SME State of Play 2015
Of all SMEs, two-thirds will start at least two businesses, a third will start at least three, and 3% will valiantly launch at least ten. The 2015 SME report provides insight and guidance for SMEs in the realm of government policy, financial reporting and corporate governance, and offers some great business advice
- SAICAs 2015 SME survey
- Culture of governance in SMEs essential for economy
- The top reasons SMEs stumble
- SMEs still straining against red tape
- Five tips for young entrepreneur
- Businesswoman Achiever
- Additional relief for SMEs
SAICAs 2015 SME survey
SAICA has released its SME Insights Report on 15 September 2015, in which the findings of over 1 300 SME respondents are detailed. By Bridgitte Kriel
The report provides insights on how and what government, big, medium and small businesses need to do to encourage employment growth in line with the National Development Plan.
In 2014 SAICA commissioned its inaugural survey into certain practices, attitudes and characteristics of SMEs in South Africa. The study was conducted digitally, and respondents were invited to participate by email, through SAICA-affiliated small and medium practices (SMPs), and through the business media. The survey attracted sponsorship from CQS and was supported by DotNews – our thanks to them both. Our target was to attract 100 small and medium entities (SMEs) to respond and our objective was two-fold:
- To explore ways in which SMPs could add value to the sector while broadening their own business base
- To understand the needs of SMEs better so that SAICA could engage with national government and with its own SMPs and SMEs directly with the objective of improving the performance of the sector given its critical role in the National Development Plan (NDP)
The 2014 survey attracted over 800 respondents, which was an indication of the extent to which SMEs needed to express their point of view. The survey results were shared with the then newly established Ministry of Small Business Development, Business Partners (South Africa’s largest risk-based lender to SMEs), and SEFA (the newly established subsidiary of the IDC specialising in small and micro business finance). It also generated considerable exposure for SAICA in the business press.
Surveys of this nature answer many questions but usually uncover many others. The SMP division of SAICA decided late in 2014 that it should undertake a second survey to follow up on many issues raised by the first survey and to explore new and important concepts. The same method of encouraging SMEs to participate was used, and DotNews and Sage must be thanked for mailing the survey link to their clients and for encouraging them to participate. Fieldwork began in March and ended in June 2015.
The response from SMEs once again surprised us, with over 1 300 SMEs participating in the survey.
The 2015 survey results will once again be shared with various government departments in an attempt to influence policy toward this sector, as well as with SME funders and our own SMPs in an effort to create healthy growth and sustainability in the sector. The results will also be publicised in the industry and business media as feedback to the SME sector and in an effort to guide and influence both government and big business in the ways they deal with SMEs with the objective of creating an improved business environment.
EXECUTIVE SUMMARY OF THE FINDINGS
The 2015 research sought to shed more light on the plight of SMEs, the effect that policy has on them, and the extent to which they engage with the procurement engine of government.
The highlights of the 2015 survey findings and recommendations are:
- Of all SMEs, two-thirds will start at least two businesses, a third will start at least three, and 3% will start at least ten.
- Policy-makers should reduce the amount of red tape to start a business and then to comply with legislation during the lifespan of an SME. Although regulation is necessary, a more balanced approach is needed.
- If government wishes to maximise the power of their procurement engine for transformation and job creation, they should do more to make their business more attractive to SMEs by improving payment terms and simplifying the tender process.
- A small band of SMEs generate more than 50% of their turnover from business with government, and run successful businesses. On average these SMEs employ more people than the rest of the sample. What is evident is that government can grow jobs at a faster rate if they utilise SMEs to a larger extent as their service providers.
- In the quest for job creation from SMEs there exists an employment sweet spot. The number of people employed in SMEs grows rapidly with turnover and with the length of time an SME survives. Thus, similar to 2014, government should focus more on growing and keeping SMEs in business in order to derive this benefit.
- Many SME shareholders are also the chairpersons of their boards, the only directors, and the CEOs. This leads to extremely flexible decision-making but also to some poor governance and sometimes to rash decisions. There are a number of ways SMEs can improve their governance, which in turn will improve their ability to secure funding and improve the management of business risks and thus have a positive effect on their survival rate.
- The main reasons for SME failure are cash-flow related. A lack of financial planning and control are at the heart of their problems.
- Just over 56% of the SMEs in this sample have been in existence for ten years or more, with only 4% starting less than a year ago.
