International Financial Reporting Standards for Small and Medium-Sized Enterprises - Essay Example

IFRS for SMEs Introduction Business entities are required to prepare a financial ment following the laid downprinciples of accounting standards and make public the information for decision making by the users of that information (Maynard, 2013). All companies are required by companies Act of 1985 (amended by Companies Act 2006) to publish their financial statement at the end of trading period. Companies are, therefore, obliged to prepare financial statement in order to disclose their financial position, cash flows and performance for economic-decision making by the users of financial information. The financial statement depicts the financial performance of the entity and demonstrates competence of the management. The financial statement for public entities follows International Financial Reporting Standards (IFRS) and disclosure of information is used by external and internal stakeholders (IFRS Foundation, 2013). However, SMEs are not obliged to use complicated and expensive accounting standards since the disclosure of information to external parties is unnecessary (ICAEW, 2014). This document examines the regulatory framework for IFRS for SMEs and the importance of using accounting standards in preparing financial statement. In order to fulfil the Companies Act 1985 entities must prepare and report financial information for every trading period. The accounting standards for Small and Medium-sized enterprises (SMEs) offer SMEs with a framework that creates reliable, relevant and valuable information that can provide superior quality and understandable set of accounting standards (Maynard, 2013, p. 57). IFRS defines SMEs as entities that are not publically listed thus have no public accountability. IFRS for SMEs refers to independent standard integrating accounting principles based on existing IFRSs that have been harmonized to outfit the entities the fits within the scope (IFRS Foundation, 2013). Financial report is essential because it provides stakeholders with financial information concerning a particular entity which helps stakeholders to make a sound decision about their involvement in the entity. In this case, stakeholders are described as the primary user group of users of financial information who have claims on the resources of the entity. The accounting standards applicable to public owned entities cannot all apply in SMEs because the disclosure requirement the SMEs are subject to disclosures relevant to external stakeholders (ICAEW, 2014). Therefore, IFRS for SMEs does not require disclosure of earning per share, assets held for scale, segment reporting, interim financial reporting, insurance, etc. Furthermore, the revaluation model for equipment, plant, property, intangible assets, etc. “All financial instruments are measured at amortized cost using effective interest method” with the exception of publically traded for non-convertible and non-puttable shares that can be measured at fair value over profit and loss (Maynard, 2013, p. 84). SMEs are exempted from applying complicated accounting standards when during preparation of the financial report. Consequently, SMEs are required to comply with about 10% of the total accounting requirements applied by the public listed companies. The essence of having separate accounting standards for the SMEs is to reduce the cost of financial reporting and is justifiable by the use of information provided to the users (IFRS Foundation, 2013). Furthermore, SMEs use financial information for a narrower range of decision hence no need for subjecting the business to tedious and expensive accounting standard requirements. The general users of financial information for SMEs include lenders, shareholders, creditors, consumers, employees, etc. IFRS for SMEs provides a simplification of IFRS principles for identifying and measuring “assets, liabilities, income and expenses” (IFRS Foundation, 2013). It has fewer disclosure requirements and simple accounting requirements IFRS Regulatory Framework The framework involves the statement of functions of financial statement to promote robust process of standard-setting, ensure consistency of preparation of financial statement and provide guidelines for developing standards in the future (IFRS Foundation, 2013). The regulatory framework enables users of financial information to understand the accounting principles that guide them in interpreting financial statement and provides guidelines for developing accounting standards. The framework determines the procedure to be followed in preparing and applying accounting standards and specifies the entities that the standards apply (Maynard, 2013). The framework presents qualitative characteristics as the traits that make information provided in the financial statement valuable to users. Small and Medium Enterprises Unlike limited companies small business enterprises (SMEs) have no public accountability thus they publish financial statement for general purpose use by the external users. The external users of SMEs financial information include credit rating agencies, creditors (existing and potential), business owners, etc. the general purpose information should disclose fair financial position of the business, operating performance, cash flow and so on (ICAEW, 2014). Entities are accountable to the public if they have debt or equity instruments trading in a public market or are intending to start trading in a public market. Also, entities holding assets in fiduciary capacity for various external owners as its primary business as in the case of banks, insurers companies, security dealers, investment banks, mutual funds, etc. are accountable to the public (ICAEW, 2014). The purpose of financial statement for SMEs is to disclose information about the performance, cash flow and financial position of the business entity (ICAEW, 2014). The financial position of the business is the disclosure of state of business assets and liabilities at any given time when the statement was being prepared which is usually at the end of trading period. On the other hand, financial performance depicts relationship between income and expenses of the business during the period covered in the report (ICAEW, 2014). In addition, the financial statement demonstrates the management competence over the business resources. Setting of Accounting Standards The Financial Accounting Standards Board (FASB) is responsible for setting accounting standards in consultation with various stakeholders through a rigorous, comprehensive and independent process