Small dis­ap­point­ment

Fail­ing to meet the needs of small busi­ness

Finweek English Edition - - In The Spotlight - EWALD MÜLLER

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.

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