- Consistent with the 2014 survey results, SMEs again indicated that they consider their most difficult obstacles in growing their businesses to be:
- Government- and big business-generated red tape
- Obtaining finance
- VAT registration
- Compliance with legislation
- Finding customers
In this issue of Accountancy SA you will find three articles which explore some of the themes of the research findings: ‘The top reasons SMEs stumble’, ‘SMEs still straining against red tape’, and ‘Culture of governance in SMEs essential for the economy’. The full 2015 report is available on www.saica.co.za/smp.
AUTHOR: Bridgitte Kriel CA(SA) Project Director – Practice at SAICA
CULTURE OF GOVERNANCE IN SMEs ESSENTIAL FOR ECONOMY
By embedding effective corporate governance principles in their businesses, SMEs can achieve a level of performance essential for South Africa’s economy, writes Vikeshni Vandayar
Contrary to popular belief, the King Report on Corporate Governance in South Africa 2009 (King III) governance principles are not the preserve of large corporates – small businesses can benefit hugely by implementing the guidelines that formalise the business cornerstones of responsibility, accountability, transparency and fairness. The latest Governance in SMEs Guide of the Institute of Directors in Southern Africa (IoDSA) simplifies the King III principles so that these can be easily understood, adapted and implemented by any SME irrespective of its nature, size or level of maturity.
Increased levels of corruption and a general decline in business confidence are taking their toll on the South African economy. Owing to the significant role SMEs play in the South African economy as envisaged in the National Development Plan – an effective governance framework in SMEs (which results in improved leadership, better strategy and reduced risk) will go a long way towards lessening, and even reversing, these effects.
The Department of Small Business Development and the South African Chamber of Commerce and Industry have expressed their support of the Governance in SMEs Guide, which points the way to establishing and maintaining an effective governance framework in SMEs.
SMEs are encouraged to embed the fundamental corporate governance principles and practices into their businesses from the outset in order to set the ethical foundation from the ground up. The best way to achieve good governance is to make it part of the culture and values of the organisation. It is, however, essential that those in key-decision making roles in SMEs (that is, the leaders) are committed to making governance work in order for it to be effective.
Corporate governance is essentially about effective ethical leadership. In other words, good governance is ensuring that your organisation:
- Is responsible for its assets and strategic path
- Is accountable for (is able to justify) its decisions and actions
- Gives fair consideration to the legitimate interest and expectations of all stakeholders, and
- Is transparent on its performance and sustainability through the disclosure of information in a manner that enables stakeholders to make informed decisions/analysis of the organisation
The manner in which governance principles and practice recommendations are implemented will differ from SME to SME to ensure that they are practical and relevant to that SME’s nature, size, circumstances, industry and maturity at the time.
There is no one size fits all solution to corporate governance. Each SME needs to apply its mind as to how to achieve the desired outcomes of good governance through mechanisms appropriate to its specific business. The level of corporate governance required will thus change as an SME moves from an owner managed scenario to a non-owner managed scenario. For example, the more reliance placed on others within the organisation, the greater need to ensure that there are adequate governance mechanisms in place to manage this separation of ownership and control.
The benefits of good governance include not only improved leadership, decision-making, strategic vision and stakeholder confidence, but also improved mechanisms to monitor and manage risks.
For SMEs to assist with the creation of jobs, existing SMEs need to grow and be sustainable so as to grow the number of people that can be employed. Two obstacles faced by SMEs in growing their businesses, according to the 2015 SAICA SME Survey, is competiveness in the marketplace and the difficulty in raising finance. The benefits of formally adopting good governance practices will effectively result in SMEs showing credibility and commitment to its organisations performance and sustainability to external stakeholders (such as financiers). Good governance can thus have a direct impact on an SME’s ability to obtain financing.
The SAICA SME Survey further indicates that 51% of SMEs have one shareholder. One of the governance challenges faced by many SMEs is that the same individuals often play the role of shareholder, director and manager in the SME and thus the distinction between these governance roles gets blurry. In addition, it is often seen that single owners are often reluctant to rely on others within the organisation and let go of the reins as the organisation expands. This interception often restricts the organisations ability to grow and to be sustainable. In these circumstances, it is important for such individuals to be aware of the different roles they play and what perspective/hat they should be wearing at different times when making decisions that affect the organisation. An effective governance framework establishes stable and effective relationships between shareholders, the board, management and other stakeholders.
Governance does not need to be costly or difficult, if applied in a practical and relevant manner to the organisation. King III is based on an ‘apply or explain’ model for this very reason, so that it can be adaptable and applicable to all organisations.
