FRS for SMEs – Definition issue

shenton way last week

The International Accounting Standards Board (IASB) published the International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs, or Standard) on July 9, 2009.

The Professional Standards Group of Foo Kon Tan Grant Thornton made an obervation of South Africa’s experience in preparing for the adoption of an SME standard. It observed that 90% of the queries on the ED were on who could apply the ED.

Thus getting the definition of the term SME right is of paramount importance. Let me present some definitions offered by the various authorities thus far.

The Standard is designed to meet the financial reporting needs of entities that:-
(1) do not have public accountability and
(2) publish general purpose financial statements for external users.

Spring Singapore defines SMEs as those entities with:-
(1) less than $15mio of non current assets in manufacturing sector or;
(2) employ less 200 workers in non manufacturing sector.

Last year, Accounting Standards Council (ASC) proposed that an entity would qualify as a SME if it satisfies two of the three size criteria below.
(1) net assets do not exceed $15mio;
(2) annual turnover does not exceed $15mio and;
(3) average number of employees does not exceed 200.

What are the possible practical application issues on the definitions?

(1) Non current assets
– Based on historical purchase price of asset? Can revalued? Impairment?
– Based on net book value? Thus it could depend on depreciation method adopted?
– Classification “mess” between NCA and CA?

(2) Annual turnover
Currently an exempt private company with less than $5mio of annual revenue is already exempted from the need for audited financial statements. Is there not a conflict with the $15mio criteria?

(3) No. of employees
– Who is your employee? Those on CPF contribution list? Part time?
– Can manipulate to meet criteria by moving from “contract for service” to “contract of service”/outsourcing?

Source – ACCA Singapore, FOCUS Quarter 3 – 2009

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