Disclosure

Do SMEs really need to follow IFRS to the letter? Peter Williams ponders the popular argument

International accounting standards are too often associated solely with quoted companies. The financial reporting needs of the world's capital markets may dominate the headlines but small and medium sized enterprises (SMEs) make a significant contribution to the global economy, and a set of coherent accounting standards for this vital sector is long overdue.

The problem for those dealing with SME financial reporting is that the standard setters have traditionally concentrated on getting it right for the listed companies - representing less than 1% of all enterprises - while the small firm sector has been handed down complex standards that could not, and should not, apply to them.

The IASB is promising to improve the regime for SMEs. It is following a route taken by many national standard setters which are already providing exemptions or simplifications for SMEs within their own accounting requirements. In other countries where SMEs are, in theory, required to follow every last jot of the main requirements, companies depart unofficially from standards without much fear of retribution.

These exemptions, official or not, show that few people hold to the argument that identical standards - in both terms of measurement and disclosure - ought to apply to all filed or published financial statements that aim to give a fair presentation. Such a purist view is generally rejected on the grounds that, like other accounting standards, International Financial Reporting Standards (IFRSs) are unnecessarily demanding for non-quoted companies and some of the information provided under the full standards is not relevant or not needed by users of SME financial statements.

However, even if there is general consensus that SMEs' accounting standards should differ from those applied by their quoted brethren, there are varying views on how that should be achieved. A major concern is that international accounting standards for SMEs will turn out to be, in essence, IFRS-lite with bits chopped off. The resulting package of standards could end up being irrelevant to vast numbers of companies because they will be adaptations of international standards that were built specifically for multi-national listed entities with different needs and resources.

In that case, you could argue that the IASB - in conjunction with national standard setters - should throw out all the extant standards and start again with a clean piece of paper. While that may sound like an ideal solution, it is unlikely to happen for two reasons: first it is doubtful whether the IASB has the resources and the appetite for such a project; secondly - and perhaps more importantly - IASB chairman, Sir David Tweedie, is opposed conceptually to such an idea. While he is keen for financial reporting to be relevant, he also believes strongly that reports and accounts should adhere to basic concepts that underpin all accounting standards. This is particularly important so that companies can switch between the two regimes when, for instance, they gain a stock market quote.

One key problem the IASB has to resolve is defining an SME (and, hence, defining which organisations can use the altered standards). This is probably the toughest call as many want clarity and explicitness in this area. Traditionally, SMEs have been defined by size (turnover, balance sheet totals, number of employees) but while setting such criteria may work nationally, it is doubtful meaningful figures can be stipulated internationally. The other test could be public accountability. But that may not always give the right intuitive answers. Large private companies may escape the scrutiny perhaps they warrant, and public accountability from a financial reporting viewpoint (i.e. ownership) does not always equate with public interest.

While the thorny details need to be resolved, the good news for SMEs is that their financial reporting needs are being taken seriously at the highest level.

The IASB has published a Discussion Paper on Standards for SMEs setting out its preliminary views. Comments requested by 24 September 2004. To download, go to www.iasb.org and see the publications section.

Peter Williams is a freelance journalist and a chartered accountant and has written on accounting, financial reporting and auditing issues for many years. He is a former editor of Accountancy Age and Financial Director magazines and he currently edits titles concerned with on-line learning and knowledge management. He has twice won the Institute of Internal Auditors UK Award for excellence in Business and Management Press Journalism.