With small and medium-sized entities (SMEs) playing an important role in the global economy and representing over 95% of companies worldwide, the IFRS for SMEs was deemed an appropriate topic for discussion on the ICAEW symposium at the European Accounting Association – held in Valencia earlier this month. The specific question to be addressed by the panellists – representing both the academic and standard setting community – Is the IFRS for SMEs good for SMEs?
Comparability: two sides to the story
General consensus among the panel was that there were many potential benefits in adopting the IFRS for SMEs including improving access to finance by offering finance providers more transparent and comparable financial information. However, it was noted that comparability was a double edged sword in the case of the IFRS for SMEs; adoption of it making private companies more comparable on a like-for-like basis but less comparable for a larger private company aspiring to grow and wanting to be compared with quoted companies adopting full IFRS.
As discussions developed it was noted that the IFRS for SMEs had not been widely adopted –with South Africa being a notable exception. Does this suggest underlying issues with the standard? Has the standard failed to meet its objective? Not according to the IASB representative on the panel who confirmed that global adoption was never the intended objective of introducing the IFRS for SMEs: its real purpose being to assist countries with no or poor accounting standards. Full adoption was therefore deemed not to be an appropriate performance measure; some countries had chosen to adopt the standard, others had used it as a blueprint for their national standards and some had not adopted at all – particularly when existing national standards are already aligned with IFRS. However, it was felt by the panellists that the standard creates a good foundation for developing countries as a first step towards full IFRS.
Does the IFRS for SMEs have an image problem?
Several other theories were put forward to explain the lack of wide spread adoption of the standard, including political motives. For some countries, the desire to signal that their country is a ‘good place to do business’ was the main driver in deciding to adopt the standard. It was noted that this had also led to two categories of adopters: serious adopters and labelled adopters acting in their own self-interest. Some other countries have taken an opposing view. It was suggested that a few countries had shunned the IFRS for SMEs in favour of full IFRS as a matter of principle. For these countries, emphasising their ambition for smaller companies to expand and grow had led to the adoption of full IFRS for all companies, regardless of size. In a light-hearted moment, one of the panellists offered a solution to this problem, suggesting that the IFRS for SMEs had an image problem and should consider rebranding to – among other names – ‘cool IFRS’.
As the panel came to a close, a member of the audience asked an interesting question as to whether some countries had chosen to adopt the standard due to the support it has been given by the World Bank and the IMF and whether any research exists providing evidence on an increase in foreign direct investment following the adoption of the IFRS for SMEs. The academics on the panel agreed that this would be an interesting research opportunity and should be explored, recognising that challenges would be faced in isolating the impact of adopting the IFRS for SMEs from other factors. It was also noted that in some cases it would take decades for the benefits of adoption to be seen.