In their prime, but do some accounting standards face the chop?

ACCOUNTING STANDARDS for SMEs are currently undergoing a lengthy consultation but some have argued that standards for smaller enterprises are more worthy of review.

Financial Reporting Standards for Small Entities (FRSSE) apply to businesses that meet at least two of three criteria: Turnover of less than £6.5m net; a balance sheet total under £3.26m; and 50 employees or fewer.

Currently, these businesses are happily following a standard based on the old UK GAAP but this could be about to change. With their larger cousins potentially shifting to International Financial Reporting Standards for SMEs (FRSME), these micro-entities will be the only dinosaurs sticking to a resolutely British way of keeping the books.

The Accounting Standards Board’s FRSME consultation has been occupying the spotlight in recent months but, with the deadline for responses now passed, stakeholders have already turned their attentions to those accounting standards yet to undergo the IFRS treatment.

For the masses

FRSSE has always been hugely popular with users, offering a short-and-sweet 500 sides on book-keeping for small businesses while avoiding the complicated tome of UK GAAP that runs to thousands of pages. The standard is widely used, with more than one million companies following its lore.

These companies are often tiny, UK-focused and unlikely to dip a toe into international waters. For this reason, giving their accounting standards a global spin has long been regarded as an unnecessary exercise that runs up significant costs and few benefits.

However, experts are starting to make anti-FRSSE noises; their main gripe concerns the complexity of having two accounting systems running side by side.

FRSSE, though popular, is rooted in UK GAAP, while IFRS and FRSME grew from the same internationally focused tree. Stakeholders are beginning to count the cost of maintaining these two systems in parallel, with training, textbooks and IT requirements making them see double.

Baker Tilly partner Danielle Stewart said that FRSSE was popular in days gone by, before the existence of the IFRS-lite option now being proposed for SMEs. She said: “When full IFRS was the only alternative, of course small companies wanted to keep FRSSE; now there’s a much simpler version that’s easier to use yet based on the same framework.”

Stewart welcomed the work already undertaken on creating a simplified standard for SMEs, saying that little more would be needed to create a third, ultra-simple standard along the same lines. In her view, just a few hours’ concerted effort could turn the proposed FRSME into a rulebook suitable for even the smallest businesses.

Other experts would be willing to sign the death warrant for FRSSE, though do not agree that a basic version of FRSME is required. One said that the SME standard is simple enough already and a few well-placed disclosure exemptions – such as cash flow statements – could render it serviceable for micro-entities.

Sell-by date

The expert went further, saying that FRSSE has a limited shelf life and will require revision eventually. What, he questioned, is the point of updating an old standard when FRSME is close to being rolled out and could stand in its stead?

Having all company accounts based on the same standard holds obvious attractions for accountants: faster training, less confusion and thinner reference books among them. While some smaller firms might consider an IFRS-based standard unnecessarily complex for modest businesses, they will probably see the sense of preparing all clients’ books according to the same basic set of standards.

Others suggested that, while delaying the switch would defer the financial and administrative costs, firms could find it less expensive in the long run to take the plunge at an early stage.

Aside from accountants, small businesses are the main parties that will be affected by such a switch. If standard setters manage to develop an IFRS-based rulebook for non-listed companies that is simple enough for the smallest entities, the switch from FRSSE should not spark too much outrage.

Small business owners might still question the wisdom of switching to international accounting but, in the long run, it may not be their choice. Stewart said that firms eager to cut costs will charge more for books prepared under the old system, making IFRS-lite cost-effective even for businesses that will never extend their reach past Dover.

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Fiona Westwood of Smith and Williamson.