IFRS for SMEs: Views from IFAC
Sylvie Voghel, Chair, IFAC Small and Medium Practices Committee
CAPA Osaka Conference, October 5, 2007, Osaka, Japan
PART 2A
SLIDE 1 (TITLE SLIDE)
Thank-you Mr. Chairman. Good morning ladies and gentlemen.
Before I start I would just like to say what a privilege and a pleasure it is for me to be
able to participate on this panel. I wish to share with you today the significant points that
IFAC is likely to make in the comment letter to the IASB. I will also outline some of the
key findings from a micro-entity financial reporting research project. And finally I will
spend a few minutes on assurance services for SMEs.
SLIDE 2
Let me frame my comments with some observations. In the recent past, issues
impacting small- and medium-sized entities (SMEs) and small-and medium-sized
practices (SMPs) have rose to the top of the agenda - of the regulators, professional
accountancy bodies, standard setters, and IFAC. The IASB’s project to develop an SME
accounting standard is testimony to this. It seems the main spur for this emphasis on
SME/SMP is concern over regulatory overload, overload that is stifling the ability of
small business to innovate, grow and compete. This regulation, including standards of
accounting, auditing, and ethics, was often tailored to suit large business. It’s no
surprise it is ill fitting for small business. The standards sometimes lack relevance to
1
SME/SMP. And SME/SMP often lack the capacity to efficiently implement and comply
with them.
IFAC has been alert to these concerns for some time. Indeed, it established the SMP
Committee some 3 years ago with the primary aim of helping to ensure international
standard-setting bodies - such as the International Auditing and Assurance Standards
Board (IAASB), the International Ethics Standards Board for Accountants (IAESB), and
the IASB - consider issues relevant to SMEs and SMPs. It does this by helping to shape
the form and content of those standards, largely through direct input to the standardsetting processes of these bodies. The aim is simple in principle but difficult in practice –
to ensure these bodies develop succinct, relevant, and understandable guidance for
SMP/SME that yields a favorable cost-benefit outcome
SLIDE 3
Now let me turn to the IASB’s SME accounting project. IFAC, largely through its
SMP Committee, has been closely tracking this project ever since its inception in 2003.
We have input whenever there has been a request for public consultation. And we hope
the project will culminate in a globally applicable SME standard that is consistently
implemented. That standard must ease the compliance burden on SMEs and ensure
that the benefits from using SME financial reports exceed the costs of preparing,
disseminating and using them. Not surprisingly IFAC considers the release of the
proposed IFRS for SMEs a significant milestone for the global accountancy profession.
We wholeheartedly support this project and are firmly committed to assisting the IASB
secure an optimal outcome. Accordingly, IFAC, largely through its SMP Committee, has
taken various steps.
2
SLIDE 4
First, IFAC has vigorously encouraged its member bodies and regional accountancy
organizations to contribute to the debate for example, through:
 responding to the ED;
 participating in roundtables; and
 undertaking field tests.
We are pleased to note that our member bodies and regional accountancy
organizations have been playing their part. Today’s panel discussion is a good example.
Many such events like this have taken place. Paul Pacter, Director of SME Standards at
the IASB, has presented at many. I am sure his invaluable contribution will more than
offset his carbon emissions from touring the globe!
Thorough field testing of the ED on real-life SMEs is crucial. They will indicate whether it
eases the burden on the preparers and whether the resulting financial statements
provide the users with the information they need. We have promoted the use of the
IASB’s field tests to our members, regional accountancy organizations like CAPA, and
others. A number of member bodies are participating. But more are needed. We hope
member bodies represented here today will join if they have not already done. The IASB
recently deferred the deadline for comment letters until 30 November 2007 to allow
organizations participating in field tests to factor the results into their comment letters.
Second, IFAC, recognizing that users and preparers of SME financial statements often
do not get involved in the international standard-setting process, is actively encouraged
3
them to do so. SMEs and SMPs present today should seriously consider getting more
involved, however briefly.
Finally, IFAC itself will respond to the ED. This response will take a global public
interest perspective. The SMP Committee has taken the lead role in drafting. We have
consulted widely – most especially with other IFAC committees and boards that have a
strong interest in the topic.
We are being pragmatic. We are focused on the major things, those things that we feel
need to be addressed. This way we hope the ED can be quickly revised and issued as a
final standard. The letter will make a number of suggestions for improving both the
substance and structure of the ED. However, we consider the field tests to be the acid
test as to the suitability of the ED. To the extent the field test results contradict our
suggestions we are open to be persuaded.
PART 2B
SLIDE 5
Let me outline some of the key points we will be making.
First, enormous progress has been made on this project. We think the ED provides the
key elements of a workable SME accounting standard. However, we suspect it is better
suited to medium and larger unlisted entities and as such may prove too complex for
many smaller entities. For that reason we propose further recognition and measurement
simplifications, such as:

elimination of deferred tax – as well as presenting problems for preparers few
users seem to demand the information;
4

amortization of goodwill – this should reduce the incidence of impairment tests
which are especially burdensome for SMEs;

simplified impairment tests – where such tests are needed the process should be
made easier; and

some modifications to financial assets and liabilities.
SLIDE 6
Second, while the ED is largely stand-alone – elimination of the mandatory fallback
greatly helped – it is not completely so. There are numerous cross references to full
IFRS for options and topics not addressed. These need to be eliminated. This can be
done either by integrating summarized provisions in the IFRS for SMEs or eliminating
topics or options altogether. Topics we feel should be removed altogether include:

segment reporting;

earnings per share; and

interim financial reporting.
IFAC favors removing most options and specifying a single treatment. Options, many
the legacy of political compromise while drafting full IFRS, create complexity and impair
comparability. Hence, we support the cost model only, subject to impairment, for
property, plant and equipment, investment property, intangibles, and the consolidation
of associates and joint ventures.
5
SLIDE 7
Third, the standard should explicitly embrace cost-benefit as being the primary
objective or principle of financial reporting. Cost-benefit should be more than simply a
constraint.
Fourth, restructure the draft standard so that topics that are only relevant to certain
SMEs (for example, consolidated financial statements) are placed towards the back
Fifth, we feel there is significant scope to rationalize the set of disclosures. The focus
should be on what users need so as to understand the entity’s financial position and
changes in this position.
Sixth, we recommend a post-implementation review, just like the Trustees of the IASB
recently announced it will do for all new IFRS, say two years after release. This should
include a comprehensive investigation into whether the financial statements produced
based on the standard satisfies user information needs.
Finally, the standard should explicitly exclude from its scope very small entities that
have very few external users of their financial statements. For these entities we feel
special purpose financial reports tailored to meet the specific information needs of a
particular user should suffice.
SLIDE 8
This final point brings me to the second part of my presentation – the IFAC SMP
Committee’s micro-entity financial reporting research project. We initiated this
project in response to concerns expressed by delegates at recent IFAC SMP Forums –
6
in Prague in 2005, Hong Kong in 2006 (incidentally our next one is on October 30 in
Malta) - that the IFRS for SMEs will prove unsuitable for the smallest entities, so-called
micro-entities. We wanted to simply inform the debate.
The first phase, which summarized the existing research evidence on the needs of
users and preparers of the financial reports of micro-entities, culminated in the
publication of an IFAC Information Paper in December 2006. Entitled Micro-Entity
Financial Reporting: Perspectives of Preparers and Users it concluded that there was a
lack of international research in this area. This conclusion prompted us to embark on a
second phase.
SLIDE 9
Employing focus group interviews of users (owners and financiers) and preparers in
Kenya, Italy, Poland, the United Kingdom and Uruguay, Phase 2 investigates whether
the proposed IFRS for SMEs is likely to meet the needs of users of financial reports of
micro-entities and whether it can be easily applied by preparers.
We are in receipt of a draft report summarizing the findings. As well as using these
findings in our comment letter we intend publishing this report later this year. We hope
the findings will help provide a better understanding of what micro-entities and their
stakeholders are looking for from an SME standard and in particular, identify what
changes to the ED may be necessary if it is to be suitable for micro-entities.
SLIDE 10
Let me share with you some of the key findings. As I do please bear in mind the
caveats. They are based on the views expressed by small groups of owners, preparers
7
and financiers in five countries. As such they are not representative. In addition, the
conclusions are those of the researchers not necessarily IFAC nor indeed its SMP
Committee.
First, there was mixed support for international guidance for micro-entities.
Nevertheless, all groups were asked about the suitability of the existing ED for micro
entities and the characteristics of new guidance should it be issued.
Second, there was overwhelming agreement that the ED was too complex and long to
be useful to micro entities.
Third, the groups were emphatic that the characteristics of any new guidance should
include: simplicity; as few rules as possible; infrequent updates; as short as possible;
and to be applicable to all businesses (that is, not dependent on industry or legal
status).
SLIDE 11
Fourth, in terms of outline content, there was general support for fixed format
statements, a simple disclosure checklist, and some clear rules for the most common
transaction supported by a statement of principles. There was also support for two
versions: a simple précis version that would be easy for business owners to follow and
understand and a more technical version for preparers.
Finally, as regards publication, any such guidance should be available both on the
internet and in hard copy - not all small business owners have access to computers,
particularly those in rural areas in developing countries.
8
SLIDE 12
The researchers conclude as follows:

The ED appears unsuitable for micro entities;

It seems unlikely that simply making relatively minor changes to the ED will make
them better suited to users and preparers of micro-entity financial reports;

There is no clear case for a separate tier of accounting guidance for micro
entities; and

Some form of assurance provided by the accountants should accompany the
financial reports of micro entities.
PART 2C
SLIDE 13
This conclusion regarding assurance brings me to the last part of my presentation –
what type of assurance is appropriate for SMEs and micro-entities.
First let me say that we do not feel it is IFAC’s place to dictate global policy in this area.
It is for individual jurisdictions to determine what is most appropriate given their set of
circumstances. Hence, we do not wish to advocate a particular assurance service –
audit, review or something else – for SMEs. That said, the SMP Committee does feel
that if there is strong demand for an assurance service other than audit or review then
the IAASB should make available the appropriate standards. Accordingly, we welcome
the proposals of the IAASB in respect of assurance for SMEs as set out in its proposed
9
Strategic and Operational Plan for the years 2009-2011 (which incidentally is on public
exposure until the end of this month). The proposals are to:

Revise ISRE 2400, Engagements to Review Financial Statements; and

Explore, in consultation with other interested parties, the concept of an
alternative assurance service for SMEs and, if considered appropriate,
commence a project to develop a standard for such a service if different from
ISRE 2400.
If these proposals get approved then the SMP Committee will be ready to assist the
IAASB.
SLIDE 14
Let me conclude. The next year will be critical. We are close – very close - to getting a
workable accounting standard for SMEs. IFAC is doing all it can to help.
Ladies and gentlemen, thanks for listening.
10