Instead of viewing corporate governance as a compliance checklist of practices to be implemented, focus should rather be placed on the desired outcomes that these practices intend to achieve. If SMEs enshrine the overarching governance principles of responsibility, accountability, transparency and fairness into the way that they conduct business, this, together with the mind-set mentioned above, should stand them in good stead for achieving good governance in an efficient and affordable manner, and thereby positively impacting on their survival and growth.
Author: Vikeshni Vandayar LLM is Governance and Legal Specialist at IoDSA
THE TOP REASONS SMES STUMBLE
Ever wondered why so many SMEs struggle? A broad look at the findings of SAICA’s most recent SME survey reveals their most prominent struggles
This year’s SAICA SME survey saw over 1 300 participating respondents – providing a clear view into the mechanics of small businesses, what can be done to help them, and the common pitfalls that future or current small business owners should be aware of.
CASH FLOW WOES
When asked, business owners indicated that cash flow woes top the list of reasons why small businesses fail. The reasons were listed as: SMEs start with less capital than they need, are unable to adequately manage their cash flow, receive late payments or non-payment from debtors, and have large company overheads.
We are able to deduce, then, that while business owners are getting their businesses off the ground and working hard to attract customers, they are underestimating the importance of actively managing their cash flow from day one. Quick business expansion coupled with poor cash flow management quickly tips the scales and stops SMEs in their tracks.
Adding to the burden of cash-flow related obstacles, SMEs cite long payment terms as one of the reasons why they don’t do business with government. Research findings indicate that 73% of business owners do not do business with national, provincial, municipal or parastatal sectors. The top reasons that rated the highest was non-transparent tender process with 49,7%, slow speed at which decisions are made with 48,3% and long payments terms with 44,2% of respondents listing this as a top reason for not engaging with government.
STARTING WITH TOO LITTLE: INADEQUATE ACCESS TO FUNDING
Would-be business owners who need funding to get their business off the ground have historically been underserved by South Africa’s banking sector. In South Africa traditional lenders (such as the Big Four) require collateral against SME loans – with the result that the many SMEs who lack collateral are unable to have their loans approved.
While Business Partners (South Africa’s premier risk-based funder), the Industrial Development Corporation (IDC) and the Small Enterprise Finance Agency (SEFA) are successfully funding SMEs without the traditional collateral required by the banks, government should ensure that SMEs are adequately funded. Government would do well to use their R3 billion budget allocation for mentoring and training of owners of micro-enterprises, to contribute to the skill sets required of those SMEs being funded by government to ensure that the risk of these SMEs failing is reduced.
BENEATH THE RED TAPE
In the context of this article, red tape can be viewed as all those processes that hinder ease of doing business – by imposing delays and cost that exceed their benefit.1
When asked which are the most pertinent barriers to entry: red tape from government ranks highest with 77% of respondents, followed by obtaining finance with 70%, red tape from large private sector businesses with 65% of respondents, and registering for VAT with 56% of respondents.
Findings indicate that, surprisingly, in comparison to the above difficulties, most respondents have very little difficulty registering for PAYE and UIF, registering their business, registering for tax, or opening a bank account.
THE WAY FORWARD
These findings are valuable in terms of wayfinding for government and SMEs – highlighting the way in which government can meaningfully assist small businesses and alerting small business owners to the pitfalls of the small business ecosystem.
Between lack of funding, late payment and red tape there are clear ways to assist SMEs in their growth and development goals going forward. If we can create an enabling environment where SMEs have the help necessary to manage their cash flows, can rely on the funding they need to start their businesses, are not constrained by burdensome red tape and are willing to engage in doing business with government we will no doubt strengthen the sector.
Answers to question: Small businesses have a high failure rate. What do you think are the most important reasons why they fail? Please rank each item from 1 to 7, where 1 represents reasons that are less important and 7 represents reasons that are most important. The above is the average rating per response out of 7
Answers to question: If you do not do business with government, what are the major reasons why not? Please score each item where 1 is not an important reason and 7 is a very important reason
Answers to question: What are the most difficult barriers to entry when starting a new business? Please score each activity from 1 to 7 with 1 being a very low barrier and 7 being a very high barrier. The score above is the average score out of 7
1 See http://led.co.za/tool/red-tape-reduction-rtr.
Author: South African Institute of Chartered Accountants
SMES STILL STRAINING AGAINST RED TAPE
The findings of the small to medium enterprise (SME) survey recently conducted by SAICA) reveals that red tape is still the top barrier to entry when starting a small business
One definition of red tape or regulatory compliance is that it refers to those ‘rules, regulations, procedures or processes that impose delays and costs that exceed their benefit’.1
View all Graphs (150Kb PDF)
While Small Business Development Department Minister Lindiwe Zulu asserted earlier this year during her budget speech that ‘government recognises the need to review the policy and regulatory environment that continues to hinder development, growth and competiveness of small businesses,’2 red tape remains a costly obstacle course for business owners.
