Financial Assets and Investing
52
EXPERTS´ OPINIONS ON THE USE OF
INTERNATIONAL FINANCIAL REPORTING
STANDARD FOR SMALLAND MEDIUM SIZED
ENTITIES
Eva Hýblová
Masaryk University, Faculty of Economics and Administration
Lipová 41a, 60200 Brno, Czech Republic, e-mail: hyblova@econ.muni.cz
Introduction
Small and medium-sized enterprises represent a significant sector of market economy; in
the European Union, there are about 23 million small and medium-sized enterprises,
employing 75 million people, and representing 99 % of all enterprises. (Information SME,
2008)
These types of enterprises usually do their accounting and create financial statements
in compliance with particular national GAAP, which are based on different historical,
legal and social foundations. The outcome is a differing information relevance of the data
presented in the statements.
The differences in the information relevance of statements are becoming a serious
drawback to international comparison of individual companies, which can prevent them
from obtaining financial means or can present a problem in their communication with
banks, shareholders, development institutions, contractors, rating agencies, etc.
In previous years the harmonization of accounting predominantly focused on large
companies, registered at world stock exchanges14
. Due to the growing significance of
SMEs, the harmonization processes have also encompassed these entities for which the
International Accounting Standards Board (hereinafter IASB) produced and published the
International Financial Reporting Standard for Small and Medium-sized Entities. The
acceptance of the project is supposed to be voluntary; however, IASB expects that the
standard will gradually become world-wide accepted.
From the point of view of statement users, the implementation of the standard in the
international context seems to be highly significant. From the point of view of statement
producers, which means small and medium-sized enterprises, the process of implementing
the standard can present a number of various problems.
An enterprise is considered to be small or medium-sized if it meets the criteria set in the
Commission Recommendation (EC/280/96), as amended 1/1/200515
:
14
Since 2005, all businesses issuing securities at registered markets in EU member states have to use the
International Financial Reporting Standards to produce both consolidated and non-consolidated financial
statements.
15
EC Commission. Communication from the Commission on a simplified business environment for
companies in the areas of company law, accounting and auditing [online]. [cit. 2009-08-05]. Brussels: 2007.
Available at:
No. 1/2011
53
• staff headcount,
• turnover,
• balance sheet total,
• autonomy.
The standard is supposed to harmonize small and medium-sized enterprises, which are in
contrast to the European Commission Recommendation defined qualitatively16
:
SMEs are entities that:
• do not have public accountability; and
• publish general purpose financial statements for external users.
Examples of external users include owners who are not involved in managing the
business, existing and potential creditors, and credit rating agencies.
An entity has public accountability if:
• it files, or it is in the process of filing, its financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class
of instruments in a public market; or
• it holds assets in a fiduciary capacity for a broad group of outsiders, such as a
bank, insurance entity, securities broker/dealer, pension fund, mutual fund or
investment banking entity.
The contents of the standard are as follows:
Preface 20 Provisions and Contingencies
1 Scope 21 Equity
2 Concepts and Pervasive Principles 22 Revenue
3 Financial Statement Presentation 23 Government Grants
4 Balance Sheet 24 Borrowing Costs
5 Income Statement 25 Share-based Payment
6 Statement of Changes in Equity and Statement
of Income and Retained Earnings
26 Impairment of Non-financial Assets
7 Cash Flow Statement 27 Employee Benefits
8 Notes to the Financial Statements 28 Income Taxes
9 Consolidated and Separate Financial
Statements
29 Financial Reporting in
Hyperinflationary Economies
10 Accounting Policies, Estimates and Errors 30 Foreign Currency Translation
11 Financial Assets and Financial Liabilities 31 Segment Reporting
12 Inventories 32 Events after the End of the
Reporting Period
13 Investments in Associates 33 Related Party Disclosures
14 Investments in Joint Ventures 34 Earnings per Share
http://www.europarl.europa.eu/meetdocs/2004_2009/documents/com/com_com(2007)0394_/com_com(2007)
0394_en.pdf
16
International Accounting Standards Board. International Financial Reporting Standard, IFRS for Small and
Medium –sized Entities. London : 2009. ISBN 978-1-907026-16-4.
