Failing to meet the needs of small business
INTERNATIONAL FINANCIAL Reporting Standards (IFRS) have gone a long way towards steadying the global financial ship in the wake of the Enron scandal. Yet those who believe that IFRS is the panacea for all accounting ills find themselves disappointed by its failure to meet the needs of small business.
While admirably comprehensive, the 2 500 pages of standards that comprise IFRS are an anathema to firms that can’t justify a full-time chartered accountant or the fees that audit firms levy to ensure compliance of new reporting standards.
The conundrum is daunting, especially in a country such as South Africa, where entrepreneurship is highly encouraged, particularly among black business people, and where black economic empowerment companies have enough to contend with without being plagued by IFRS compliance, hence the SAgenerated IFRS for SMEs – which, as the acronym suggests, is essentially a watered down version of fullblown IFRS. But even the abbreviated IFRS for SMEs is excessively detailed when it comes to compiling a set of accounts for them. What’s surely then required is a solution that covers all the bases while also ensuring essential standards of accounting aren’t compromised.
It’s a goal easier said than done, given that a mountain has to be climbed in order to evolve from a situation 15 years ago when there were 14 standards covering about 200 pages to one where there are 2 500 pages of standards that bear little resemblance to their predecessors.
I suggest the gap is bridged by asking (and answering) why IFRS exists and at whom it’s aimed. As things stand in SA, IFRS is applicable to any company with a public interest element. Entities that don’t have that should therefore use IFRS for SMEs.
IFRS isn’t designed for small companies – it’s designed for and used worldwide by listed companies. It’s only in SA (and some other developing countries) where it’s been applied to a much broader sphere. In developed economies, IFRS is for listed entities. Companies that aren’t listed use something else. The SA Institute of Chartered Accountants (Saica) is currently researching solutions whereby IFRS can be adapted, summarised and simplified for nonpublic interest entities. Among several considered answers is to move IFRS for SMEs into the public interest sphere and create something much simpler, which is where a third level of reporting such as micro generally accepted accounting practices (micro-GAAP) comes into play.
Micro-GAAP has been positioned for entities that don’t have to report in terms of the new compensation contained in the Companies Bill. The bigger plan is that microGAAP could fill the gap for even some limited interest companies instead of IFRS for SMEs. Such a solution would answer the criticism that IFRS for SMEs is still too complicated.
The Corporate Laws Amendment Act says the Financial Reporting Standards Council will create a reporting framework for limited interest companies. Last year the Accounting Practices Board (APB) insisted that IFRS for SMEs constituted just such a reporting framework.
By so doing, the APB is trying to create an easier reporting framework for some level of public interest companies and then create a much simpler framework for all limited interest companies. The objective is to have a framework that can be used way down the line – one that’s robust but simple. That’s the balance that has to be created for it to be effective.
In short, IFRS should only be applicable to truly public interest companies – essentially listed companies. Others can always adopt IFRS. There’s nothing to stop them from adopting a higher framework but they can’t move down. Micro-GAAP has to cover everything that IFRS covers but needs to be a lot simpler. We’re looking at something like 150 pages versus IFRS’s 2 500.
The desperate need for micro-GAAP is highlighted by the fact that SA has more than 1m close corporations, many of them reporting on the equivalent of IFRS of 15 to 20 years ago.
That’s why Saica is currently putting together a micro-GAAP framework, a lot of which is being drawn from SA research and from countries now applying some or other version of micro-GAAP. Ultimately, we maintain there should be an end result whereby: • There’s IFRS for public interest companies with international capital market implications. IFRS for SMEs, bearing in mind that the principles of IFRS should be applicable to all public interest companies. Micro-GAAP, where there’s no need for us to reinvent the wheel but rather to customise an existing framework based on research for our market. In arriving at a micro-GAAP for SA we’ll be seeking feedback from both users and preparers. Only after getting their input will we complete the framework. A big advantage is that it will solve a fair amount of queries that we field on a daily basis. For example, how to report as an NGO or how SMEs should have their accounts audited. If a framework such as micro-GAAP is in place, the answers are forthcoming. And over the long term it’s going to solve a lot of problems – quickly.
IFRS compliance standards a fetter on SMEs.