Small GAAP: a large jump for the IASB

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 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.