Financial Assets and Investing
54
15 Investment Property 35 Specialised Industries
16 Property, Plant and Equipment 36 Discontinued Operations and
Assets Held for Sale
17 Intangible Assets other than Goodwill 37 Interim Financial Reporting
18 Business Combinations and Goodwill 38 Transition to the IFRS for SMEs
19 Leases
Expert opinions
Within the research, also experts in the practice are consulted on particular issues,
although currently, they are addressed only randomly because this is only an auxiliary
criterion as also the number of respondents shows. All respondents have experience with
the implementation of the full IFRS; they were asked several months before the standard
for SMEs was published:
The question:
“What is your opinion on using the International Financial Reporting Standard for SMEs
in practice?”
Reply 1: Finance Manager of a medium-sized enterprise
I have experience with using the IFRS in practice; mainly the transition from the national
GAAP to the IFRS was demanding as it requires knowledgeable economic staff,
modifications of software, etc. The question is what the international standard for SMEs
will bring to specific businesses, what the differences in contrast to full IFRS will be. As it
is a standard for small and medium-sized enterprises, it should be comprehensible; I
expect it should be of smaller content than full IFRS and individual areas should be
clearly defined. However, if the differences in contrast to full IFRS will be minimal, I
cannot see any great benefit. Because some areas are reported on differently in compliance
with international standards, it can have a great impact on the profit and loss of a trading
company, the equity capital, division of profit, dividends. These facts have to be
communicated to the owners and shareholders in advance. Further, there is the question of
the corporate income tax. If the tax return remains to be based on the profit and loss as
reported in compliance with Czech regulations, businesses will have to keep other
accounts for the taxing purposes. This should be clarified and unified. All in all, I have to
say that my experience with using the IFRS tells me that some areas are reported more
precisely and truly than they were in compliance with the national GAAP.
Reply 2: Auditor
I perceive using the international financial reporting standard for small and medium-sized
entities in the practice of the Czech Republic at the time being and near future as rather
troublesome. For these companies, especially companies with one or several owners,
accounting serves as a way to establish the optimum tax base to calculate the corporate
income tax. This group of enterprises often uses accounting depreciations at the tax level,
a depreciation plan in relation to the planned period of using long-lived assets and its
updating is quite rare. Similarly, it is difficult to enforce rectifying items the creation of
which is not a tax deductible expense on securing, maintaining and achieving profits. This
shows that small and medium-sized enterprises do not even commonly use the basic
No. 1/2011
55
principles stipulated in the Act on accounting. Therefore, the implementation of the
international financial reporting standard in the accounting procedures of these enterprises
will demand enlightenment not only of accountants but also owners or managers of these
companies.
Reply 3: Assistant auditor
The standard could mainly help global corporations which are consolidating. Currently,
individual financial statements are created in compliance with the local accounting
standards and then reported in the required standards of the parent company, which is
highly laborious from a client’s perspective and for an auditor’s inspection. Further, it
leads to higher risk of potential errors. If there was the IFRS for Private Entities and its
principles were used in the GAAP of individual states, these processes would be
significantly simplified.
Another considerable advantage of its implementation and application would be better
comparison of incomes and other indicators of financial analysis of small and mediumsized
enterprises of individual countries.
What to remark in conclusion? As it is clear from the experts´ opinions, the introduction
of IFRS is a process that has to include not only accountants, but also managers, owners
and the other employees of a company.
What problems are to be expected in relation to the implementation?
• The standard is extensive, it can be complicated and incomprehensible for many
accountants, the process will be demanding as far as obtaining new information is
concerned.
• SMEs have limited capacities for accounting, in the time of the transition the
accountants will be overloaded with the current way of accounting and at the
same time preparations for the transition.
• They will have to drop the current procedures based on the national GAAP, and
start using a new way of thinking.
• It is not usual in smaller companies that the management and other employees get
involved in accounting – it will be necessary to break the barriers in the
understanding of the function of accounting.
• The entire process will be financially demanding; the financial burden can be
excessive for small businesses.
This paper is one of the outputs of Grant Agency of the Czech Republic (GA CR) project
no. 402/09/0225 “IAS/IFRS Usage in Small and Medium-sized Enterprises and its
Influence on Performance Measurement”.