Definition: What is an SME?
Small and medium-sized (SMEs) entities are entities that do not have public accountability and publish general purpose financial statements for external users (owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies). Entities with public accountability are those whose debt or equity instruments are traded in a public market, or are in the process of issuing such instruments for trading in a public market. A second group of companies which would fall outside the ambit of small and medium-side entities would include most banks, credit unions, insurance companies, securities brokers/dealers, mutual funds, and investment banks.
The Objective: Why the IFRS for SMEs Exists.
The International Financial Reporting Standard for Small and Medium-sized Entities’ (IFRS for SMEs) was developed by the International Accounting Standard Board (IASB) with the aim to provide a framework that generates relevant, reliable, and useful information which should provide a high quality and understandable set of accounting standards suitable for small and medium-sized businesses around the globe. This objective will thus enable compilers of financial statements to meet the users’ need while balancing the costs and benefits associated with their preparation.
A Brief History of the IFRS for SMEs.
The current set of standards under the IFRS for SMEs is the result of a lengthy process that started as far back as 2004, and it included the following stages:
- 2004 – Discussion paper and preliminary views on Accounting Standards for Small and Medium-sized Entities published
- 2007 – Exposure draft proposed IFRS for Small and Medium-sized Entities published (various translations were also subsequently published)
- 2009 – IFRS for Small and Medium-sized Entities issued
- 2012 Request for information Comprehensive Review of the IFRS for SMEs published
- 2013 – ED/2013/9 Proposed amendments to the International Financial Reporting Standard for Small and medium-sized Entities published
- 2015 – Amendments to the IFRS for SMEs issued
The IFRS for SMEs consists of 35 sections and it is less than 250 pages in length. In the IFRS for SMEs, Section 1 explains what a SME is and Section 2 is the conceptual framework for SMEs. The other sections deal with the recognition and measurement of accounting transactions and the presentation and disclosure of financial statements. The standard provides an alternative framework that can be applied by eligible entities, however there are several accounting standards and disclosures that may not be relevant for the users of SME financial statements. As a result, the standard does not address or include certain topics such as earning per share, interim financial reporting, segment reporting, insurance and assets held for sale.
Key differences between the full IFRS and IFRS for SMEs.
Whilst the conceptual framework for SMEs does not differ vastly from the full IFRS conceptual framework, the disclosure requirements for SMEs are generally simplified and less onerous. A few examples of these simplifications include the following:
- In terms of IAS 24- Related Party Disclosures under full IFRS, an entity must disclose key management personnel compensation in total and for short-term employee benefits, post-employment benefits, termination benefits, other long-term benefits, and share-based payment…. Under IFRS for SMEs under section 33 on Related Party Disclosures, an entity must disclose key management personnel compensation in total.
- Goodwill and other indefinite-life intangibles are amortised over their useful lives but if useful life cannot be reliably estimated, then 10 years.
- A simplified calculation is allowed if measurement of defined benefit pension plan obligations (under the projected unit credit method) involves undue cost or effort.
- The cost model is permitted for investments in associates and joint ventures.
It would be worthwhile to mention that the SMEs Standard and full IFRS Standards are separate and distinct frameworks. Entities that are eligible to apply the SMEs Standard, and that choose to do so, must apply that standard in full and cannot choose the most suitable accounting policy from Full IFRS or the SMEs Standard at the same time.
The Future: What’s in store for IFRS for SMEs?
There is no universally agreed upon definition of an SME. Definitions can differ between firms, sectors, or countries at different levels of development. Additionally, it appears most definitions are based on size use measures such as number of employees, annual turnover etc. However, the SME Standard clearly excludes entities with public accountability. Prime users of full IFRS are capital markets and quoted companies. On the other hand, most of the world’s companies are small and privately owned, and it could be argued that full IFRS are not relevant to the needs of their users. Furthermore, IFRS for SMEs will allow easier transition to full IFRS if the SME decides at a later stage to become a public or listed company. This also serves as a response to the international demand from developed and emerging economies for a rigorous and common set of accounting standards for smaller and medium-sized businesses that is much simpler than full IFRS. It is therefore the reason why SMEs Standard was welcomed globally by business owners and accounting professionals and will continue to be used as their preferred accounting framework.