IFRS for SMEs: A Comprehensive Review

By Maria Madeira R. Vestil and Sherwin V. Yason

First Published in Business World (11/5/2012)

In July 2009, the International Accounting Standards Board (IASB) issued International Financial Reporting Standard for SMEs (IFRS for SMEs) which, based on the fundamental principles of IFRS, was to serve as the simplified standard to address the needs of owner-managed, private, non-publicly accountable entities.

In the same year, the Philippines Financial Reporting Standards Council and the Philippine Securities and Exchange Commission (SEC) adopted IFRS for SMEs for Philippine companies effective January 1, 2010. The Philippine SEC included additional quantitative criteria in the definition of an SME. It mandated that entities with total assets of between P3 million and P350 million, or total liabilities of between P3 million and P250 million, should be covered by the Philippine Financial Reporting Standard for SMEs (PFRS for SMEs) framework, with certain specified exemptions.

In June 2012, two years after financial statements have been published using IFRS for SMEs, the IASB initiated a comprehensive review of the said standard. As an initial step, the IASB issued a Request for Information (RFI) on June 26, 2012 to seek feedback from those who have applied the standard, as well as other interested parties, on whether any amendments to the standard must be made. Highlights of the RFI include:

• whether the concept of “public accountability” remains the key basis for distinguishing entities that can use the IFRS for SMEs framework;
• whether to incorporate recent changes in IFRS into IFRS for SMEs; and
• whether to extend the accounting policy options under IFRS to IFRS for SMEs.

Concept of public accountability
The current SME standard explicitly prohibits publicly accountable entities from using the standard. An entity has public accountability if:

(a) its debt or equity instruments are traded, or if it is in the process of issuing such instruments for trading, in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or
(b) it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.

For some, public accountability should continue to be a basis for distinguishing entities that should apply IFRS, or a simplified framework such as IFRS for SMEs. IFRS for SMEs contains simplified accounting requirements, and excludes certain sections, such as requirements on earnings per share and segment reporting, where there are additional requirements under IFRS for publicly accountable entities. In addition, IFRS for SMEs has less disclosure requirements, so there may be diversity in practice compared to IFRS reporters, which would inhibit comparability of financial reporting between publicly accountable entities.

The position of other concerned parties, meanwhile, is that regulatory authorities in each jurisdiction should be given the power to decide whether some publicly accountable entities in their jurisdiction are eligible to use IFRS for SMEs, based on their assessment of public interest in the entity, and the needs of the users of financial statements in their jurisdiction, among others.

Incorporating recent changes in IFRS into the IFRS for SMEs
Since its issuance, the IFRS for SMEs has not been amended. Though based on the fundamental concepts of IFRS, it is considered an independent and stand-alone accounting framework. Thus, any changes and/or amendments to IFRS have not been reflected in the standard for SMEs.

However, several changes to IFRS, which are all effective for annual periods beginning on or after January 1, 2013, such as IFRS 10 – Consolidated Financial Statements, IFRS 11 – Joint Arrangements, IFRS 13 – Fair Value Measurement and the revised International Accounting Standard (IAS) 19 – Employee Benefits, among others, raise the question of whether these changes should be incorporated into a revised IFRS for SMEs.

Some hold the view that if IFRS for SMEs is intended as a simplified framework independent of the developments in IFRS, then such should be enhanced and improved over time, irrespective of whether there are developments under IFRS. They believe that IFRS for SMEs should not be revised based on changes in IFRS.

Others maintain that if IFRS for SMEs is based on IFRS, there is a need to develop a set of principles and due process on how and when to incorporate changes in the basic IFRS framework. In Section 29 of the SME standard on Income Taxes, the provisions were based on an exposure draft in IFRS that the IASB eventually decided not to proceed with. In this particular case, the due process review of the standard was not observed, resulting in confusion in the application by SME adopters. The changes in IFRS must be adequately field-tested by a broad and varied range of users and applied by preparers of IFRS to determine merit for inclusion in IFRS for SMEs.

Extending accounting policy options under IFRS to IFRS for SMEs
Certain accounting options were removed from IFRS for SMEs to simplify accounting requirements for cost-benefit reasons. These options, which are not available for SMEs, are (a) the revaluation model for property, plant and equipment; and (b) the capitalization of development and borrowing costs, among others.

Some agree with the simplified accounting requirements of IFRS for SMEs as it is less costly for SMEs. For instance, obtaining an appraisal report for property, plant and equipment, or capitalizing development or borrowing costs, would require additional cost and effort from SMEs. On other hand, there are those who prefer making accounting options (not necessarily as requirements) available to users of IFRS for SMEs if these will result in more useful financial information for financial statement users.

Implications to Adopters of the IFRS for SMEs
Since this is the first comprehensive review of the SME standard by the IASB, it is crucial that the IASB receives varied points of view to consider and address. Thus, we encourage all interested parties, especially the current adopters of the standard, to respond to the RFI published by the IASB on its website www.ifrs.org/ifrs-for-smes.

Users should surface other implementation issues and express whether simplifications to the standard made a difference in financial reporting, particularly since any future change will impact accounting functions for SMEs and the configuration of accounting systems and processes for financial reporting, among others. The deadline for comment to the IASB is on November 30, 2012.

Maria Madeira R. Vestil is a Partner and Sherwin V. Yason is a Senior Director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.