International Financial Reporting Standards (IFRS) are anathema to small firms that cannot justify a full-time chartered accountant, nor the attendant fees to ensure compliance.
The conundrum is daunting, more especially in a country like South Africa, where entrepreneurship is highly encouraged. Hence the SA-generated IFRS for SMEs, a watered down version of fullblown IFRS.
At present, IFRS applies to any company that has a public interest element. Others should use IFRS for SMEs. SAICA is currently researching solutions whereby IFRS can be adapted, summarised and simplified for non-public interest entities.
Among several answers is to move IFRS for SMEs into the public interest sphere and create a much simpler third level of reporting like micro generally accepted accounting practices (micro-GAAP).
Micro-GAAP has been positioned for entities that do not have to report in terms of the new compensation contained in the Companies Bill. The bigger plan potentially is that micro- GAAP could fill the gap for even some limited interest companies, instead of IFRS for SMEs.
The Corporate Laws Amendment Act says that the Financial Reporting Standards Council will create a reporting framework for limited interest companies. Last year the Accounting Practices Board (APB) insisted that IFRS for SMEs constituted just such a reporting framework.
By so doing, the APB is trying to create an easier reporting framework for some level of public interest companies and then creating a much simpler framework for all limited interest companies. The objective is to have a framework that can be used way down the line; one that is robust but simple. That's the balance that has to be created in order for it to be effective.
In short, IFRS should only be applicable to truly public interest companies – essentially listed companies. Others can always adopt IFRS; there is nothing to stop them from adopting a higher framework but they can't move down.
Micro-GAAP has to cover everything that IFRS covers but needs to be a lot simpler. We are looking at something like 150 pages versus IFRS's 2 500 and IFRS for SMEs' couple of hundred.
The desperate need for micro-GAAP is highlighted by the fact that we have more than a million close corporations in South Africa, many of which are reporting on the equivalent of IFRS of 15 to 20 years ago.
This is why SAICA is in the process of putting together a micro-GAAP framework, much of which is being drawn from local research and from countries that are currently applying a version of micro-GAAP.
Ultimately, there should be a result whereby:
- There's IFRS for public interest companies with international capital market implications;
- IFRS for SMEs, bearing in mind that the principles of IFRS should be applicable to all public interest companies;
- Micro-GAAP, which will customise the existing framework, based on research, for our market.
A big advantage is that it will solve a fair amount of queries that we field on a daily basis; for example, how to report as an NGO or how SMEs should have their accounts audited. In the long term it is going to solve a lot of problems – quickly.