Introduction
After more than six years of drafting, consultations, redrafting, deliberations, field testing and debates across a number of countries of the world, the International Accounting Standards Board (IASB), the body responsible for international standard-setting for the accounting profession, has issued an International Financial Reporting Standard (IFRS) designed for use by small and medium-sized entities (SMEs). Guyana is a member of the International Federation of Accountants and such standards automatically apply to Guyana.
The accounting regulator in Guyana, the Institute of Chartered Accountants of Guyana is now considering adoption. While it has not pronounced on the new standard it is expected that the standard would be available for use in the 2009 financial statements of all Guyanese SMEs. While not the most satisfactory situation, some members of the accounting profession have opined that even in the absence of such pronouncement, businesses and their auditors should take the lead and apply the new standard immediately.
The release of the new IFRS should be seen as one of the most welcome developments and contribution of the accounting profession in modern times. It simplifies many of the rules governing the preparation, contents and presentation of financial statements for all but a dozen or so of our companies. Up to this time the same rules that applied to the multi-billion dollar company like Demerara Distillers Limited also applied to the small one person operation – a requirement that is expensive, impracticable and nonsensical. The financial sector would be particularly gratified as the new standard removes one of the excuses of the profession about the cost, time and complexity involved in the preparation of financial statements submitted to them in support of credit applications and renewal.
The IFRS for SMEs is a self-contained standard of about 230 pages tailored for the needs and capabilities of smaller businesses. Many of the principles in full IFRSs for recognising and measuring assets, liabilities, income and expenses have been simplified, topics not relevant to SMEs have been omitted, and the number of required disclosures has been significantly reduced.
Main features
The following principal changes to existing accounting rules for SMEs arising from the new IFRS are highlighted:
1. Some topics in IFRSs are omitted because they are not relevant to the typical SMEs. These include: earnings per share; interim financial reporting; segment reporting; and special accounting for assets held for sale. To the extent that they do apply, non-mandatory reference could be made to the existing IFRS’s, which does compromise the stand-alone precept.
2. Some accounting policy options permitted under full IFRSs are not allowed under the SME IFRS because a more simplified method is available under the new standard. These include: financial instrument options including available-for-sale, held-to-maturity and fair value options; the revaluation model for property, plant and equipment and for intangible assets; 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; and various options for government grants.
I have highlighted the revaluation issue because this has become a common practice in Guyana following our experience with hyper-inflation in the late seventies and eighties.
3. Recognition and measurement simplifications: The main simplifications to the recognition and measurement principles in full IFRSs include the accounting principles and disclosure rules for financial instruments; goodwill and other indefinite life intangible assets which must be amortised over their estimated useful lives (ten years if useful life cannot be estimated reliably); research and development costs which must be recognised as expenses; borrowing costs which must be recognised as expenses; property, plant and equipment and intangible assets; and defined benefit plans the past service cost of which must be recognised immediately in profit or loss while all actuarial gains and losses must be recognised immediately either in profit or loss or other comprehensive income.
4. Substantially fewer disclosures: No longer should the financial statements look like a formidable book written in a language to confuse rather than inform. Pro-forma financial statements compatible with the new IFRS have been developed and published by the IASB and are available on their website.
5. Simplified redrafting: A significant feature of the new standard is that it will only be subject to triennial reviews so that there is more certainty and uniformity in the preparation and presentation of financial statements. No need to worry about annual reviews and changes and the implications for comparative figures. Hopefully as well, instead of spending a whole lot of time on what was essentially non-added value work, auditors will assist their clients in offering advice on internal controls and business issues.
Definition
One of the main questions that obviously came to mind in developing the new standard is what will be considered an SME, since there was no agreed or universally accepted definition. SMEs come in many shapes and shades and it would be a challenge for the profession and the law to capture in a single definition the range of such entities. An SME in a developed country could be a major player in a developing one and therefore a definition based on quantitative factors such as number of employees or level of sales was rejected.
An SME is defined in the standard as an entity which publishes general purpose financial statements for external users but does not have public accountability. An entity has public accountability if (a) its debt (borrowings) or equity (shares) instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market; or (b) it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. All companies traded on the Guyana Stock Exchange, banks, insurance companies, securities brokers/dealers, unit trusts, etc, would be considered to have public accountability and cannot therefore prepare their financial statements using the IFRS for SMEs.
What about those SMEs that seem to be neither fish nor fowl and how do we deal with the public interest companies for which special reporting requirements are desirable? Where for example does a Guysuco, a GPL or a GT&T come, and are consumers any less important than investors?
The IASB considered whether to include in the definition of public accountability those companies which provide an essential public service such as a public utility. Respondents to the discussion paper however felt that in many jurisdictions such entities could be very small.
Consideration was also given to those entities which were economically significant in their home jurisdiction but the IASB felt that “economic significance may be more relevant to matters of political and societal accountability” and therefore felt that the final decision should be left to the individual jurisdictions.
Time for action
The issue of this standard should be addressed not only by the accounting profession in relation to its clients but by the Ministry of Finance, the Guyana Revenue Authority and the lending community. The Companies Act envisaged that the Minister of Finance would set certain levels of income, assets or staff below which the requirement of the audit of a company could be dispensed with. The act has now been on the law books for eighteen years but no such pronouncement has been done. It is time that this be done.
The Guyana Revenue Authority too has to consider whether it should be insisting that a one-man company with a small turnover and few assets should require an audit but the multi-billion dollar self-employed person does not. Yes, it is a legislative matter but it is up to the GRA to make recommendations based on practice and experience.
The lending community now has an opportunity to decide whether it will continue to accept some of the sloppily and inaccurately prepared financial statements submitted in support of lending applications or whether it will now sit with its clients and the accounting profession and insist on a higher standard of accounting and reporting. The accounting profession locally has generally been very slow and a ditherer on the occasions on which leadership was required. It should now piggy-back on the initiative of its international brotherhood – for that is what it is – and take decisive action on this matter to justify the wide powers it enjoys under statute.
Conclusion
The new IFRS is clearly both an opportunity and a challenge and to use that overdone term, every stakeholder should see and use this to rectify many of the serious mistakes that have been perpetrated and tolerated for decades.
Mistakes that have caused the loss of billions of dollars of revenue to the state, the loss of reputation of a profession that has become associated with tax evasion and aggressive tax planning and the inability of the layperson to read and understand financial statements, an important requirement for a developing capital market.
At the same time, the new IFRS is not a panacea and outstanding issues such as corporate governance, money-laundering, tax evasion and poor and unethical standards of accounting and auditing will remain to be addressed. This new IFRS is however welcomed by Business Page as a useful development. One cheer for the accounting profession!