do not have public accountability and publish general purpose financial statements for external users. The other advantage of this standard is that it is also an excellent cost-saving approach as it minimises complex disclosures and fair value valuations that need the continual involvement of experts.
The IASB (International Accounting Standard Board) started with the development of IFRS for SMEs in 2003 and the first IFRS for SMEs was issued on 9 July 2009. Amendments were made to this and a new updated IFRS for SMEs was published in May 2015, of which the compulsory application is for reporting periods starting on or after 1 January 2017. Earlier application of the standard is accepted. The amendments in the first SMEs was as a result of the feedback that IASB received during the initial comprehensive review and taking into account the fact that the IFRS for SMEs is still a new Standard. There are only a few amendments to the updated IFRS for SMEs as compared with the first IFRS for SMEs.
There are two requirements for the application of IFRS for SMEs:
The SME must not have public accountability. What this entails is that it does not trade its debt or equity instruments in a public market and it is not in the process of issuing such instruments for trading in a public market, and the entity does not hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses (e.g. it must not be a bank, insurance company, brokers and dealers in securities, pension funds or mutual funds). IFRS for SMEs can be applied by entities that hold assets in a fiduciary capacity for reasons incidental to their primary business (e.g. travel agents or schools and utilities).
The entity must publish general purpose financial statements (GPFS) for external users. General purpose information is relevant and useful information that is directed to the common needs of a wide range of users. Therefore a simplicity was done in the IFRS for SMEs, few disclosures are required (roughly a 90% reduction from IFRS), IFRS for SMEs are in a simple and clear language, irrelevant topics are omitted (such as earnings per share, interim financial reporting and segment reporting) and many IFRS principles are simplified as SMEs generally encounter a narrow range of simple transactions.
IFRS for SMEs consist of 35 sections and it is less than 250 pages long. In the IFRS for SMEs, Section 1 explains what a SME is; section 2 is the conceptual framework for SMEs (it doesn’t differ vastly from the IFRS conceptual framework) and the other sections deal with the recognition and measurement of accounting transactions and the presentation and disclosure of financial statements.
The updated IFRS for SMEs is not materially different from the first IFRS for SMEs. The major difference that will affect many SMEs is that the new standard allows the option to use the revaluation model for property, plant and equipment, align the main recognition and measurement requirements of the deferred income tax with IAS 12 - Income Taxes and aligning the main recognition and measurement requirements for exploration and evaluation of the assets section with IFRS 6 – Exploration For and Evaluation of Mineral Resource. With the exception of the above mentioned changes, the other amendments in the updated IFRS for SMEs individually affect only a few paragraphs.
Some researchers have estimated that in South Africa, small and medium-sized enterprises make up 91% of formalised businesses, providing employment to about 60% of the labour force and total economic output accounts for roughly 34% of GDP (The Banking Association South Africa: 8 April 2016). Therefore SMEs play an important role in South Africa and in the world. In South Africa, there are many programmes and organisation that are created to help create and develop SMEs.
Therefore it is important to have knowledge of SMEs. This will save the reporting costs for the SMEs. With IFRS for SMEs, the SMEs will apply simple accounting principles, less fair value requirements and only relevant information will be disclosed to the users.
Trainee Accountant, Johannesburg