Small GAAP: a large jump for the IASB
Baskerville, Rachel F.; Cordery, Carolyn J.
Date: 1 July 2006
Working Paper
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Abstract
In the last fifteen years, many national standard setters have introduced differential
reporting for small and medium enterprises (SMEs). Internationally, SMEs are a diverse
and dynamic group which are described under broad characteristics in different countries.
SMEs are not issuers or public sector entities and therefore frequently ...
In the last fifteen years, many national standard setters have introduced differential
reporting for small and medium enterprises (SMEs). Internationally, SMEs are a diverse
and dynamic group which are described under broad characteristics in different countries.
SMEs are not issuers or public sector entities and therefore frequently the qualitative
criteria of not being publicly accountable may define these entities. Acceptance and
imposition of International Accounting Standards (IASs) has reignited the debate on
differential reporting, especially since the International Accounting Standards Board
(IASB) issued a discussion document in June 2004 on SME reporting.
It is apparent the majority of national standard setters support an IASB-generated
alternative reporting regime for SMEs, citing that IFRS developed specifically for listed
entities are not relevant for SMEs. Benefits would include lower compliance costs for
reporters who would face reduced disclosure due to simplified presentation. This would
encourage continuing compliance to the IAS regime thus benefiting users when SMEs
produce comparable financial information.
It is the objective of this paper to provide a review of the diversity in jurisdictional
approaches to resolve these issues. This includes a discussion of the two approaches: the
‘top-down’ or the ‘bottom-up’ approach, with examples of each. This research has been
motivated by the absence in academic literature of sufficient studies examining the
underlying issues fundamental to redefining the balance between the accountability and
decision-usefulness functions of general purpose financial reporting. To achieve this
objective, this paper considers relevant academic and practitioner literature before
undertaking an analysis of the issues this literature raises. Unique SME factors, including
close-knit agency relationships, and a tendency to aim for survival and stability over profit
maximisation and growth suggest a distinctly different focus to the IASB conceptual
framework is required.
The prevalence of an unsubstantiated view that SMEs are ‘small entities on the way to
becoming large entities’ overshadows the argument on whether and how SMEs should be
offered relief from highly technical IAS. Some countries have regulation for SMEs already
or are developing a Best Practice Guide for their SMEs. Exemptions may be based on a
public accountability test (as in Canada), but Finland finds the Canadian example ‘too
vague’ and New Zealand’s sector-neutral stance made the application of this definition too
broad.
The IASB may limit definition to broad qualitative and quantitative SME boundaries in its
struggle to provide a useful suite of SME accounting standards to nation states. Managing
different worldviews and the demands of both preparers and users who are unused to
lobbying at a high level, will be challenging for the IASB. Although the IASB originally
aimed for a single set of conceptually robust SME standards, they must revisit the specific
stewardship focus of SME reporting to gain traction in this project. The SME debate
appears as a crucible in which the resolution of such tensions may in time be resolved.
Finance and Accounting
Faculty of Environment, Science and Economy
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