The Accounting Practices Board has withdrawn SA GAAP (South African Generally Accepted Accounting Practice) as a basis for preparing annual financial statements for SMEs (Small and Medium-sized Entities). The choices (with two exceptions noted below) for SMEs are either IFRS (International Financial Reporting Standards) or IFRS for SMEs.
Most SMEs will be able to adopt IFRS for SMEs. The person who draws up your financial statements will determine if you should use IFRS or IFRS for SMEs – speak to your accountant for further clarification.
It is important for you to understand the reasons for, and ramifications of, this change, so your first question will be:
Why the move to IFRS for SMEs?
One of the main reasons for producing financial statements is that decision makers can readily understand and have confidence in your financial statements. If your bankers or investors cannot place faith in or understand your financial statements, then your cost of funding will rise or, worse still, you may not be able to access funds at all.
As SMEs drive job creation in the economy, there has been a global initiative not only to improve the standard of financial reporting for SMEs but also to make financial statements as easy as possible to understand. IFRS for SMEs is a much simpler framework than IFRS, which is already used by large entities. You must also bear in mind that a wide variety of users will read your financial statements – apart from bankers and investors there are creditors, SARS, shareholders, credit agencies and your customers.
SAICA has extensively researched and been involved with the development of IFRS for SMEs. In fact, SAICA have gone even further by releasing a guide for micro businesses to assist them with the implementation of IFRS for SMEs – speak to your accountant about this. The guide is user-friendly, sets out if this guide applies to your business and takes you through the IFRS for SMEs process with examples, illustrative financial statements and disclosure checklists. Micro businesses in this context include entities with a public interest score of less than 100, determined as follows in terms of the Companies Act of 2008:
• One point for each employee (you must take the average number of employees you had during the financial year)
• One point for each R1 million or part thereof of turnover
• One point for every R1 million of third party liabilities or part thereof
• One point for every shareholder (and anyone else with a direct or indirect “beneficial interest” in the issued shares and other securities).
How does this affect me?
If your public interest score is less than 100 and a) you compile your own financial statements or b) you are an owner-managed entity, then there is no need to adopt IFRS for SMEs – you may still produce financial statements on the standard you have always used. Remember though that your bankers and other external readers of your financial statements will find it harder to understand them as IFRS for SMEs becomes the de facto standard for financial statements.
There will be an investment of money and effort as your business moves to IFRS for SMEs. The International Accounting Standards Board has undertaken that there will be no changes to this standard for at least three years after publication which gives you the opportunity to absorb this change.
Remember you are moving to a globally recognised and best practice standard which should improve your relationships with your key stakeholders as they will be in a better position to understand your financials.
© DotNews, 2005-2012. This newsletter is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.