More accounting relief for small and medium entities

International accounting body publishes final financial reporting framework for SMEs

Johannesburg, Tuesday, 14 July 2009 – The International Accounting Standards Board (IASB) has issued the final International Financial Reporting Standard for Small and Medium Entities (IFRS for SMEs).  The publication of IFRS for SMEs marks the end of a five year process during which the final standard was developed with input being provided by South Africa and many other stakeholders around the world.

While many countries are expected to adopt the final IFRS for SMEs, South Africa became the first country in 2007 to adopt the Exposure Draft of the IFRS for SMEs as a Statement of Generally Accepted Accounting Practice (GAAP). The intention of the early adoption of the standard at the time was to provide immediate relief for limited interest entities under the then pending Corporate Laws Amendment Act. 

Sue Ludolph, project director of accounting at the South African Institute of Chartered Accountants (SAICA), welcomes the positive move by the IASB to issue the final standard that includes a number of areas of further relief compared to the exposure draft, as complexity is one of the biggest problems with financial reporting for SMEs.

“As a result of the early adoption of the standard in South Africa, SAICA provided relevant feedback to the IASB on the practical issues identified by local companies in implementing the standard, which helped shape the final IFRS for SMEs,” says Ludolph.

She says with over 30 amended or new standards becoming effective in the next year, companies reporting under full International Financial Reporting Standards (IFRS) face tough challenges in preparing their accounts.  “This standard provides crucial relief for SMEs.”

The IASB has indicated that the SME standard will only be amended every three years.  This in itself will provide relief for companies adopting this standard as full IFRS currently has numerous changes being required annually.

Frank Timmins of Grant Thornton, who is a member of the IASB Working Group for SMEs, supports Ludolph’s sentiments. Grant Thornton encouraged all their clients that met the criteria to switch from full IFRS to the Statement of GAAP for SMEs. Timmins too welcomes the relief provided by IFRS for SMEs and is pleased to see that the IASB’s final standard includes improvements that also respond to many of South Africa’s concerns. 

Bruce Mackenzie, member of SAICA’s Accounting Practices Sub-Committee on SMEs, says that IFRS for SMEs has provided relief and lowered the burden of preparing financial statements in many areas that were found onerous in South Africa. Some of the areas of relief include:

• Straight lining of operating leases, which is not required if increases in lease payments are reflective of expected general inflation;
• No requirement to annually assess residual values, useful lives and depreciation methods for property, plant and equipment;
• Financial instruments, now measured mainly at cost instead of a mixture of fair value and cost; and
• Allowance for expensing of many items that full IFRS requires capitalisation of, which is easier and simpler to do. 

“The new standard does, however, still require entities reporting under this framework to prepare consolidated accounts where there is a holding company in a group,” says Mackenzie.

It is anticipated that most companies that do not have ‘public accountability’ and which publish general purpose financial statements for external users may adopt the IFRS for SMEs. An entity has public accountability if:

(a) Its debt or equity instruments are traded in a public market or 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.

“The standard will be available to other entities looking to prepare a set of accounts that can be described as ‘fairly presenting’ under an accounting framework. This includes companies, close corporations, partnerships, sole traders and trusts where the trust deeds permit,” says Ludolph.

The IFRS for SMEs standard will be available for immediate use when approved for issue in South Africa by the Accounting Practices Board (APB). The APB will consider this at its meeting in August. 

SAICA will be conducting seminars on IFRS for SMEs, covering how to implement it and where it differs from the current Statement of GAAP for SMEs.

Ludolph says IFRS for SMEs will co-exist with the recently exposed Reporting Framework for Non-public Entities that has been developed in South Africa by users, auditors and preparers. “This latter framework even further simplifies preparation of financial statements by adopting the historical cost method throughout and making fair value disclosures entirely optional. Further relief is also provided by aiming for minimal adjustments to management accounts by allowing leeway in the selection of certain accounting policies by preparers.  The entities that can use this framework will ultimately be determined by the APB.”

For detailed documents and upcoming seminars on IFRS for SMEs visit www.saica.co.za

NOTE TO EDITORS:

It is envisaged that the reporting landscape could look as follows in terms of the new Companies Act, 2008, when it possibly becomes effective in 2010:

An entity may always elect to use a “higher” framework, but not a “lower” framework. The regulations to be made by the Minister of Trade and Industry may alter the picture below:

MEDIA CONTACTS:

Edward Makwana
Project Director: Communication
The SA Institute of Chartered Accountants (SAICA)
Tel: 011 621 6713
Cell: 083 717 3184
Email: edwardm@saica.co.za

Anusha Mudhai
Meropa Communications
Tel: 011 506 7314
Cell: 084 911 2535
Email: anusham@meropa.co.za

ABOUT SAICA:
The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 28 000 members who are Chartered Accountants and hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in their spheres of business operation. Most of these members operate in commerce and industry, and play a significant role in the nation’s highly dynamic business sector and economic development.

SAICA serves the interests not only of the Chartered Accountancy profession, but also of society in general through its key objective of upholding professional standards and integrity. The pre-eminence of South African Chartered Accountants [CAs(SA)] nationally and internationally attests to the successes achieved by SAICA on a broad global canvas. SAICA’s members enjoy the privilege of using the highly regarded and prestigious CA(SA) designation. Members of SAICA are subject to a Code of Professional Conduct, which provides guidelines for ethical and professional behaviour. Fundamental ethical principles to which CAs(SA) are expected to achieve include:

- Integrity;
- Objectivity;
- Professional Competence and Due Care;
- Confidentiality; and
- Professional Behaviour.

SAICA members serve on international accounting bodies including; the Trustees of the International Accounting Standards Committee Foundation (IASCF), the International Accounting Standards Board (IASB), the International Financial Reporting Interpretations Committee (IFRIC) and the Council of the International Federation of Accountants (IFAC). SAICA is also a member of The Global Accounting Alliance (GAA). 

For more information visit www.saica.co.za