Globally, there is unanimity on the need to simplify accounting requirements for small and medium-sized entities (SMEs). However, there are significant differences over the extent and manner of simplification. For example, in India, SMEs have specific exemptions/ relaxations from accounting standards, mainly related to presentation and disclosure requirements, as well as some related to complex measurement requirements. In contrast, the UK and some other countries have separate standards for SMEs containing significant simplifications.

While the debate continues on the approach and extent of simplification, there is realisation that there can be significant benefits if SMEs across the globe use common accounting standards. This will, for instance, facilitate assessment by financial institutions that provide loans across borders and operate multi-nationally. Similarly, credit rating agencies may work uniformly across borders. Also, entities can easily determine the status of their customer/ supplier’s financial health when scouting for a long-term business relationship. The International Accounting Standards Board has, consequently, issued International Financial Reporting Standards for SMEs.

Nearly 230 pages of text, arranged into 35 chapters, cover all the requirements under recognition, measurement, presentation and disclosure. It is based on the fundamental principles of full IFRS, but simplified. IASB has removed several of the accounting options available under full IFRS and simplified the accounting for SMEs in certain areas. In a number of areas, the requirements for SMEs are significantly different from full IFRS as well as the current Indian GAAP (Generally Accepted Accounting Principles).

Preparation of consolidated financial statements will generally be mandatory for an SME that has subsidiaries, except where the entity meets prescribed exemption criteria. Under Indian GAAP, SMEs are not required to prepare consolidated financial statements.

Jointly controlled entities can be accounted for using the cost model, the equity method or the fair value model. There is no option to use proportionate consolidation.

Property, plant and equipment must be measured at cost less any accumulated depreciation and impairment losses. There is no option to revalue the same.

Investment property must be measured at fair value, unless fair value cannot be measured reliably. There is no option to use the cost model.

All research and development costs are expensed as incurred. No capitalisation is allowed for internally generated intangible assets. This is considerably restrictive than Indian GAAP.

All borrowing costs must be expensed as incurred and cannot be capitalised.

Goodwill is amortised over its useful life. If this cannot be estimated reliably, a useful life of 10 years is assumed. Under Indian GAAP, different standards prescribe different treatment for goodwill.

There are two categories of financial instruments. Basic non-derivative debt instruments are measured at amortised cost. All other financial instruments are measured at fair value with gain/ loss recognised in profit or loss.

From an SME’s perspective, the adoption of this IFRS may impact performance metrics such as net profit and reporting ratios. This, in turn, may impact taxes payable, managerial remuneration, dividend payout and compliance with debt covenants.

From an overall economic perspective, significant benefits can be expected from the application of this IFRS to Indian SMEs. In particular, it will facilitate better comparison with global counterparts and help entities raise finance from global markets at competitive rates.

India will likely converge with full IFRS for public interest entities from April 1, 2015. Simultaneously, the Institute of Chartered Accountants of India and the Ministry of Corporate Affairs should take swift measures to adopt IFRS for SMEs.

The author is Senior Professional in a member firm of Ernst & Young Global

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