The Hindu Business Line : A milder regulation for SMEs

The IASB has issued the draft of a proposed accounting standard for SMEs. Its aim is to provide a simplified, self-contained set of accounting principles that are appropriate for smaller, non-listed companies.

Small and medium enterprises (SMEs) find special mention in statutory laws in India, be it in the Central Excise Act, service tax laws or banking laws, as it is felt that they need milder regulations compared to the big players. The Institute of Chartered Accountants of India (ICAI), the accounting-standard setter in the country, was quick to realise that SMEs would not be able to comply with accounting standards in their full form. So, it classified enterprises into three levels.

The top level comprising listed and proposed-to-be-listed companies, banks, financial institutions and insurance companies and companies with turnover in excess of Rs 50 crore or borrowings in excess of Rs 10 crore. Companies with turnover in the Rs 40 lakh to Rs 50 crore band and borrowings between Rs 1 crore and Rs 10 crore forming the second level. And the residual companies making up the third. .

The mild treatment was in the form of excluding them from the rigours of certain accounting standards — such as AS 3 (on cash flows), AS 17 (on segment reporting), AS 18 (on related party disclosures), AS 24 (on discontinuing operations) and ASs 21, 23 and 27 — that were mainly applicable to top level enterprises. . These enterprises were also exempted from making disclosures under AS 20 (on earnings per share) and AS 29 (on provisions and contingencies). A general rule of the standard-setters has been to defer the applicability of new standards for SMEs to give them time to get used to them.

International scene

Recently, the International Accounting Standards Board (IASB) issued a draft of a proposed accounting standard for SMEs. The aim of the standard is to provide a simplified, self-contained set of accounting principles that are appropriate for smaller, non-listed companies, based on International Financial Reporting Standards (IFRSs) developed primarily for listed companies.

By removing choices for accounting treatment, eliminating topics that are not generally relevant to SMEs and simplifying methods for recognition and measurement, the resulting draft standard reduces the volume of accounting guidance applicable to SMEs by more than 85 per cent when compared with the full set of IFRSs.

The IASB has drastically simplified the definition of SMEs, stating them to be entities that do not have public accountability. It goes on to state that an entity has public accountability when it has issued debt or equity securities in a public market or it holds assets in a fiduciary capacity for a broad group of outsiders, such as bank, insurance company, securities broker/dealer, pension fund, mutual fund, or investment bank.

Three concessions

Three broad concessions have been given for SMEs: Omission of topics, simpler option, and simplification of recognition and measurement.

The topics omitted include general price-level adjusted reporting in a hyperinflationary environment, equity-settled share-based payment, determining the fair value of agricultural assets, extractive industries, interim reporting, lessor accounting finance leases, recoverable amount of goodwill, and earnings per share and segment reporting.

Simpler options for SMEs are: The cost-depreciation model for investment property, the cost-amortisation-impairment model for property, plant and equipment and intangibles, treating borrowing costs as expense, indirect method for reporting operating cash flows and one method for all grants.

Recognition and measurement relaxations are given in `Financial Instruments - Recognition and Measurement', and these include simplified hedge accounting, goodwill impairment, share-based payment (the intrinsic value method is permitted) and finance leases.

Future outlook

Since the future belongs to IFRS, it could be time for the ICAI to look into definition of SMEs. The monetary values given for turnover or borrowings would need to be revised if the ICAI is keen on retaining a value definition. The IASB definition, with its focus on public accountability, appears to be more practical and is something the ICAI could consider. It has been a tradition with most Indian corporates and SMEs not to disclose much unless bound to do so. If most SMEs go the IFRS way , complying with the full-blown IFRS when they grow up and join the big boys will be easy.

(The author is a Hyderabad-based chartered accountant.)

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