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INFLUENCE: Financial reporting in a micro entity

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SAICA’s National Small and Medium Practices Committee (NSMP) and the Accounting Practices Committee (APC) jointly conducted a survey in order to better serve and understand the financial reporting needs and reporting environment of small and micro entities.

The objective of the survey was to solicit views from preparers, auditors, reviewers and advisors/consultants of small and micro entities regarding their experience in applying the current financial reporting frameworks, specifically the International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs).

The Companies Act of 2008 prescribes various financial reporting frameworks for companies depending on the company’s public interest score. International Financial reporting Standards (IFRS), South African Statements of Generally Accepted Accounting Practice (SA GAAP) (although withdrawn for year-ends commencing on or after 1 December 2012) and IFRS for SMEs are currently available for use by companies in South Africa. In addition, these frameworks could also be used by other types of entities such as partnerships, sole proprietors, trusts and schools. These entities may also apply entity-specific accounting policies, in certain circumstances.

The survey was conducted using internal online methodology and was answered by 256 respondents. This resulted in an acceptable margin of error of 5,9%. The results showed an overwhelming majority of the respondents being members in practice (91%) who reside in the SAICA northern region (Gauteng, Limpopo and Mpumalanga, 37%) and southern region (Western and Eastern Cape, 32%). This is a representative sample of the SAICA member database, however. There was also a notable skew in terms of size of practices which responded, with the majority of respondents (67%) working in audit firms/practices with fewer than five partners, with most parties playing the role of either a preparer, an auditor or a reviewer of financial statements, which was the primary target market of the survey. However, it was noted that there was a low response rate from users of micro entity financial statements.

A summary of survey results reveal the following:

  • By extrapolating certain survey results using a statistically approved method, it was found that the respondents represent approximately 38 356 micro entity clients of which approximately 55% are currently applying IFRS for SMEs and some 29% are applying their own entity-specific accounting policies.
  • Although IFRS for SMEs is widely used in most entity types, a tax basis of accounting is mostly used for sole traders, partnerships and trusts (see figure 1).

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Figure 1 Current frameworks being applied in various types of entities

  • Overall, the respondents regard the financial statements of small andmicro entities as somewhat useful (59%), with 35% classifying them as very useful and 6% stating that they are not useful at all (see figure 2).

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Figure 2 Perception of usefulness of components of financial statements in a micro entity environment

  • The top four concepts which respondents find difficult to apply in preparing financial statements for small and micro entities when using IFRS for SMEs are:
    • Property plant and equipment – the component approach
    • Property plant and equipment – residual value and reassessing of useful lives
    • Investment property – fair value model
    • Business combinations – identification of intangible assets
  • The top four concepts which are viewed as easy to apply in preparing financial statements for small and micro entities when using IFRS for SMEs are:
    • Investment property – classification
    • Deferred tax
    • Capitalisation of finance leases
    • PPE – depreciation on owner-occupied buildings
  • The income statement (statement of comprehensive income and income statement), balance sheet (statement of financial position) and detailed notes to the financial statements are components considered to be very useful in financial statements.
  • Components considered to be of limited use include the statement of cash flows, accounting policy notes, with statements of changes in equity (statement of other comprehensive income) ranking the least useful.
  • The vast majority of respondents prefer the historical cost model of accounting to fair value model or a combination of the two.
  • According to the results, none of the respondent’s clients’ financial statements are internally compiled.
  • It appears that respondents found IFRS for SMEs cumbersome to apply in a company/other entity with a PI score below 100. However, respondents also indicated that all financial statements below 100 points were independently compiled, thus limiting the entity to using IFRS and IFRS for SMEs for companies which fall within this category. Over and above the results summarised above, both the NSMP and the APC (as advised by the APC/NSMP working group) have concurred that some of the difficulties in and ‘cumbersomeness’ of applying IFRS for SMEs originates from members not being fully aware of what compliance with IFRS for SMEs really entails. Moreover, it seems that there is often a lack of awareness of the options available to entities in terms of the application of the requirements within IFRS for SMEs, which could potentially simplify certain practical implementation difficulties which practitioners may experience.

Based on the survey results, the APC/NSMP working group has decided on the following course of action to attempt to alleviate some of the burden in preparing financial statements of small and micro entities within the constraints of current legislation:

  • Education and training around compliance with IFRS for SMEs in its most simplistic form.
    • SAICA will launch the first round of training at its two-day SME technical update in February–April 2014 in 22 districts around the country where there will be a focus on simplifying and clarifying implementation issues of applying IFRS for SMEs.
    • Hosting discussion groups/webinars on compliance with difficult issues.
    • The publication of templates for IFRS for SMEs financial statements in small and micro entities for a simple and non-complex close corporation and private company.
    • Compile a list of areas that are challenging for a small and micro entity when applying IFRS for SMEs, with view of creating examples of simplifying the application of IFRS for SMEs or for simplifying the accounting treatments (and thus not complying with IFRS for SMEs).
  • Investigating ways of simplifying the application of the accounting treatments for other entities (for example body corporates, trusts and partnerships) with a view to developing guidance and templates where appropriate.
  • Comment on the IFRS for SMEs exposure draft issued in October 2013 (ED 337) to influence changes at an international level.
  • Reviewing and updating the FAQs on IFRS for SMEs on the SAICA website on a regular basis to include a wider range of application questions and solutions.

The APC, NSMP and the joint working group would like to thank all respondents for their input to the survey and for the useful information provided, which will be used by SAICA to better understand the financial reporting needs of the micro entity environment.

SAICA will continue to provide feedback on the above initiatives to members through regional information sessions, discussion groups and regional structures.

Author: Bridgette Kriel CA(SA) is Project Director: SMP at SAICA.

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