IFAC Public Discussion

IFAC's Small and Medium Practices (SMP) Committee has released a report on research into whether the proposed International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), developed by the International Accounting Standards Board (IASB), is suitable for micro-entity financial reporting. The paper, Micro-Entity Financial Reporting: Some Empirical Evidence on the Perspectives of Preparers and Users, presents the findings of focus group interviews of users and preparers of micro-entity financial reports in Italy, Kenya, Poland, Uruguay, and the United Kingdom. Focus group participants indicated that the proposed IFRS for SMEs appears to be too complex for micro-entities - defined as entities with fewer than 10 employees - and suggested that relatively minor changes to the current draft might not be sufficient to address this concern. Some participants supported the development of a separate set of accounting guidance for micro-entities.

The IFAC SMP Committee is seeking your views on the following:

1. Do you believe there is a case of a third tier of standards or guidance aimed at micro-entities, or do you believe that the IFRS for SMEs will suffice?
2. If a third tier of standards or guidance is required, should this be guidance?
3. Should the guidance have a financial reporting focus or should it span record keeping, accounting, and financial management/control?

Dear Mr Hall

MICRO-ENTITY FINANCIAL REPORTING: SOME EMPIRICAL EVIDENCE ON THE PERSPECTIVES OF PREPARERS AND USERS

The adoption by Kenya of the Full IFRS Standards for all sizes of entities is impressive in terms of the investment required in education and training that must have been required to implement such an undertaking.  The report mentions (para 3.17) that the transition from Kenyan Standards to IFRSs was not a particularly smooth transition for all users.

The full implementation of IFRSs places administrative requirements on all the entities that are required to comply.  For larger companies that benefit from ‘economies of scale' the administrative costs of implementing IFRS are relatively small.  Conversely, for smaller Kenyan companies the administrative costs will be disproportionately higher, and may be potentially burdensome.  It appears that the Kenyan participants have identified a need for a new standard for micro-entities given:

• the application of the full IFRSs for all entities and where there is local enforcement
• the absence of standards equivalent to the UK's FRSSE.

Similarly, there may be other countries that would benefit from an accounting standard for micro-entities.

The AAT supports the development of international accounting standards for micro-entities, even if those standards are not universally adopted, because it:

• would help countries adopting those standards by reducing the administrative burden on preparers and entities  
• may help improve the economy by reducing an administrative burden that may act as a disincentive to entrepreneurs.

As you are aware, the Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR), which was established by the United Nations Economic and Social Council, has developed the Accounting and Financial Reporting Guidelines for Small and Medium-sized Enterprises (SMEGA).  Pakistan has adopted the Full IFRSs for large entities and the SMEGA guidance for smaller entities, which seems to be a practical and sensible approach recognising that the needs of large entities are not necessarily the same as the needs of smaller entities or micro-entities.

Recognising that IFAC is aware of the UN's SMEGA guidelines, and assuming that IFAC does decide to develop international accounting standards for micro-entities, then we see that there may be some benefits in using the SMEGA guidelines as a starting point.

Yours sincerely

Aleem Islan

Technical Manager (Accounting)

Association of Accounting Technicians

140 Aldersgate Street, London, EC1A 4HY

t: +44(0)20 7397 3088

e: aleem.islan@aat.org.uk

w: aat.org.uk

Dear Aleem,

I am the Senior Technical Manager supporting the IFAC SMP Committee. I appreciate your views whichg are very timely. The SMP Committee discussed its next steps regarding micro-entity financial reporting at its last meeting here in New York just a few weeks ago.

At that meeting the committee resolved to keep a close watch on the evolution of the IFRS for Private Entities (the IASB has just relabelled it this from IFRS for SMEs). We understand from the IASB (see http://www.iasb.org/Current+Projects/IASB+Projects/Small+and+Medium-sized+Entities/Small+and+Medium-sized+Entities.htm) that the final standard will be simpler than the ED. We intend taking a look at the final standard and reconsider its suitability for those micro-entities that are required by local regulation to produce general purpose financial statements (GPFS). 

The committee also resolved to look into the case for encouraging micros that do not have to produce GPFS to consider producing financial statements using IFRS for PEs or some other guidance (such as UNCTAD/ISAR's SMEGA Level 3 - see http://www.unctad.org/Templates/Page.asp?intItemID=2918&lang=1). Such an entity may gain from voluntarily producing such information including: to assist with financial control; to reduce the risk of fraud; and to satisfy the information needs of (potential) stakeholders like banks.

Best wishes,

Paul Thompson