Importantly, not only is government to blame, but big business governance rules are adding fuel to the red tape fire. Out of a sample of over 1 300 small business owners, 49,4% indicate that government red tape is a barrier to entering the SME market, while 29% feel that private sector red tape is a hindrance. Clearly both government and big business have some way to go if they are to contribute towards reaching the National Development Plan’s goals.
Nevertheless, SME respondents who took part in the SAICA survey seem to believe that government does know how to reduce red tape. The requirements for registering a company for PAYE, UIF and income tax are seen as relatively easy, as is registering a new company.
And while Finance Minister Nhlanhla Nene’s scheme to create one portal to do business with government might ameliorate some of SMEs’ red tape woes, it won’t solve the problem entirely.
In the same speech referred to earlier, Minister Zulu had said that ‘to date, the red tape reduction guidelines workshops have been conducted for 102 municipalities across the country …
‘It is envisaged that during the 2015/16 financial year, the department will continue with the rollout to ensure inclusion of other municipalities.’
Yet it seems that most small businesses have not felt the interventions.
The majority (57,5%) of SMEs responded that, in terms of creating an environment where it would be easy for this sector to do business, government’s performance is very poor.
In addition, 47,8% of respondents believe that government has failed to simplify their processes and policies while a further 37,7% feel that government has performed very poorly in establishing funding agencies to help fund SMEs. Noteworthy here is that government has in fact made some changes to improve conditions and funding for SMEs with SMEs being least negative about tax relief for small businesses and B-BBEE codes.
RED TAPE BEYOND OUR BORDERS: SOUTH AFRICA VERSUS RWANDA
While certain interventions have been put in place to speed up processes such as registering a company (the ease of which is being facilitated through the Companies and Intellectual Property Commission, which links opening a bank account and registering a company) and obtaining tax clearance certificates, there is much to be done to release SMEs from the constraints of red tape.
There are some examples elsewhere in Africa where bureaucracy is indeed being successfully reduced. Rwanda is a case in point: although the World Bank’s Doing Business Report still ranks South Africa ahead of Rwanda, that country has climbed two places to 46 out of 189 economies since last year, while South Africa has dropped three places. The measurement is based on factors such as the ease of starting a business, obtaining construction permits, getting electricity, registering a property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.3
In practical terms, small business owners in Rwanda can expect reduced times with regard to registering a business, making the process of sourcing finance more flexible, and eliminating the need to have a tax clearance certificate in order to transfer property, and reduced cost and time associated with filing tax returns.4
In the 2014/15 Global Competitiveness Report, South Africa is ranked 120th out of 144, while Rwanda is ranked 6th out of 144 in terms of the ‘burden of government regulation’. What is more, while it takes a mere six and a half days to start a business in Rwanda, South African SMEs can expect the process to take about 46 days. In terms of registering for VAT, in Rwanda it takes business owners a day, while South African business owners can expect to wait up to 21 days.
Red tape also extends to labour regulations and according to the Global Competitiveness Report South Africans rate restrictive labour regulations as the most problematic factor to doing business. South Africa ranks 143rd out of 144 countries on hiring and firing practices and 136th for pay and productivity.
It’s important to consider that as levels of red tape will increase in parallel to a business’s expansion it may be the case that some SMEs are comfortable staying small – if only to avoid the burden of increased red tape.
If South Africa’s SMEs are to prosper, it is important that government improves the ease of doing business by alleviating some of these pertinent red tape-related constraints. Investigating what has been done in countries such as Rwanda might help government to reduce those regulations that businesses still need to navigate in order to operate in South Africa and stimulate growth in the sector.
Answers to question: What are the most difficult barriers to entry when starting a new business? Please score each activity from 1 to 7 with 1 being a very low barrier, and 7 being a very high barrier
Answers to question: How do you rate government’s performance for various alternative methods of support for small business?
