Felix Nana Sackey, Managing Partner, Deloitte & Touche (Ghana), on new reporting standards for small and medium-sized enterprises

On July 9, 2009 the International Accounting Standards Board (IASB) issued the International Financial Reporting Standards (IFRS) for small and medium-sized enterprises (SMEs), an alternative framework for eligible entities in place of the full-set IFRS.

IFRS for SMEs is a self-contained standard that incorporates accounting principles based on the full IFRS but simplified to suit the smaller entities. By removing some accounting treatments from the full IFRS, eliminating topics and requirements not generally relevant to SMEs, and simplifying requirements for recognition and measurement, the IFRS for SMEs reduces the volume of accounting requirements applicable to SMEs by over 90%, compared with the full-set IFRS.

The IFRS for SMEs is for use by entities with no public accountability. An entity has public accountability if it has debt or equity instruments that are publicly traded, or if it is a financial institution or entity that, as part of its primary business, holds and manages financial resources entrusted to it by clients. It is also to be used by entities that are required or choose to publish general-purpose financial statements for external users. A subsidiary that is part of a consolidated group that uses the full IFRS is not prohibited from using the IFRS for SMEs in its individual financial statements.

Ghana’s deputy minister of finance and economic planning announced the adoption of the IFRS for SMEs by 2013 on January 25, 2012. The standard has been organised by topic to make it more like a reference manual so as to be more user-friendly.

The IFRS for SMEs and full IFRS are separate frameworks. Entities that are eligible and choose to apply the IFRS for SMEs must apply that standard in full. However, the application of reporting standards to SMEs prohibits certain accounting treatments that are available under the full IFRS, such as the revaluation model for property, plants, equipment and intangible assets, as well as proportionate consolidation for investments in jointly controlled entities. For investment property, measurement is driven by circumstances rather than allowing an accounting policy choice between the cost and fair value models. Under the IFRS for SMEs, if an entity can measure the fair value of an item of investment property reliably without undue cost or effort, it must use fair value, otherwise cost is applied;

As for financial instruments, the standard drops the available-for-sale and held-to-maturity provisions of the International Accounting Standard (IAS) 39. It has no fair value option, and has simplified hedge accounting and derecognition requirements. However, there is a fallback that allows entities to apply IAS 39 in its entirety instead of the financial instrument requirements in the IFRS for SMEs. This is the only fallback option to the full IFRS. Most SMEs are expected to avoid applying IAS 39 due to the added complexity.

The IFRS for SMEs makes numerous simplifications to the recognition and measurement requirements of the full IFRS, which makes the application easier for SMEs. Goodwill and other indefinite-life intangibles are amortised over their useful lives (if useful life cannot be estimated, then it is taken to be 10 years). A simplified calculation is allowed if measurement of defined benefit pension plan obligations using the projected unit credit method involves undue cost or effort. Furthermore, the cost model is permitted for investments in associates and joint ventures, and there are no special accounting requirements for assets held for sale.

The disclosure requirements in the IFRS for SMEs are substantially reduced when compared with those in the full IFRS. The disclosures reduction has been applied for two principal reasons: either they relate to topics or accounting policy options in the full IFRS omitted from the IFRS for SMEs, or they relate to recognition and measurement principles in the full IFRS that have been replaced by simplifications in the IFRS for SMEs. Another reason is that they may not be considered appropriate or necessary based on users’ needs and/or cost-benefit considerations. IFRS for SMEs may be applied for annual financial statements of Ghanaian entities that are authorised for issue after January 1, 2013.