2007 was a landmark year for our country. Not only did we win the Rugby World Cup (for a second time), but South Africa was the first and only country to adopt the Exposure Draft of the International Financial Reporting Standard for Small and Medium Entities as South African Generally Accepted Accounting Practice for SMEs (Statement of GAAP for SMEs). I’m sure both these events bring tears to your eyes.
In adopting the exposure draft issued by the International Accounting Standards Board (IASB) as a Statement of GAAP for SMEs, we provided relief from the requirements of Full IFRS/Statements of GAAP for limited-interest companies as defined in the Corporate Laws Amendment Act of 2007 (CLAA). At the time, we realised this was only an interim measure given that the standard was based on an exposure draft, but it was a first step towards how things would change for SME reporting in the future. In July 2009, the IASB issued the final standard – IFRS for SMEs, and we now have much more relief for SMEs’ financial reporting in South Africa.
The implementation of any new framework can be a challenge. The introduction of a framework for SMEs is no different. With the early adoption of the exposure draft in South Africa, we have been a perfect test bed for the project team working on SMEs at the IASB. As a result, SAICA has provided relevant feedback to the IASB on the practical issues identified by local companies in implementing the standard, which helped shape the final IFRS for SMEs.
The IFRS for SMEs standard states that the framework is applicable to entities with no public accountability; and who will publish general purpose financial statements (i.e.: Not tailored to the needs of any one group). The standard defines public accountability as companies with listed debt or equity, or in the process of listing debt or equity; and those that “hold assets in a fiduciary capacity for a broad group of outsiders as one if its primary businesses”. Unlike where the exposure draft created confusion in relation to entities such as schools, charities or other entities that may hold assets as an incidental part of their business, the new standard states that these entities are not scoped out of the IFRS for SME standard.
Looking at the final standard, it has been written as a stand-alone document. Whereas the exposure draft had numerous references back to full IFRS/Statements of GAAP, this Standard only has one reference back to full IFRS for financial instruments, which I believe would be very rarely used in practice.
There are some significant changes that will provide relief for reporters using this Standard. These include, amongst others:
• no requirement to straight-line operating leases, unless the escalation clause does not reflect inflation or there are bullet payments;
• residual values, useful lives and depreciation methods no longer require annual review for property, plant, equipment and intangible assets, unless there are indications that they have changed;
• expensing of all borrowing costs (Full IFRS/Statements of GAAP require the opposite from 1 January 2009);
• amortisation of all indefinite life intangible assets, including goodwill;
• simplification of financial instrument accounting by amortised cost being almost exclusively applied. No onerous disclosure requirements as required by IFRS 7, Financial Instruments: Disclosure;
• whereas the primary statements have moved to the new IAS 1, Presentation of Financial Statements, in requiring a statement of financial position (balance sheet) and statement of comprehensive income (income statement), there are no provisions for requiring three years for the statement of financial position for SMEs; and
• held-for-sale classification and the resulting presentation and measurement requirements removed.
There are still some requirements for fair value accounting for certain financial assets and investment properties; which include a requirement to prepare consolidated accounts.
From the above list of relief, you can see that preparing a set of accounts under the IFRS for SMEs will be far less onerous than full IFRS/Statements of GAAP. But that’s not all! You also need to remember what’s happening to full IFRS/Statements of GAAP. There are currently over 30 new or amended standards that are coming into effect from years beginning on or after 1 January 2009. Should you choose to remain on full IFRS/Statements of GAAP, you will need to begin your implementation planning around these. For entities using the SME standard, these will not apply. In addition, the SME standard will only be amended every two or three years, giving preparers a chance to ‘get to grips’ with the framework before any changes are required.
So now that you’ve decided to apply the standard, how do you do it? Well, the standard requires retrospective application – that means you need to go back and restate the opening balance sheet and comparative financial statements for changes necessary in bringing your accounting in line with the SME standard. Whereas this an onerous requirement, the IASB has given a number of exemptions on first-time adoption of the IFRS for SMEs to make this process easier.
Remember that you will be a first-time adopter of the standard whether you’ve previously used IFRS, Statements of GAAP, Statement of GAAP for SMEs or any other reporting framework. To assist members in understanding these changes, and looking at how to implement the new framework, SAICA is rolling out seminars nationally. Bookings can be made for these on the SAICA website.
In my view, adopting this standard is an absolute necessity for companies that are within the scope of the standard. If, however, you are planning on a listing or being purchased by a listed entity, then you should consider staying on full IFRS/Statements of GAAP, as this will be required in the above circumstances. SAICA has provided a detailed circular to help you to determine if your entity can use the IFRS for SMEs, which is available on the SAICA website in the IFRS for SMEs section.
Bruce Mackenzie CA(SA), Registered Auditor, FCCA, JSE Approved IFRS Advisor, is a director at W.consuting, an independent IFRS consulting and training company.