1 See http://led.co.za/tool/red-tape-reduction-rtr.
2 See http://www.gov.za/speeches/minister-lindiwe-zulu-small-business-development-dept-budget-vote-201516-20-may-2015-0000.
3 See http://www.newtimes.co.rw/section/article/2014-10-29/182484/.
Author: South African Institute of Chartered Accountants
FIVE TIPS FOR YOUNG ENTREPRENEURS
Steven Cohen gives five tips for running a business that not only would help you earn a living, but also enrich your life
If you’re of school-leaving age, you’re old enough to run your own business.
Sure, you might need a family member to help you with a loan or encouragement and advice, but that doesn’t mean you can’t set up your own business if that’s where your heart lies.
That said, it’s a good idea to get some working experience under your belt when you finish school or university. Your late twenties to early thirties is a great time to pursue a business opportunity of your own, because you’ll have a good mixture of youthful energy and practical experience to offer the market.
Running a small business takes courage and hard work, and it is not for everyone. However, the life of an entrepreneur might be for you if you truthfully answer ‘yes’ to the following questions:
- Am I willing to work long hours to achieve my goals?
- Do I like the idea of being my own boss? Am I able to manage myself and work independently?
- Can I tolerate risk and bounce back from failure?
- Can I think creatively about solving problems people have or enriching their lives, and turn my solutions into profitable products and services?
- What skills and interests of mine could I apply to this end?
Once you decide to become an entrepreneur, you’ll need to think about how you will ensure the success of your business. There are many ways to define success, but unless your business is profitable from its early months, it probably won’t survive.
Here are your five tips.
FIND A MENTOR
When running a small company, you need to come to grips with labour law, tax regulations, supplier negotiations, and many other challenges. From collecting money from people who won’t pay up to dealing with difficult employees, running a business involves many tough decisions and thorny situations that will test your maturity.
If you’re starting out with your first business and have limited experience in running a company, it helps to have someone who has been there and done that to ask for advice. It could be the accountant who has become a friend to your family, a family member or an older colleague who has run a business in the past, or even a customer or supplier with whom you strike up a good rapport.
SURROUND YOURSELF WITH GOOD PEOPLE
It makes sense to fly solo for as a long as you can because hiring people introduces cost and complexity into your business. But as you grow, you might find that you need helping hands if you are to maximise your opportunities.
Be fussy about who you employ. Look for people who not only have skills, experience and contacts that will help you grow your business, but who also have values, personalities and approaches that align with yours.
Trust your instinct – if you feel unable to trust someone or think you won’t get along with them, don’t hire them. And remember that there are certain areas of the business you might need help with, such as taxes or employment contracts, even if you can’t hire someone full-time. Rather than trying to do it all yourself, hire trustworthy consultants to assist.
HAVE A PURPOSE AND SET GOALS
To succeed in a business, you need to have a purpose. Start out by thinking about your skills, interests, and assets, and how you could put them to work to serve the marketplace.
It needs to be a vision of what you can and will do for your customers that no one else is doing very well or at all – a unique solution to a problem your proposed customers have or something that answers an unmet need or desire in the market.
Whether your goal is to create the next Facebook or simply to offer the best garden service in Sandton, you need to have a purpose for your business that goes beyond making money.
Once you have the vision, turn it into a practical set of goals and milestones; from there, create tangible business plans to achieve your goals. It’s all very well to say you’re going to build a new Naspers, but write down the steps that will get you there over the next five or ten years. Without structure and deadlines, you will probably not get where you want to go.
Think about how many customers you’d like to have in six months, a year, five years down the road; about what your expenses and income will be; and what products and services you might offer. Real life might intrude and make a mockery of your plans, in which case you should improvise and adapt.
Time management is a vital skill for any entrepreneur to master if he or she is making the most of life at home and at work. Focus on the things that matter – look at ways of reducing the impact that time-wasters such as unimportant emails or social media have on your time.
Then, set short-term goals for yourself, perhaps drawing up lists of daily or weekly priorities. Once you commit to focusing on high-priority jobs and set out a schedule for doing them, you’ll soon find yourself getting in front of your work.
Another important element of time management is using the right tools and people for the job – it might be worth paying someone to do your typing for you or to buy an accounting package because of the time savings you might achieve.
