Choppy accounting waters ahead for SMEs

By: Graham Gardiner

The implementation of a new international accounting standard for small and medium-sized entities is likely to increase financial reporting obligations

The implementation of a new international accounting standard for small and medium-sized entities is likely to increase financial reporting obligations and costs, according to a leading accountant.

Rob Mackay, Moore Stephens’ Head of Technical Accounting Services, says the International Financial Reporting Standard (IFRS) for SMEs will provide a more robust framework for the financial reporting of smaller entities that previously did not prepare their financial statements in accordance with the measurement and recognition criteria of AASB accounting standards.

However, he contends it is debateable as to whether this cost can really be justified, particularly for the small end of town.

Mackay predicts that if, and when, implemented by the Australian Accounting Standards Board (AASB), there will be aspects of the standard that are going to be unpopular for certain entities.

Examples include: assets classified as property, plant and equipment are prohibited from being revalued; jointly controlled entities cannot be proportionately consolidated; goodwill and other intangibles must be amortised; and all research and development expenditure and borrowing costs incurred cannot be capitalised but must be expensed to the bottom line.

"While the IFRS for SMEs is deemed to constitute a separate accounting framework, I think that for complex transactions, accountants will be inclined to push back to the full IFRS book for guidance on how to account for them as opposed to attempting to achieve an SME framework resolution which could be seen as considerably more judgemental," he says.

"This is not such a bad thing for reporting purposes, but does highlight the fact that entities will not be able to ignore the main IFRS standards completely and will probably continue to need to consult with their external accountants and auditors for assistance.

"Now that we have the final standard, I would agree with the comments from the Financial Reporting Council that further public consultation is needed.

"Having regard to the potential implementation costs to entities, the current economic climate, and the accounting restrictions that certain entities will encounter on adoption, I am not yet convinced that this standard represents an improvement on the current differential reporting model in Australia to an extent that warrants its immediate support."

Moore Stephens has participated in the development process of the standard, having earlier been commissioned jointly by the ICAA, CPA Australia and the NIA to undertake field testing on Australian entities when the IASB released its exposure draft relating to the standard.
Mackay says the IFRS for SMEs represents a significant improvement from the exposure draft issued in 2007.

"It is pleasing to see that the IASB has implemented many of the suggestions provided to it through its process of capturing global feedback during the development process," he says.

"For example, it was apparent that the standard setter may have under-estimated the degree to which SMEs utilise complex financial instruments in their operations and this is a section of the standard has now been revised and clarified."

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