Confusion over SME size could complicate international rules

With an annual GDP of $26.5bn (£16.2bn), the small nation of Botswana can’t exactly boast of having a vast number of large businesses.

So, when the International Accounting Standards Board released its long-awaited book of accounting rules for small and medium sized enterprises, businesses in Gaborone were confronted with a dilemma, what is a medium or small enterprise in a land where all businesses, by global standards, are small or medium sized.

ICAEW’s head of SME issues Clive Lewis stumbled across the curious accounting issue while in conversation with an African colleague at a function.

‘In a casual discussion we couldn’t find any company that wouldn’t fit the definition of SME in Botswana,’ he said.

The conversation exposed what may become an emerging concern as nations begin to take up global standards for SMEs – the question as to what exactly is an SME.

Lewis concedes that under the global definition SMEs can range from extremely large companies to very small companies, depending on each nation’s specific interpretation.

‘In the US, by some definition, an SME can have 1,500 employees, which, in the UK, can be a very large company,’ he said. James believes the problem could affect the compilation of international statistics or affect companies with subsidiaries in different jurisdictions.

‘If you have a small and expanding business which trades in countries outside the UK, if they have a legal entity in those countries, then they will have different levels at which they have to comply in their accounts,’ he said.

‘It’s mainly going to affect those companies that are rising to public listing or those which are trading internationally or want credit.’

Plug the word SME into online encyclopedia Wikipedia, and what pops up is a definition which seems to pose more questions than it answers.

‘Small and medium enterprises are companies whose headcount or turnover falls below certain limits,’ the website states.

But what limits? Read on and the picture seems to become more blurred.

‘The traditional definition in Germany had a limit of 250 employees, while, for example, in Belgium it could have been 100. By contrast, in the United States, when small business is defined by the number of employees, it often refers to those with fewer than 100 employees, while medium-sized business often refers to those with fewer than 500 employees,’ the website claims.

In an attempt to clear up the confusion, in 2003 the European Union set down some SME definitions which stipulated that medium sized businesses had to have less than 250 employees while small businesses had less than 50 employees.

But, in an effort to reducing the confusion, the EU added an extra category – micro-enterprises – which where defined as containing less than 10 employees.

On 9 July, the IASB released its long-awaited global accounting rule book for SMEs. But search the 230-page document and you won’t find an SME definition that includes head counts or turnover figures.

Instead, the document, which was six years in the making and was created with the help of hundreds of businesses from across the world, acknowledges that ‘many jurisdictions around the world have developed their own definitions of the term.’

The body defines SMEs as having two essential criteria. Firstly, they do not have public accountability and, secondly, they publish general purpose financial statements for external users.

Under this definition the small and medium sized enterprises could apply to businesses which are very large, but might not apply to businesses which are very small.