TAKE CALCULATED RISKS
One of the biggest risks an entrepreneur can take is to take no risks at all. In fact, your youthfulness and ability to conceive game plans bigger companies might consider to be too risky could be one of your biggest competitive advantages. You don’t need to be reckless, but it’s important to recognise that opportunity and risk are often two sides of the same coin.
For example, most small businesses will get to a point where they need to consider borrowing money to increase production or hire staff to service a big new customer. Don’t let fear of failure be the reason that you allow an important business opportunity to slip away. Do your research and try to protect yourself with legal agreements where relevant, but always be mindful of the opportunity costs of deciding to pursue or steer away from a risky venture.
Author: Steven Cohen CA(SA) is Managing Director for Sage One AAMEA
Jeneen Galbraith has made mentorship her mandate. Not only did this mother of four build her business from scratch to an astounding 3 000 clients in seven short years, her company boasts 30% growth year on year
As a 50% partner in Galbraith Rushby, a firm offering accounting, taxation, consulting and other advisory services, Galbraith has seen her firm grow from its humble beginnings in the basement of her house with one employee to purchasing an office in Woodstock and now accommodating some 38 employees. She believes in the value of growing a team of motivated individuals through developing their potential.
Chartered accountants and registered auditors are no stranger to hard work. And not only is Galbraith a qualified chartered accountant and a chartered management accountant (CMA), but during her final year at Rhodes University she took home all the gold medals for auditing, accounting and taxation. This was the first time this had been achieved by a woman at the university.
Before starting her firm in 2008, Galbraith enjoyed a successful career in accounting. This self-starter has been fortunate to have had the opportunity to develop a well-rounded skill from a career path spanning corporate finance, auditing and taxation, and has worked internationally.
She began her career at Coopers & Lybrand in 1994 and quickly climbed the ladder from a trainee to their audit supervisor in their London office within four years. Then she seconded to GlaxoSmithKline plc as a senior financial analyst before coming back to South Africa.
Galbraith attributes the growth of the firm’s client base to the service they provide to their clients, be they large or small. ‘Our growth is due mainly to our existing clients who recommend us by word of mouth to new clients,’ she shares. In addition to managing a successful business, Galbraith is a dedicated wife and mother to four children, one of whom is a special needs child. ‘Every day is filled with dealing with clients financial needs, reviewing staff work, training staff, overseeing internal administration, emails, phone calls and then attending to my families needs at home, which involve changing nappies, bathing, homework and helping the children practise piano and cello,’ she explains.
‘When I started my business in 2008, I did not have any capital to start with but built the business from the ground up by working hard and I was committed to delivering an excellent service but at a reasonable price,’ she says.
Dedicated to mentorship and training, Galbraith makes a point of following a proactive training approach and has personally trained many of her staff, some of whom have grown with her company from the early days. The company also offers learnership programmes, which enable staff to become chartered accountants. ‘This approach requires patience, commitment and time. I sit with them at their desks and work with them. This is very different from most traditional accounting firms, where staff only get to deal with the partners in a very limited way.’
In terms of social responsibility, the firm provides pro bono accounting services to a number of non-profit organisations such as the Property Foundation of South Africa and Down Syndrome Inclusive Education. Additionally, they offer reduced fees to organisations such as 5 for Change NPC.
In addition to 38 staff members, her firm outsources work to a number of independent bookkeepers who work from their homes. ‘This particularly assists those who are single moms and need to be available for their children,’ Galbraith says.
‘I believe in the value of building your team and giving them the tools to reach their full potential. I truly believe that building a team of exceptional people is key to our success and take pride in the enthusiasm, motivation and focus of each and every employee at Galbraith Rushby,’ she concludes.
ADDITIONAL RELIEF FOR SMES
The long-awaited amendments to IFRS for SMEs have finally been published. With numerous changes being made, the amended standard provides an improved foundation for financial reporting for companies without public accountability, writes Bruce Mackenzie
The year 2007 was a landmark one 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-sized Entities (IFRS for SMEs) as a South African Statement of Generally Accepted Accounting Practice for Small and Medium-sized Entities (Statement of GAAP for SMEs). I’m sure memories of 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, South Africa provided relief from the requirements of International Financial Reporting Standards (IFRS) / Statements of Generally Accepted Accounting Practice (Statements of GAAP) for limited-interest companies as defined in the Corporate Laws Amendment Act of 2007. At the time, South Africa realised this was only an interim measure given that the Statement of GAAP for SMEs was based on an exposure draft, but it was a first step towards changing the financial reporting landscape for SMEs. In July 2009, the IASB issued the final IFRS for SMEs standard – which was adopted by South Africa. The final standard provided even more relief for SMEs.
