IFRS for Small & Medium Entities - Literature review Example

?IFRS for Small & Medium Entities Table of Contents Introduction 3 3 Aims Behind Applying IFRS For SMEs 4 Benefits of IFRS for SMEs 5 Implementation Issues of IFRS for SMEs 7 Conclusion and Recommendations 8 References 10 Introduction Small and medium enterprises (SMEs) are extremely crucial for the overall development of an economy. It is therefore argued that accounting standards followed by SMEs should primarily subject to international standards instead of different national standards. In this relation, it has been perceived widely that International Financial Reporting Standard (IFRS) for SMEs shall benefit in acquiring common accounting framework for SMEs. Moreover, adoption of IFRS by all the SMEs shall not only facilitate commonality among national SMEs accounting standard but it shall also facilitate in harmonisation of SMEs accounting standard across the world (Pascu & Vasiliu, 2011) Primarily the objectives of IFRS for SMEs have been to support its accounting and financial reporting system as well as dramatically meet the basic financial requirements of these entities which does not have any public accountability and liability to publish financial statement for its external users (Laptes & Popa, 2009). Contextually, this paper critically evaluates the need of IFRS for SMEs and the challenges in adopting IFRS for SMEs. Aims Behind Applying IFRS For SMEs The primary aim of the IFRS for SMEs is to provide a standard for entities in nations that have no national GAAP (Generally Accepted Accounting Principles). IFRS for SMEs shall not facilitate in providing accounting framework in certain specific countries for entities that do not have necessary the resources to adopt full IFRS. Another important aim of the application of IFRS is to provide those nations which have already set-up their own national GAAP with IFRS standards, a framework that shall recognise and understand the needs of accounting framework across the territories. In general, the application of IFRS in SMEs aims at providing financial statements and other financial reporting of profit-oriented entities. Accordingly, it is aimed that with the application of IFRS in SMEs shall be directed towards satisfying the common information requirements of an array of users such as shareholders, employees, creditors, and the public at large as well as facilitating single financial standard for the preparation of financial reporting across the territories (The International Accounting Standards Committee Foundation, 2009; Madawaki, 2012). In addition to above stated aims, there are certain specific aims that are often being considered while applying IFRS in SMEs. These supplementary aims include reduction of cost for SMEs for preparing financial statements, eliminating complexity and harmonizing financial reporting by SMEs particularly private entities operating across the globe (Aristidou, 2012). Thus, it can be argued that the aims and objectives behind the IFRS implementation in SMEs are indeed wholesome and appreciable both from economic as well as accounting perspectives. Benefits of IFRS for SMEs It has been argued that IFRS for SMEs are the self-contained set of principles that comprises the accounting standards based on the Full IFRS. Additionally, it has been admitted that SMEs applying IFRS will have the significant opportunity to prepare their financial reporting statements using a set of reliable standards which is truly based on the global financial reporting language. This will further enable SMEs to expand themselves into a new global financial dimension (Samujh, 2007). Additionally, it will also pave the way for SMEs to expand globally and increase their capability to generate greater revenue. Precisely stating IFRS for SMEs are likely to provide following benefits: Understanding the Global Financial Reporting Language: SMEs in jurisdictions where IFRS were not being historically used by those SMEs who wish to apply IFRS will became familiar with the requirement of IFRS. Moreover, the application of IFRS by SMEs will facilitate in learning global financial language which will ultimately lead towards easier for the SMEs to explore the possibility of cross-broader partnerships and acquisitions. As well as, IFRS will make them familiar with inbound and outbound trade operations (Epstein, & Jermakowicz, 2008; Marcellan, 2009). Global Recognition: It is worth mentioning the IFRS is the globally recognised set of financial reporting principles. Thus, consistently applying the IFRS will improve the transparency and compatibility of the accounting framework of SMEs. It will further facilitate in providing access to global lenders and investors which shall progressively influence the SMEs in the areas of security traded in the public capital markets (Marcellan, 2009). Attracting Talented Finance Personnel: Not only the SMEs as an organisation is going to be benefited with application of IFRS but the personnel dealing with accounting and finance with the SMEs will also be able to avail the benefits themselves with increasing their expertise related with the current practices in the global financial context. It will provide opportunities for these accountants and finance personnel to secure a successful financial career. Additionally, it has been argued that application of IFRS will be more attractive for finance personnel in SMEs than that of GAAP (Marcellan, 2009). In Preparation for IPO: It is also expected that like other growing companies that are considering listing their shares in overseas stock exchange might facilitate SMEs applying IFRS to undertake steps that are required to apply for the purpose of the IPO (Marcellan, 2009). Simplification: The IFRS for SMEs is an autonomous standard of about 230 pages designed according to the needs of and know-hows of smaller businesses. The major simplifications have been continuously introduced throughout all areas of IFRS such as recognition, measurement and disclosures (Marcellan, 2009). Opportunities Related To the “One Off “Exemptions