The 9th July 2009 will stand out as a key date in the history of financial reporting. It was the day that an IFRS for Small and Medium Sized Enterprises was published which revolutionises financial reporting in these islands. It is just over 200 pages in length and in less than three years time it will totally replace local financial reporting standards.
In the medium to longer term this will be of tremendous benefit to private companies as instead of reading 2,500 pages they will prepare their financial statements using a much shorter standard. There will, however, be considerable work for accountants in the year of transition.
The IASB have endeavoured to make a number of key simplifications from full IFRS whilst largely retaining the same recognition and measurement criteria. These include:
- The removal of nearly 90% of the disclosure requirements in full IFRS which should considerably reduce the volume of information to be reported in the Annual Report.
- Some simplification in the measurement and recognition rules e.g. borrowing costs and development costs must be expensed rather than capitalised (as in IAS 23 and IAS 38), and goodwill must be amortised rather than being retained as a permanent asset in the Statement of Financial Position (as in IFRS 3).
- The removal of certain options e.g. no revaluation will be permitted for property, plant and equipment.
- Some topics have been omitted on the grounds that they are irrelevant for private entities e.g. earnings per share (IAS 33), segment reporting (IFRS 8) and interim reporting (IAS 34).
There are a number of interesting new titles to the primary statements which chartered accountants will have to get used to. The balance sheet becomes the statement of financial position, the profit and loss becomes a statement of income and retained earnings (provided there are no unrealised gains and losses) and a new statement of changes in equity will be required.
The IFRS for SMEs will be a standalone standard. Preparers and users will not refer to the full IFRSs at all nor the Framework for the Preparation and Presentation of Financial Statements nor to other pronouncements of other standard setting bodies. Instead, if a transaction emerges which appears not be to covered by the standard preparers will refer to Section 2 of the document which sets out the basic concepts and pervasive principles that must be followed in deciding whether or not it should be recorded as an asset, liability, income or expense. That should provide more credence to the document.
Although the standard is published it is up to individual jurisdictions to decide to whom it is should be applied and when. There are considerable pressures in the United Kingdom to implement the standard early as the public sector has already started to implement full IFRS this year. All government departments had to publish their last set of UK financial statements in May/June 2009 and had to prepare those same accounts under IFRS by the 10th September 2009. That in effect means that the UK Treasury is leading the way into IFRS and taking the initiative away from the Accounting Standards Board (ASB). The ASB therefore decided to publish a consultation paper in August 2009 outlining their ideas on how and when the IFRS will be implemented in the near future.
The Consultative Paper recommends the introduction of a three tier reporting system for the UK and undoubtedly a similar system will be set up in Ireland. The IFRS for SMEs will constitute the middle tier and will apply to 80% of all Irish reporting entities. However, there is a lot more detail required in the IFRS than currently required by the Financial Reporting Standard for Smaller Entities (FRSSE) which has proved very popular in Great Britain. As a result pressure has emerged from practitioners to permit small entities to retain that standard. Some of the differences include the need to publish a cash flow statement in the IFRS as well as having to publish consolidated financial statements.
There are still a number of issues that have to be finalised. This includes a decision as to whether or not to introduce a size test to force very large private companies to use full IFRS. Another issue is whether or not subsidiaries of listed companies should prepare their accounts under full IFRS or would be permitted to use the standard. At the moment it would appear that only subsidiaries that are publicly accountable will have to use full IFRS. All other subsidiaries will be able to adopt the new standard.
One of the problems that Irish practitioners have to face is whether or not to use the IFRS for SMEs for all their smaller clients including those under the FRSSE threshold. At the moment very few practitioners in Ireland adopt the FRSSE but will clients be prepared to pay for the extra workload imposed by the IFRS for SMEs? A similar problem is whether or not the software providers will be ready for the switchover in time as this will be a crucial aspect of its development and success.
For chartered accountants brought up in the world of local UK/Irish Gaap this would appear to be a frightening prospect - a complete revolution. However, most of the standards to date are similar to UK reporting and there should only be problems in 5 or 6 of the standards. Help is on its way with the publication by the IASB of a training manual due to be published in December. This is likely to be free of charge on the IASB's website (see www.iasb.org.uk). Currently the IFRS is already available for download free of charge as well as an illustrative set of financial statements. The proposed starting date is for all financial statements commencing on the 1st January 2012 thereafter. Comments are due to be sent on the consultation paper by February 2010 so we should know the final position by early next Summer.
Robert J Kirk
Professor of Financial Reporting
University of Ulster
Robert regularly presents CPD courses for Chartered Accountants Ireland, including 'IFRS for Private Entities' and the 'FRS & IFRS Review' taking place in October and November 2009. For more information please visit www.charteredaccountants.ie/cpd