Over the last few years we have seen various changes being made with regards to the IFRS (International Financial Reporting Standards) accounting framework, which includes new standards such as IFRS 15 (Revenue), IFRS 9 (Financial Instruments) and IFRS 16 (Leases), replacing the old IAS 18, IAS 32 and IAS 17, respectively Show These changes may seem like a mere modification in abbreviations, that you can leave your accountant and auditor to worry about, but in actual fact, they have had a significant impact on all companies that elected to adopt IFRS as their accounting framework. The new revenue and financial instruments accounting standards under the IFRS accounting framework has become effective for all entities with a financial year starting on or after 1 January 2018, while the new leases standard is applicable to all entities with a financial year starting on or after 1 January 2019. Without going into too much detail regarding the disclosure and accounting requirements, the effect of the new standards have been found to be onerous and overly complex by most people who have dealt with these new accounting and disclosure requirements. Most companies in South Africa, aside from listed groups, struggle to see the benefit of these new standards and why they need to be adhered to. The question is therefore raised as to why one would apply the IFRS accounting framework and what the alternatives would be. The South African Companies Act requires a company to compile its financial statements in accordance with an acceptable accounting framework, the options for which include either IFRS, IFRS for SMEs(International Financial Reporting Standards for Small and Medium-sized Entities) or a financial framework determined by the company (entity-specific accounting policies). The most common of these are IFRS or IFRS for SME’s as very few companies apply entity-specific accounting policies for various reasons. There is a general misunderstanding as to when a company needs to apply IFRS, and when it is able to apply IFRS for SMEs. The PIS (Public Interest Score) of a company is calculated by taking a number of factors into consideration, such as the number of individuals with beneficial interests (i.e. shareholders), turnover for the financial year, third party liability at the end of the financial year and the average number of employees. The general misunderstanding is that the application of the accounting framework is dependent on the company’s PIS, which is not the case. In terms of the Company’s Act a company only needs to apply IFRS if the company is a state-owned company as defined by the Act or if the company is a public company listed on an exchange such as the JSE or AltX for example, all other companies are able to apply IFRS for SMEs. Before a change is made to the accounting framework of a company, other considerations should also be applied such as whether the MOI (Memorandum of Incorporation) requires a specific accounting framework and also whether there are any requirements from the shareholders in terms of the accounting framework that should be applied. The company might form part of a group of companies that apply IFRS and therefore it is required that all of the companies within the group apply the same accounting framework to make the consolidation or aggregation process more efficient and accurate. There are various entities that are able to apply the simpler and less onerous financial reporting framework of IFRS for SMEs. Besides the fact that IFRS for SMEs is less complex and onerous, proper consideration should always be given prior to making a decision about changing the accounting framework. There are significant differences between the above-mentioned frameworks, and each has pros and cons that need to be carefully assessed. It is unlikely that smaller groups and owner-managed business will see any value in the complexity and additional disclosure requirements that the new IFRS standards bring along. As such, the increase in audit, consultation, tax, and compilation fees can be avoided by making the change to IFRS for SMEs. However, it is very important that an assessment is made by the shareholders and directors of the company, in consultation with its auditors, so that an informed decision can be made. Author: Wiehann Olivier The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) is designed to apply to all entities that do not have public accountability. The International Accounting Standards Board (IASB) developed the IFRS for SMEs in recognition of the cost and difficulty to relatively small private entities of preparing fully compliant IFRS information. The IASB also recognised that users of private entity financial statements may have a different focus to those interested in publicly listed companies. In addition, the IFRS for SMEs contains fewer disclosure requirements in a dramatically shorter document, compared to that of the IFRS, and therefore appeals to both the users and preparers of financial statements. The IFRS for SMEs standard is potentially available for immediate use, however it is for the relevant standard setters and authorities in each country to decide which entities are permitted and/or required to apply IFRS for SMEs. In May 2015, the IASB completed a comprehensive review of the IFRS for SMEs and made limited amendments to the Standard. The complete revised version of the IFRS for SMEs was issued in December 2015. PKF International prepared an accounting update for the amendments. The International Accounting Standards Board has published a Request for Information (RfI) which is the first step in its second comprehensive review of the IFRS for SMEs Standard. As part of the first phase of the 2019 Review, the Board is developing a Request for Information requesting views on how, and if, the IFRS for SMEs Standard should be updated to take account of full IFRS Standards and amendments not currently incorporated into the IFRS for SMEs Standard. Visit ifrs.org for more on the second comprehensive review. In line with the amendments issued by the IASB, PKF International prepared illustrated disclosures for a compliant set of financial statements with IFRS for SMEs. Who can use IFRS for SMEs?All entities apart from public companies, state- owned companies and certain non-profit companies are allowed to apply the IFRS for SMEs. Profit companies, other than state owned or public companies, whose public interest score for the particular financial year is at least 350.
Which entities use IFRS?IFRS for SMEs is intended to be used by SMEs, which are entities that publish general purpose financial statements for external users and do not have public accountability.
What is IFRS for small and medium sized entities?Small and medium-sized entities are entities that: (a) do not have public accountability, and. (b) publish general purpose financial statements for external users. Examples of external users include owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies.
Which companies must comply with IFRS?All domestic companies whose securities trade in a public market are required to use IFRS Standards as adopted by the EU in their consolidated financial statements.
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