that promotes broad participation and objectivity of stakeholders’ views (PriceWaterhouse Coopers, 2013). The process of establishing accounting principles is "subject to oversight by the Financial Accounting Foundation’s Board of Trustees." "The procedure is directed by rules to promote transparency" (PriceWaterhouse Coopers, 2013). The rules followed when setting standards includes "establishing the organization or industry in which the FASB works" (Maynard, 2013, p.118). The board sets the mission they have to accomplish the principles to guide their process; they establish the responsibilities of the boards chairperson and technical staff, establishing the communication process including the procedure for reporting the details of the accounting standards, the meeting and voting procedure, and the process for making public announcement and the nature of information to be made public (ICAEW, 2014). Before the board pronounce a change accounting standards first they carry out analysis of cost and benefit to determine the justification of the change of accounting standards expected benefits over the anticipated cost (PriceWaterhouse Coopers, 2013). The nature and procedure of research involved in the standard-setting procedure vary across the projects and depends on nature and scope of the issues to be reported. The FASB ascertains the financial reporting issues through a variety of ways such as the suggestions or requests presented by the stakeholders (Maynard, 2013). The staffs prepare an analysis of the issue to guide the board in deciding on whether to include the project to the technical agenda. The board examines the identified reporting issues in a meeting(s) and issues an Exposure Draft or Discussion Paper to implore the stakeholders input (PriceWaterhouse Coopers, 2013). Where appropriate the board convenes a roundtable meeting to discuss the Exposure Draft. The staff examines the information obtained through a formal process such as public roundtable discussions, comment letters, etc. Then the board re-examines the suggested provisions and makes careful consideration of the stakeholders input obtained through various public meetings (PriceWaterhouse Coopers, 2013). Finally, the board releases update of the amendment to the Accounting Standards Codification. Importance of Accounting Standards in Preparing Accounting Statement When preparing financial statement business entities are, rely on accounting standards that require using a specific procedure and principles (ICAEW, 2014). The use of accounting standards gives the financial report characteristics of being reliable, understandable, relevant, etc. Reliability: The reliability of the financial statement information depends on the faithful representation of that information (ICAEW, 2014). In order for information to be reliable it should be free from material error or partiality and should represent what it intended to represent faithfully without misleading the users of such information. Understandability: The reliability depends on the assumption that the users of financial information have economic, business and accounting experience and that they can apply that knowledge appropriately when studying information contained in the financial statement. Those responsible for preparing the financial report should present information using terms that are relevant in order to ensure the users of information get to understand it (ICAEW, 2014). Therefore, users of information should interpret all terms used in the financial information as much as they can to increase understandability without compromising the quality of the report by omitting relevant information (PriceWaterhouse Coopers, 2013, p. 1027). Relevance: The roles of financial information are related to each other. In order for the financial information to be relevant, it should have ability to influence economic decision of the users and should guide them in interpreting past, present and future events and ratifying or modifying past estimations (ICAEW, 2014). The information about financial position and performance of the business entity should assist the users of that information to forecast future performance of the business and make any other relevant assessment of the business. The importance of information depends on its nature and materiality. The concept of materiality infers the omission or misstatement of such information can influence the economic decision made by the user based of information presented in the financial statement (PriceWaterhouse Coopers, 2013, p. 1036). Pervasive Recognition and Measurement Principles Pervasive principles are drawn from the "International Accounting Standards Board (IASB) framework for the preparation and presentation of financial statements and from EU-adopted IFRS" (Maynard, 2013, p. 121). The pervasive principles are applicable in recognition and measurement of assets, liabilities, income and expense in the FRS. In the situation where the FRS does not specify the requirements applicable to specific transaction or other conditions the pervasive principles provides guidance for making judgement and establishes the hierarchy that business entity has use in making decision concerning the appropriate policies to be applied in that situation (IFRS Foundation, 2013). The preparation of financial information follows the accrual basis except for the cash flow information. Conclusion SMEs do not require public accountability and their financial statements are not needed by external users. Whereas IFRS are applicable in public companies IFRS for SMEs are applicable to SMEs in preparation and reporting of financial statement. The regulatory framework provides the accounting standards board with guideline for establishing principles and concepts when setting accounting standards to be used in the entities. IFRS-SME meets the objectives of financial statements to provide information about the performance, cash flow and financial position of the SME entities. Preparing financial statement according to established accounting standards gives the financial report traits of, reliability, comparability, relevance, etc. by the users of that information. List of References ICAEW (2014). IFRS for SMEs learning and assessment programme. Available at IFRS Foundation, (2013). FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland. Financial Reporting Council Limited. Available at Maynard, J. (2013). Financial Accounting, Reporting, and Analysis. UK: Oxford University Press. Pp. 57-744. PriceWaterhouse Coopers, (2013). Manual of Accounting –New UK GAAP. A&C Black. Pp. 1003-1186. Read More