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The financial reporting standards are convincing statements of how particular types of transactions and dealings ought to be reflected on financial statements. The international financial reporting standard-setting process came to be developed several decades ago and onwards (IASB, 2009, p. 56). The international accounting standard board (IASB) publishes the standards in a sequence of announcements referred to as International Financial Reporting Standards (IFRS) (IAS, 2008, p. 21).
Purpose of the standards
The standards aim at promoting the integrity of the accounting profession. It was a way of making assured consistency in the way accountants present the transaction records and also in the preparation of the business final accounts. The industrialized nations moreover wanted to create standards to be used by developing and smaller countries not capable of establishing their own reporting standards. This is by a large extent meant to enhance the assurance of stakeholders, principally shareholders and prospective financier in the accounting profession. However, as the business world became more comprehensive, managers, shareholders, large firms and auditing companies came to appreciate the significance of embracing general standards in the field of the financial accounting chain.
Financial reporting standards are essential to encourage quality financial reporting The elementary function of accounting is to transmit financial information regarding businesses and other institutes to the relevant stakeholders as well as government, and the general public (Dick & Missonier-Piera, 2010, p. 45). The government, investors, suppliers, lenders, and all shareholders, use the financial reports in their decision-making and also, assessing the credibility of people chosen to administer such businesses. If the financial information does not amuse the stakeholders, they may fail to make effective decisions to their benefit. For instance, if a business show rise in profits on their financial report the investors would tend to hold on to their shares with the hope of the company doing much better. The financial reports should be reliable exhibiting the good qualities of relevance and under stability.
Other options IASB considered before a standalone standard were developed.
In coming up with a decision to develop an IFRS, the IASB considered some of the following issues:
1. Capability of others doing it
The Board well thought-out the possibility of financial reporting standards to be prepared by other people either internationally, within a country, or possibly a region. The board concentrated their efforts, mainly on standards for entities played part in the public capital markets. Nevertheless, the IASB noted that their mission was not constrained to standards for entities that only played part in public capital markets (Mackenzie, Coetsee, & Njikizana, Wiley, 2011, p. 123). If the board concentrated only on those entities is probable to end up in practices for new entities, which may fail to address the requirements of external consumer or user of the financial statements, who may not be conversant with the boards structure designed for the Preparation of Financial Statements, also the standards, may perhaps be short of comparability on general regional boundaries or within a country. The board considered those reasons and focused on undertaking the project.
2. Do national standard-setters support a board’s initiative
The IASB project is supported by the nationwide accounting standard-setters. The board had to have to survey on whether its initiative on the standalone for SMEs was considered. The IASB board held a meeting in September 2003 with the nationalized accounting standard setters in which the standard setters approved.
3. An IFRS for SMEs is consistent with the IASB’s mission.
Developing standalone standards ought to be consistent with the board’s mission. The prime goal of the IASB was to develop with the public interest at hand, a particular set of worth, comprehensible and applicable worldwide financial standards, which are highly guided by, transparency and analogous information in financial reporting and statements that could guide the capital markets in making economic decisions. A ‘standalone’ means that all entities nationwide follow the same standards.
4. Different users’ needs and cost-benefit considerations
The standard alone framework had the intention of financial statements is to give data regarding to the financial situation, routine and variations in financial status of an entity which is that is valuable to a variety of clients in economic decisions making. In setting up standards for the structure and meet general purpose with regard to financial statements, the user requirements are paramount.
Some of the users of financial statements of SMEs might not get the significance of various information presented in the financial statements, which are prepared in agreement with full IFRSs. For instance, the user of SMEs financial statements of might have been interested in temporary cash flows, liquidity, past trends of earning and the strength of the balance sheet, which may help them in decision making. However, the financial statements of SMEs might not present all the information which an entity shareholder requires.
The board considered some accounting policy options. Normally, some transaction, event or condition, tend to be simpler to put into practice than the other. The board had to decide whether the IFRS for SMEs ought to get rid of all bookkeeping policy preferences and, thus, necessitate all Small and medium enterprises to follow a distinct accounting policy to complete a specified transaction, event or condition. This was undertaken to facilitate simplification of the IFRS for Small and medium enterprises and better comparability of the consequential economic information among entities using the IFRS for SMEs.
According to IASB board, the accounting policy benefits were attractive. It finalized that eliminating the small and medium entities from employing an accounting policy option which is accessible to entities by means of full IFRSs may possibly hold back comparability between small enterprises and entities using full IFRSs. The Board acknowledged that there was a possibility of most SMEs opting for the uncomplicated choice in full IFRSs. Therefore, the Board decided to include only a simpler option in the standalone policy.
(Barry J. Epstein, 2010)
Q2. Factors that SMEs will have to consider in managing the change to IFRS for the first time
The IFRS for SMEs
The standard was established on July 2009 by the International Accounting Standard for Small, and Medium sized Entities (Hillary, 2000, p. 67). Its aim was to develop a smooth progress of financial reporting to small entities through an easy and fewer comprehensive requirement and regulation from full IFRS standards. It was also intended to remove complex options in some areas in which the full IFSR standards permit several accounting options (Kumar, 2010, p. 127).
Considerations prior to adopting the IFRS for SMEs
The main goal for IFRS for SMEs is to make financial reporting easier and bring down costs of the financial statements preparation. The adoption of the IFRS for SMEs is acceptable to any entity; nevertheless, the entities must comply with the intended scope of the standards in order to claim their financial statements comply with the IFRS for SMEs. The scope for IFRS for SMEs is only applicable to entities that are not publicly accountable (Mackenzie, Lombard and Coetsee, 2010, p. 32).