Offered By IFRS1: SMEs moving towards the application of IFRS will be benefitted to use the exemption granted by IFRS 1. Accordingly, SMEs will be able to use the fair value of initial estimated cost for property plant and equipment. Once the SMEs are able to determine original cost grounded on fair value, later these entities are permitted to utilize the cost method as the source of measurement in the subsequent period (Marcellan, 2009). Implementation Issues of IFRS for SMEs There are certain specific issues that SMEs might face while adopting IFRS. Some of the major challenges may include lack of knowledge about IFRS among the staffs assign with the tasks of preparing financial reporting. Additionally, it has been argued that IFRS will lead towards high cost through the subscription requirements and other membership fees. At the same time, many SMEs consider IFRS accounting standards to be complex for applying within the entity. Moreover, lack of practical knowledge of converting traditional accounting standards to IFRS also imposes considerable challenge for the adoption of IFRS by SMEs. Other key challenges in relation to the adoption of IFRS for SMEs can be related with the fact that separate routes taken by different countries in adopting IFRS often tend to create a paradoxical situation. With regards to broader perspective, the adoption of IFRS by SMEs will require amendments to regulatory requirements as well as tax laws. Furthermore, it may be followed by increased volatility of earning after the adoption IFRS (Tesfu, 2012). Correspondingly, ample transition time is required for the effective implementation of the standards. Hence, it is ascertained that successfully managing the transition to IFRS adoption largely demands a sustained and thorough engagement on the part of implementing authorities. The thorough engagement in a sense requires continuous training, and regulatory staffs and market participants. Additionally, it also requires monitoring duly the company’s progress in preparing for the implementation of IFRS. SMEs adopting IFRS shall have to face with problems and difficulties related with keeping the standards up-to-date. Thus, it can be argued that adoption of IFRS within the SMEs not only has significant benefits but it also imposes considerable challenges (Fortin & et. al., 2010). Conclusion and Recommendations The role of SMEs in the national economy has grown significantly over the years. It is therefore argued that the need for financial reporting has also been simultaneously increased in order to meet the rising financial need of SMEs. Contextually, more emphasis has been allocated on the adoption of international standard instead of focussing on national standard. In the course of international standard for financial reporting, IFRS has significantly gained popularity and is widely being advocated as the primary accounting standard to be applied in SMEs. The primary aim of the implementation of IFRS is to provide a consolidated and reliable accounting standard for the companies belonging to that nation which do not have proper accounting standards. Additionally, it is also being viewed that implementation of IFRS will contribute towards cost reductions associated with the preparation of financial reporting as well facilitating harmonized accounting standard across the world. Simultaneously, it is also expected that SMEs will immensely be benefitted with the adoption of IFRS (Strouhal, 2011). SMEs adopting IFRS will be able to understand the global accounting languages and further they shall be able and inspired to perform across the borders and establish international partnerships. Furthermore, it will also facilitate SMEs to avail global recognition. Precisely, the benefits of adopting IFRS are numerous for SMEs as well as for the countries of the SMEs. Thus, it is important that ‘government should create considerable awareness and encourage SMEs to for the adoption of IFRS. The governments should make it mandatory for the adoption of IFRS within the country and regularly monitor whether IFRS’s are duly being applied or not (Philip & et. al., 201; McQuaid, n.d.). References Aristidou, M., 2012. The IFRS for Small Medium-Sized Enterprises. Accountancy Cyprus, Vol. 106, pp. 108. Epstein, B. J. & Jermakowicz, E. K., 2008. Wiley IFRS 2008: Interpretation and Application of International financial Reporting standards. Wiley & Sons. Fortin, H. & et. al., 2010. Accounting for Growth in Latin America and the Caribbean: Improving Corporate Financial Reporting to Support Regional Economic Development. The International Bank for Reconstruction and Development/ The World Bank. Laptes, R. & Popa, A. F., 2009. The IFRS Standard for Small and Medium-Sized Entities – Another Challenge for the Romanian Accounting. Facultatea de Economie si Administrarea Afacerilor, pp. 27-34. Madawaki, A., 2012. Adoption of International Financial Reporting Standards in Developing Countries: The Case of Nigeria. International Journal of Business and Management, Vol. 7, No. 3, pp. 152-161. McQuaid, L., No Date. IFRS for SMEs A Brave New World. Duignan Carthy O’Neill, pp. 1-2. Marcellan, M., 2009. A Guide through IFRS for Small and Medium-Sized Entities (SMEs). RSM International Association, pp. 1-51. Pascu, A. M. & Vasiliu, A., 2011. International Financial Reporting Standard for Small and Medium-Sized Entities- A New Challenge for the European Union. CES Working Papers, III, pp. 121-134. Philip, M. & et. al., 2011. Assessing the Challenges of Adopting IFRS by SMEs in Uganda. Uganda Martyrs University, pp. 1-22. Samujh, R. H., 2007. IFRS for SMEs: A New Zealand Perspective. Working Paper Series, pp. 1-27. Strouhal, J., 2011. Harmonization of SMEs Financial Reporting in Emerging CEE Countries. WSEAS Press, pp. 1-34. The International Accounting Standards Committee Foundation, 2009. IFRS for SMEs. International Accounting Standards Board, pp. 1-53. Tesfu, F. F., 2012. The Adoption of International Financial Reporting Standards (IFRS) in Ethiopia: Benefits and Key Challenges. Addis Ababa University, pp. 1-115. Read More