IFRS or GAAP
The Accounting Practices Board agreed to issue IFRSs (International Financial Reporting Standards) as Statements of GAAP in late 2003. The JSE Limited required listed companies to comply with IFRSs from 2005. Effectively IFRSs apply to all forms of companies registered in South Africa. The debate around the continued and increasing complexity of financial reporting standards continues to rage both locally and globally. On the global front, many countries are only now adopting IFRS and like us, continue to grapple with the application thereof to different forms of legal entities.
The practicality of applying IFRS to SMMEs (Small, medium and micro enterprises) is a topic that has been raised by both accounting practitioners and SMMEs in most of our interactions with member and other groups on a regular basis. In a survey conducted recently by SAICA, the overwhelming majority of respondents was of the opinion that IFRS is still too great a burden for these organisations to comply with. The rules and reporting requirements of IFRS are perceived as not being relevant to small and micro enterprises, with the end result being too complex and not easily understood by the ultimate recipients of financial statements.
The feeling from the majority of respondents was that these entities would be better served by a simplified set of standards that is principle based and significantly easier to understand and comply with as compared to IFRSs. The general consensus was for a historical basis of accounting that is accrual rather than cash based. The overriding concern in most instances was around the usability of the final set of accounts prepared. Given that users of financial statements in the small and micro arena are primarily owners, creditors, regulatory agencies (SARS) and financial institutions, it was felt that the financial statements should reflect information relevant and understandable to those groups of users of financial statements.
This past year the APB issued a Statement of GAAP for Small and Medium-sized Entities (SMEs). This Statement is the International Accounting Standards Board’s (IASB’s) exposure draft of IFRS for SMEs. The rationale behind this early adoption of an exposure draft was to provide immediate reporting and principle relief to those companies not categorised as widely held companies in terms of the Corporate Laws Amendment Act (CLAA). Although not yet in its final state, the draft standard provides significant reporting relief. It does not deviate from IFRS as regards principles and the application thereof. The intention of the IASB is to simplify the standard even more, with a view to issuing a final version early next year. It is anticipated that the standard will remove many of the more complex requirements inherent in full IFRSs and will address more adequately the reporting needs of medium and smaller enterprises.
The question though is whether this will fully address the needs of the ‘micro’ market that is pervasive in all developing countries. The answer, on a global front, seems to be a decisive “no”. This is evidenced by the development by organisations and countries globally of an accounting framework that meets the needs of the micro segment of the market. These frameworks have mostly been developed independently of the IASB and encompass the requirements articulated by small and micro entities locally. Our dilemma is to consider whether or not we rely on the final Statement of GAAP for SMEs and assume that it will cover both the medium and micro segments of the market or develop a separate framework that deals with smaller entities.
There are several considerations in this regard of which one is the proposed changes in Company Law as captured in the Companies Bill 61-08. The Bill suggests that different reporting standards may be developed for profit and non-profit companies; and different categories of profit companies. The implications of this need yet to be assessed, however, in a developing nation like ours, this has the potential to, from a reporting and regulatory perspective, detract from the integrity of the financial system as a whole should there not be some kind of consistent, standardised reporting framework that meets the requirements of key users of financial statements. The other consideration, as articulated above, is the end state of the IASB’s IFRS for SMEs. Our members and to a large extent their customers, do not believe that the final SME standard will provide enough principle and reporting relief for the micro segment of the market. Given that the IASB’s IFRS for SMEs is pitched at all publically accountable entities that publish general purpose financial statements this would seem a fair assumption. The divide between a large to medium sized non-listed entity and a micro entity is huge and would seem to demand a differentiated set of accounting standards that address the needs of that market.
So what does all of this mean? How do we go about formulating a framework that is appropriate? Internationally, two main approaches to Micro GAAP exist – top down or bottom up approaches. The former starts with IFRS rules and offers various exemptions to specific rules, while the alternative approach starts with the small enterprise and develops a separate set of standards specifically for the smaller enterprise. In the latter approach, some or all of the recognition and measurement criteria and methods may be different from IFRS principles or rules. In contrast, the top down approach tends to concentrate upon simplifying disclosure rules. We are currently considering both and will be tabling various proposals to impacted stakeholders over the remainder of this year. As always, I implore members to participate in the development of the principles and guidelines that shape the ultimate direction of financial reporting in our country.
Nazeer Wadee CA(SA) is Chief Operating Officer, SAICA.