The following are some of the factors that an entity could consider before adopting the IFRS for SMEs.
1. Local financial reporting requirements
Among other things, the adoption of the IFRS for SMEs should count on whether, the standard complies with local laws Even though the standards comply with local laws and authority needs or else consent the standard as suitable for financial reporting structure, subsequently, individual entities taking into consideration affecting the standard still require establishing whether they are able to assert compliance in their particular circumstances with the standard. For example, if an entity meets the requirements under the criterion defined by an authority who accepts an application of the IFRS for SMEs may not be able to assert to the agreement with the customary if it is publicly accountable (Barry J. Epstein, 2010, p. 97).
A further feature that an entity has to put into consideration is whether the IFRS for SMEs is extensively accepted on economic reporting structure in their operating business environment. One is required to analyze whether the user will agree with the IFRS for SMEs financial information or if they would need supplementary revelation and statements. If any addition requirement is established, then the cost- benefit test may not be met. Furthermore, there is a benefit for entities in the quest of foreign investments through the adoption of the set standards. If additional disclosures or statements were required, then a cost-benefit test might not be met. Meanwhile, entities involved in international trade or looking for foreign investment can benefit from implementing the standard that is based on similar ideologies that are broadly conventional.
2. User and comparability to other entities.
It is certain that, the necessities in the IFRS for SMEs standards are not as extensive as compared with full IFRSs, it seems unavoidable that entities reporting using the IFRS for SMEs may, in particular, conditions apply different accounting handlings, that may perhaps end up in preparing fewer comparable financial statements of entities using the IFRS for SMEs as compared to those of entities using full IFRSs This can be a temporary apprehension for consumer who may be concerned in making a comparison of different entity's financial statements. However, it would at high degree possibly reduce over time; while other entities approve the standard and the elucidation of the demands of the standard grow to be more standardized. Furthermore, the accounting statements prepared using the IFRS for SMEs might be simpler to comprehend having in mind that the IFRS for SMEs requirements are simple, and the disclosures are few.
3. Business impacts
An entity needs to consider several key business aspects such as the result on a financial metrics such as net profit, existing debt agreements, and the provisions and conditions of conventional arrangements. It may also influence on some business items: First, the amount of payable taxes. A change may arise on taxable income and the amount of tax payable, when the net profit changes or tax law is based on the accounting treatment. Secondly, the capability to pay a bonus or the amount of dividends payable: In authority for which dividends are inadequate to disseminate reserves or are objected to capital management requirements, the capability to pay dividends or the amount of dividends the which might be paid can possibly be impacted. Finally, administration compensation: when the management reparation is supported on financial metrics, subsequently a change may be realized on the amount payable.
The implication of such impact is dependent on the specifics and conditions of every entity, together with confined jurisdictional requirements. The consideration at this point is to make sure that sufficient onward preparation is embarked on, in order to limit any undesirable impacts, other than capitalizing on the constructive results.
4. Long-term plans
The firm’s long time goals and plans should be put consideration when deciding on adapting the IFRS for SMEs. While an entity has the developmental aspirations or is forecasting on an event, for example, a recording in the future which might necessitate the approval of full IFRSs, an adoption of the IFRS for SMEs earlier, may well be a valuable step towards adopting full IFRSs
5. Group reporting
For group reporting purposes, requirements in other diverse jurisdictions are predominantly relevant to reflect on. Example, for a group entity who comes from different regions, e.g. Africa, Germany, or France, should consider applying for the IFRS for SMEs for group reporting. Using the standard the business case will be more convincing if the conventional financial reporting framework is acceptable in most authorities for which the group entities come from. If the group reports are controlled by full IFRSs, a subsequent deliberation with respect to group reporting may be whether the complication and figure of consolidation alteration will vary as an effect of the group entity’s acceptance of the IFRS for SMEs. This will highly count on the entity’s present accounting reporting structure and how comparable it is to complete IFRSs.
Before adopting the IFRS for SMEs there may be necessary to put into account various cost implications, calculating on entity and authority explicit status. They might comprise the following:
Upfront investment: due to the system changes brought about by system changes, training expenses, and the change of format of the financial statements, the adoption of the IFRS for SMEs might impose some upfront investment However, it is expected that appropriate standard accounting packages may be obtainable, which may cut down the upfront investment necessary.
Ongoing training: the IFRS for SMEs may not be updated severally, continuing instruction expenses might be low as compared to the cost that would be incurred if the accounting reporting framework was to change rapidly (Tohmatsu, 2008, p. 72).
Standalone financial reporting standards, useful time and again, improve the comparability of the accounting information. Financial differences can make it difficult to understand the comparisons made by the shareholder, investors and other users. As a result of the presentation of a standard analogous financial information, superior comprehensive account reporting standards advance the effectiveness of allotment and the capital charging. This benefits both creditors and the entities that seek resources for the reason that it lessens their conformity costs and reduces reservations which have an effect on their cost of capital. Universal financial reporting standards also advance reliability in audit worth and ease instruction and training.
The gains of standalone financial reporting standards are unlimited to the entities, whose sureties do business in open capital markets. In the opinion of the Boards, the standalone financial statements benefit the small and medium-sized entities due to the application of common financial standards. The IFRS for SMEs financial statements are comparable across countries.