Development of IFRS for SMEs

The proposal regarding the crucial need for different financial reporting for SMEs was announced by Jordanian delegation members to the IASC during the time of the last century, which indicated that the standards issued by IASC were extremely complicated for SMEs to follow (Rundfelt, 2007). Later, IASC was replaced by IASB and admittedly, in spite of the previous proposal rejection as IASB believed that all firms must adhere to the same set of standards regardless of their size or whether they are public companies or not, IASB asserted that users of SMEs financial information demands are substantially different to those of public companies (Rundfelt, 2007). In addition, the need for a simpler set of standards for SMEs has been raised, because of the complexity of full IFRS and the rules in many jurisdictions to prepare financial reports in compliance with full IFRS (Devi, 2003, Epstein and Jermakowicz, 2007).

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In 2001, IASB commence took an actions towards constituting and developing international accounting standards that are more applicable and suitable for SMEs while paying considerable attention and focus to emerging economies (Aamir and Farooq, 2010).

Consequently, discussion paper was formed by IASB in 2004 that is named: “Preliminary Views on Accounting Standards for Small and Medium-sized Entities”. The paper published to receive comments from all over the world. IASB gave only 90 days in order to receive comments for SME’s discussion paper (IASB, 2009e). The emphasis and focus were attributed directly with nine issues, which have been formulated into main nine questions that divided into three to five sub-questions (IASB, 2004a). The core nine questions are illustrated in Table 2.3.

Table 2.3: issues in Preliminary Views on Accounting Standards for Small and Medium-sized Entities.

“issues in discussion paper

1- Should the IASB develop special financial reporting standards for SMEs? 2- What should be the objectives of a set of financial reporting standards for

SMEs?

3- For which entities would IASB standards for SMEs be intended?

4- If IASB standards do not address a particular accounting recognitions or measurements issue confronting an entity, how should that entity resolve the issue?

5- May an entity use IASB standards for SMEs elect to follow the treatment permitted in an IFRS that differ from the treatment in the related IASB standard for SMEs?

6- How should the board approach the development of IASB standards for SMEs? To what extent should the foundation of SME standards be the concepts and principles and related mandatory guidance in IFRSs? 7- If IASB standards for SMEs are built on the concepts and principles and

related mandatory guidance in full IFRS, what should be the basis for modifying those concepts and principles for SMEs?

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9- Are there any matter related to how the board should approach its project to develop standards for SMEs that you would like to bring to the board attention?”

Source: adopted from (IASB, 2004a, Ram, 2012).

Subsequently, IASB issued “the staff questionnaire on recognition and measurement simplification” in 2005, which encompasses two key areas that are related to (IASB, 2005b):

1. Specifying the area within IFRS for which simplification in recognition and measurement is needed to be applicable to SMEs, and also the problems that could appear from the complexity of those measurements and recognition must be determined in addition to the possible solution.

2. Determining the topics within IFRSs that are irrelevant to SMEs, which might be omitted from SMEs standards.

The number of distributed questionnaires was 120 that were sent to 40 countries. IASB received 101 questionnaires (IASB, 2005b, Ram, 2012).

In February 2007 IASB has passed the exposure draft of IFRS for SMEs accompanied with basic for conclusion document after principally taking all comments and responses in discussion paper as well as staff questionnaire into consideration (Ram, 2012). The goal of this proposal is to produce simpler and a self-explanatory set of accounting standards for smaller and unlisted companies based on full IFRS that enhances the comparability and mitigates the burden of preparing financial statements in both developed and emerging markets (IASB, 2007). The content has been derived from full IFRS by utilising the top-down approach (Pacter, 2009). All modification of content and differences of concepts between this proposal and full IFRS were justified according to cost and benefit consideration, accounting expertise of SMEs, and users’ needs (Pacter, 2009). A field test was undertaken in various countries in order to highlight the problems that may impede the application of IFRS for SMEs (IASB, 2009e). The responses to the field study which included a sample of 116 small entities from 20 diverse jurisdictions as well as some literature on ED of IFRS for SMEs identified some concerns regarding the following issues:

Firstly, IASB uses the conceptual framework of IASB from 1989, even though the response to the discussion paper support the motion of relying on full IFRS to

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develop standards for SMEs, Evans et al. (2005) criticise using IASB conceptual framework in 1989 as it is subjective toward listed firms as it was established for larger firms.

Secondly, according to analysis of the responses of the discussion paper, Baskerville and Cordery (2006) report that a high portion of stakeholders stress on the stewardship objective of SMEs’ financial statements while Botosan et al. (2006) comment that the stewardship objective is essential for all companies regardless of their size, which does not lead to a distinct need for users of private entities financial statements.

Thirdly, the difficulty in specifying what kind of entities are qualified to use IFRS for SMEs, is caused by discarding the definition of SMEs according to size that was replaced by utilising the terms of public accountability which was an imprecise definition as the definition encompasses a wide range of companies (Ploybut, 2012, Evans et al., 2005). Companies under SMEs words include small and large non- public accountability entities (Pacter, 2008).

Fourthly, Shearer (2007) insists that these standards are only suitable for medium and large companies with around 50 employees and more whilst are very burdensome for micro or small entities. This may be traced back to the use of the number 50 for employees as an indicator for SMEs. That is utilised by IASB when developing and determining the content of ED of IFRS for SMEs (IASB, 2007). Finally, the ED identifies a wide range of stakeholders who need general purpose financial statements (IASB, 2007). They are very limited and in most circumstances refer only to banks, tax authorities, and owners (Haller and Eierle, 2007, Lungu et al., 2007).

Alongside these concerns, the process of developing IFRS for SMEs has been criticised in many aspects such as, lack of studies on SMEs users’ needs, failing to explain the fundamentals over utilising or omitting topics from full IFRS, and the low portion of users participating in this process (Evans, 2010). Equally important, Di Pietra et al. (2008) questions whether the needs and circumstances of developing countries have been considered as IASB declared that ED of IFRS for SMEs is of great relevance to these emerging economies.

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Although the standards has been renamed as IFRS for Private Entities, which has been adjusted afterward to become IFRS for Non-Public Accountable Entities, it has been issued by IASB as IFRS for SMEs in 2009 after taking the response to ED into consideration (IASB, 2009e).