SMEs and IFRS

Last year, to very little fanfare outside the realm of accounting, standard setters reached their apex after decades of work writing new accounting rules that could be applied by publicly-listed companies the world over. Michelle Perry writes

Household names like Marks & Spencer and builders’ merchants Travis Perkins spent thousands of man hours, not to mention pounds, working towards this huge switch in the way they account for many items in their books. For many companies, the change resulted in a drop in profits and/or shares, for others a rise.

Now those same standard setters are on course to bring those accounting rules, albeit in simplified form, to non-publicly-listed organisations. The International Accounting Standards Board (IASB) has promised that a resulting draft standard reduces the volume of accounting guidance applicable to small and medium-sized companies (SMEs) by more than 85% when compared with the full set of IFRS.

Sir David Tweedie, the IASB’s chairman, said: ‘Our goal has been to produce a standard for use by smaller and unlisted companies that offers the comparability of full IFRSs while reducing the burden on the preparing company. When completed, the SME standard will make the accounting requirements more accessible to smaller preparers in both developed and emerging markets.’

The reasons for applying them to businesses listed on world stock exchanges are very clear – ease for investors and regulators around the world, comparability with companies in other countries and sectors, reduced cost of credit. But for SMEs, the reasons for a switch are, on the surface, more ambiguous.

It is just one of the many issues the UK and European finance professions are currently toying with. That is even before the standard setters have even started to tailor the rules.

In April, the Accounting Standards Board (ASB), the body responsible for accounting rules in the UK, began a consultation process that will last until 31 July. To kick-start the discussion process, various accountancy institutes are hosting public roundtables around the UK and Ireland. But with the varying commercial and economic pressures on SMEs, it seems unlikely that, until the standards are ready and regulators set a date for compliance, new accounting rules won’t feature very highly on most company directors’ agendas.

Awareness is the first hurdle the ASB and the IASB face. The current consultation document runs to over 400 pages in length. Garnering interest and engaging those new set of rules will ultimately be a struggle until a path forward is clear, experts say.

Given that the changes could affect in excess of 40,000 SMEs, according to the ASB, it is not an issue to be taken lightly.

Research by HIFX, a foreign exchange specialist, reveals that just one-third of internationally operating SMEs are aware of the changes, let alone prepared.

According to the research, there are 58,800 UK SMEs trading abroad, of which two-thirds (66%) are completely unaware of how the IFRS or new UK GAAP will impact on profitability and balance sheet valuations of derivatives.

For now, however, the provisional target of having SMEs complying with a simplified version of IFRS is 2009. In many respects UK companies, when compared to their European counterparts, are several steps ahead in aligning their accounts to the global set of rules now in use, as UK GAAP – one of the oldest set of accounting rules in the world – has gradually been morphing into IFRS.

The UK ASB has, for the past five years, been working closely with the IASB to eliminate differences between UK accounting rules and IFRS. Still, there are significant differences between the FRSSE, the set of rules SMEs currently use, and IFRS, even in its most simplified form.

David Littleford, partner at KPMG, says: ‘There’s an objective to converge UK GAAP with IFRS, so some will get it through the backdoor.’

Purpose

The ASB’s current consultation focuses on what purpose a set of IFRS for SMEs will have. Some IFRS run to 2,000 pages and are excessively complicated for small companies that have few complex transactions.

Littleford says: ‘2009 is quite optimistic.’

Considering the investment in resources and manpower that fully-listed and AIM companies have had to put in to comply with the deadline for their adoption of IFRS, it is unsurprising that there is concern for the process for SMEs.

Mark Harwood, audit partner at Baker Tilly, says: ‘A lot of AIM companies who are adopting full IFRS for this year have struggled and, arguably, they have more resources and more reason to do it than SMEs.

‘SMEs will struggle with the rationale of it all,’ he adds.

Harwood continues: ‘It will take a lot of time for people doing the accounts within companies to relearn the rules.’

But views differ greatly on the issues. Some experts aren’t worried about the impact on small companies, arguing that it will be their accountants, usually not in-house, that will have to adapt to any changes.

David Spencer, director of business services at Tenon, an accountancy business that is listed and has to comply with IFRS, says: ‘I genuinely don’t think it’ll have a big impact. Lots of companies don’t prepare their own accounts or have complex accounting issues. It will be an issue for accountants, but it won’t be a big issue.’

Still, many SMEs do trade across borders, even if it is simply currency exchange transactions, and the differences in treatment of derivatives and hedging is quite significant.

‘There may be more pronounced changes if the company is larger and more complicated, such as a company that uses derivatives or other financial instruments. It will be a sliding scale depending on the size and complexity of the company,’ says Littleford.

Of course, there are cost increases to factor in, but Spencer says it is unlikely the costs will reach the heights that FTSE and AIM companies have had to deal with.

‘There’s no doubt that there will be a cost increase but it won’t be a large one,’ says Spencer. ‘It’s a compliance matter for accountants.’

But if there is very little change, why change at all? ‘Most SMEs will question what benefit there is for them,’ argues Harwood.

The main benefits for public companies are consistency and comparability across borders and sectors but ‘for most SMEs that won’t be relevant. They aren’t commercial reasons.’

Harwood is supportive of a single set of accounting rules, but he says the rules must be simplified sufficiently for them to be relevant to the SME marketplace. ‘I would urge people to make their views felt. Opposition often comes after when it’s too late,’ he says.

Whatever change does take place, however large or small, it results in what regulators and standard setters, not to mention politicians, have to be sure of – that it is for the right reasons and will benefit, in some way, SMEs, because they are after all the engine of the UK economy. Any adverse effects on small business that puts them at a disadvantage to their competitors around the world could prove costly, not only for business but for the economy as a whole.

First and foremost, however, standard setters must raise the level of awareness among SMEs to engage them in discussion about their future accounts, and ensure they understand the reasons behind the proposed changes and are happy with the outcome.

Michelle Perry is a freelance business and finance journalist.