IFRS update summer 2006 – feel the squeeze

ifrs special

In association with PwC

So far, all the commotion regarding the introduction of international
financial reporting standards has been little more than a passing curiosity to
those that run and manage the finances of smaller companies. After all,
most SMEs have been perfectly
happy motoring along with the UK’s FRSSE, or financial reporting standard for
smaller entities.

Link: Access IFRS –
PwC’s IFRS resource centre

That’s not to say there haven’t been some changes along the way that may have
their roots in the push for global accounting convergence, but the actual impact
on SMEs by the work of the International Accounting Standards Board has been
small, up to this point.

All that is about to change. Currently, the IASB is in the midst of
developing a standard for small and medium-sized companies. And if the proposals
get unfavourable opinion at the UK Accounting Standards Board, we could see the
SME standard find its way to these shores, once it is finalised.

There has already been much questioning over whether a body that was set up
to create standards for large companies on an international scale is the right
place to discuss doing the same for small ones. The make-up of the board is also
a cause for further concern, with few having experience of anything but large,
listed companies.
Nevertheless, the project continues apace. The SME standards will be based on
the principles underpinning full IFRS. A decision that has caused many to get
hot under the collar.

‘The IASB seems to have taken a top-down approach, which is likely to result
in it adopting many of the same standards used by listed entities,’ says Richard
Martin, head of financial reporting at ACCA.

‘Failure to adopt more suitable standards for SMEs may present accountants,
auditors, users of financial reports and, most importantly, the SME itself, with
significant financial and operational difficulties.’

Martin adds that standards developed from the proposals had the potential to
run into hundreds of pages and delay some countries from participating fully in
the convergence of international financial reporting standards.

Even those that support the view that an SME standard should be based on full
IFRS see trouble ahead.

Ian Dilks, IFRS conversion leader at PricewaterhouseCoopers, believes this is
the right way forward ‘so as to align as closely as possible the comparability
of reporting between listed and unlisted entities’. But this should be done in a
way that substantially reduces the disclosure burden for SMEs, he argues.

Dilks warns: ‘There are however practical problems to address and whether
this is the best approach may depend on how IFRS principles develop.’

It seems that in the desire to get the US on board the convergence train,
with its apparent need for rules and reams of paperwork, the IASB could risk
alienating a sector almost as important. Emerging economies like India and China
are going to play a far more influential role in the future, but the burdens
placed on their fast-growing companies by such apparently regimented standards
could force them down another path.

The IASB seems absolutely unmoved in its belief that SMEs standards should
not start from a different theoretical base to its full ones. And with the ASB’s
close ties to its international counterpart, UK companies could well be forced
down this road, no matter how unwillingly.

But it is not only the smallest of UK companies that will be affected by the
actions of the IASB. Decisions are being taken at Aldwych House that will mean
changes to the way every entity under the ASB’s remit treats their accounts.

It has long been the aim of the ASB to eradicate the differences between IFRS
and its own standards. To what exact degree this should take place, and how it
goes beyond it have proved very tough points to clarify.

A public meeting in January was convened to try and resolve the issue and
gather some feeling of consensus on key issues. This included whether there
should be a ‘big bang’ introduction of all the new standards in a few year’s
time, or a phased implementation process. It also discussed what standards
companies that are currently too large to use the FRSSE should be required to

Unfortunately, no consensus emerged and ASB chairman Ian Mackintosh was under
no illusion that the final call was going to be a tough one.

Indeed it has proved so tough that, the board has had to put out another
document outlining its current thinking on the matter and asking for more views.
But even these proposals, which could see an additional 1500 companies using
IFRS and an extra 30,000 companies able to adopt the FRSEE, have holes in them.

The final decision on whether the FRSEE will be replaced has been put off
until the project develops further, but whatever decision is finally reached, it
is bound to upset a good number of people.

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Fiona Westwood of Smith and Williamson.