Since then, financial reporting has continued to develop. With the continual changes to IFRS being introduced by the IASB, companies reporting under IFRS have to deal constantly with the complexities of new IFRSs. This has not been the case for SMEs, who have had the same standard since 2009. But change is inevitable, and IFRS for SMEs has now also been amended.
But not all change is bad. In fact, this change is for the better. In May this year, the IASB issued the revised IFRS for SMEs (2015). The amended IFRS for SMEs is a result of a review process that began in 2012 and a process in which South Africa has played an active part. Not only are we represented on the IASB’s SME Implementation Group (SMEIG), but the IASB board member responsible for the project is our own Darrel Scott, giving us a strong voice for the South African issues.
IFRS for SMEs applies to entities with no public accountability and that do not publish general purpose financial statements (that is, not tailored to the needs of any one group). In terms of IFRS for SMEs, an entity has public accountability if its debt or equity is listed or it is in the process of listing its debt or equity, or if it holds assets in a fiduciary capacity for a broad group of outsiders as one if its primary businesses. The scope of the amended IFRS for SMEs has not changed from the 2009 standard. Whereas many entities lobbied the IASB to allow smaller listed entities the option of preparing their accounts under IFRS for SMEs, the IASB was of the view that the standard was developed with non-publically accountable entities in mind, and was still inappropriate for listed entities.
The main changes introduced to IFRS for SMEs are in response to issues raised by preparers, users and auditors of SME financial statements around the application of certain provisions in the 2009 standard. Some of the key changes include the introduction of an option to revalue property, plant and equipment, the introduction of an undue cost or effort exemption from the measurement of investments in equity instruments at fair value, the addition of an undue cost or effort exemption to the requirement to recognise intangible assets separately in a business combination, and the alignment of the section on taxation with the IFRS requirements in IAS 12, Income Taxes. These, along with the other changes, should result in it being easier for SMEs to prepare their financial statements under the revised standard.
One thing to note is that the IFRS for SMEs is not a light version of IFRS. In fact, as IFRS continues to develop, the gap between the IFRS and the IFRS for SMEs will continue to grow. This was a concern for a number of entities who saw this as a stepping stone to IFRS compliance. It should be noted that if an SME believes it will list debt or equity in the near term, or is looking to sell out to a listed entity, then it would be best for them to remain on IFRS. The IASB made this decision on the basis that, as stated earlier, the approach to SME reporting is very different to publically accountable entities reporting. IFRS is designed with a publically accountable entity in mind, and such entities would be expected to disclose more information to the markets than would be expected of an SME with a limited user base for its financial statements. As a result, IFRS requires a lot more disclosure than IFRS for SMEs. In addition, where new standards are being introduced into IFRS, the IASB will wait until these have been used in practice under IFRS for a period before deciding if these are appropriate for SMEs. Even then there is no guarantee that the IASB will align the requirements in IFRS for SMEs with that of the new IFRSs.
The amended IFRS for SMEs is effective for annual periods beginning on or after 1 January 2017. However, the standard does allow for early adoption. This is a real option companies should consider in preparing their financial statements. The amendments introduce additional relief from some of the more burdensome provisions in the 2009 version of the IFRS for SMEs, and early adoption can only result in this relief being available earlier.
The amended IFRS for SMEs will be around for the next five years without any changes. Unless the IASB finds a fatal flaw in the standard, the intention is not to revisit the standard, but rather keep it as a stable platform for SME preparers. One of the key responsibilities of the SMEIG is to consider implementation questions raised by users of IFRS for SMEs, decide which ones merit published implementation guidance, and reach a consensus on what that guidance should be and develop proposed guidance in the form of questions and answers (Q&As). These are, however, are published infrequently and are not mandatory, so do not result in continual changes to the standard.
In my view, adopting IFRS for SMEs is an absolute necessity for companies that are within the scope of this standard. With the new IFRSs on revenue recognition (IFRS 15, Revenue from Contracts with Customers) and financial instruments (IFRS 9, Financial Instruments) requiring adoption in the next few years, the burden of reporting under IFRS will continue to grow. IFRS for SMEs provides a high-quality alternative for companies lucky enough to be within its scope.
Author: Bruce Mackenzie CA(SA) is a Director at W Consulting, a JSE-accredited IFRS advisory and training company