SME standard is a giant step

The IASB’s international financial reporting standard for small and
medium-sized businesses should be embraced by small companies, their auditors,
and accounting regulators and standard-setters globally. Why? Access to capital.

Small companies often run into problems not because of the quality of their
products or services but because they cannot get the funding they need to
support their operations and grow. Lenders, vendors, and other capital providers
and rating agencies, in turn, say show us financial reports we understand, that
are complete and factual even if not everything in them is rosy.

In most countries, laws and regulations require all or many SMEs to prepare
GAAP financial statements and, often, have them audited. In the European Union
alone over 5,000,000 of the 21,000,000 business entities have a statutory
reporting obligation. The story is similar throughout the world. It’s not
accountants who imposed those obligations ­ it is parliaments and regulators.
Their goal is to protect the public interest by having good information
available to capital providers and others.

For listed companies, over 100 countries have recognised the importance of
high quality financial reporting and intercompany comparability by requiring or
permitting the use of IFRS.

IFRS is designed to meet the needs of public capital markets and consequently
address complex transactions, provide detailed guidance, include a range fair
value and present value measurements, require literally thousands of
disclosures, many intended to meet the needs of long-term equity investors.

But for smaller, unlisted companies frequently full IFRS is burdensome, and
the resulting financial statements are off-target in terms of the users of SME
financial statements, who are more interested in information about short-term
cash flows, liquidity, and solvency.

The IFRS for SMEs is standalone product. The IFRS for SMEs simplifies and
reflects the needs of users of SMEs’ financial statements and cost-benefit
considerations. The IASB undertook the project in response to requests from both
developed and emerging economies.

Compared with full IFRSs (and many national GAAPs), it is less complex in a
number of ways. The result is a set of standards that is around 230 pages long
(roughly 10% of full IFRS). Jurisdictions around the world are now in the
process of considering its use for those SMEs on which they impose a statutory
reporting obligation. It is win-win for both the preparers and users.

Paul Pacter is director of standards for SMEs at the IASB

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