An Overview of the Exposure Draft
In February 2007 the International Accounting Standards Board (IASB) published for public comment an exposure draft of an International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). The aim of the proposed standard is to provide a simplified, self-contained set of accounting principles that are appropriate for smaller, non-listed companies and are based on full International Financial Reporting Standards (IFRSs), developed primarily for listed companies.
By removing choices for accounting treatment, eliminating topics that are not generally relevant to SMEs and simplifying methods for recognition and measurement, the resulting draft standard reduces the volume of accounting guidance applicable to SMEs by more than 85 per cent when compared with the full set of IFRSs. As a result, the exposure draft offers a workable, self-contained set of accounting standards that would allow investors for the first time to compare SMEs' financial performance across international boundaries on a like for like basis.
Why are global financial reporting standards for SMEs needed?
High quality global financial reporting standards enhance the comparability of financial information. They improve the efficiency of allocation and the pricing of capital. This benefits not only those who provide debt or equity capital but also those entities that seek capital, because it reduces their compliance costs and removes uncertainties that affect their cost of capital. Global standards also improve consistency in audit quality and facilitate education and training.
The benefits of global financial reporting standards are not limited to entities whose securities are traded in public capital markets. SMEs—and those who use their financial statements—can also benefit from a common set of accounting standards. For example:
- Financial institutions make loans to SMEs, often across borders. In most jurisdictions, over half of all SMEs, including the very small ones, have bank loans. Bankers rely on financial statements in making lending decisions, in establishing terms and interest rates and in monitoring loans.
- Vendors want to evaluate the financial health of buyers before they sell goods or services on credit. This is especially true when the buyer is a small or medium-sized entity.
- Credit rating agencies try to develop ratings uniformly across borders. Similarly, banks and other institutions often develop ratings in the same way as credit rating agencies. Reported financial figures are crucial to the rating process.
- Many businesses have overseas suppliers and use a supplier's financial statements to assess the prospects of a viable long-term business relationship. The supplier is often a small or medium-sized entity.
- Venture capital firms provide funding to SMEs across borders.
- Global, regional and national development institutions, both public and private sector, provide financial assistance to entities in developing countries around the world. They rely on financial statements to make financing decisions and to assess financial results.
- Many SMEs have outside investors who are not involved in the day-to-day management of the entity. Global accounting standards for general purpose financial statements and the resulting comparability are especially important when those outside investors are located in a different jurisdiction from the entity and when they also have interests in other SMEs.
The benefits of the IASB's proposed IFRS for SMEs go beyond comparability. It is likely to improve the quality of financial reporting by SMEs in many jurisdictions because, often, the standards that SMEs are currently following may not have been designed with decision-usefulness as the overriding objective. The proposed IFRS for SMEs is designed to produce general purpose financial statements that are useful for economic decision-making by a broad range of resource providers to SMEs, such as non-manager owners, lenders, vendors and other creditors, customers and employees. Another benefit will be to reduce the financial reporting burden on SMEs in those jurisdictions where, at the moment, standards designed for reporting by participants in public capital markets have been pushed down to SMEs.
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