A look at International Financial Reporting Standards for SMEs

Small and medium-sized enterprises (SMEs) pervade the business world. In virtually every jurisdiction ( including Ghana), from the largest economies down to the smallest, over 99% of companies have fewer than 50 employees. In most jurisdictions the law requires SMEs to prepare and publish financial statements and have them audited. The global trend in the past decade has been for jurisdictions to adopt International Financial Reporting Standards (IFRS) directly or to converge local Generally Accepted Accounting Principles (GAAP) to IFRS. As IFRS are designed to meet the needs of public capital markets, securities regulators encourage this trend. As a result, the scope and complexity of issues covered in IFRS, the amount of implementation guidance and the volume of disclosures have increased.

SMEs frequently express concern about the burden of complying with complex accounting requirements and question the relevance of the resulting information to the users of their financial statements, who are more interested in cash-flows, liquidity and solvency.

Bringing Clarity

The IFRS for SMEs was issued by the International Accounting Standards Board (IASB) in July 2009 in response to these concerns. It is self-contained, tailored to the needs and capabilities of smaller businesses, and is understandable across borders. The IFRS for SMEs is written in a clear, easily understandable language and is less complex than full IFRS (and many national GAAPs); it limits accounting policy choices, omits topics that are not relevant to SMEs, simplifies the principles for recognition and measurement, and requires fewer disclosures.

Many global accounting groups welcomed the IFRS for SMEs when it was issued. The World Bank said it was a “valuable reporting framework for smaller entities that is more responsive to the size and ownership of their operations, and should help improve their access to finance”. The International Federation of Accountants said the standard “will contribute to enhancing the quality and comparability of SME financial statements around the world and assist SMEs in gaining access to finance. The beneficiaries will not be only SMEs, but also their customers, clients and other users of SME financial statements.” In Ghana, at an event organised by the Institute of Chartered Accountants of Ghana (ICAG) on January 25, 2012, Seth Terkper, the deputy minister of finance and economic planning, launched the simplified versions of the IFRS and International Standards on Auditing (ISAs) for use by SMEs.

Challenges

Adoption of IFRS for SMEs will certainly bring a lot of challenges to both the operators and regulators. First, there is an apparent lack of understanding of the standards even among some accounting professionals. Though the local GAAP Ghana National Accounting Standards are usually based on international accounting standards, most of these local GAAP are gradually being phased out to keep abreast with current trends and changes on the international accounting standards platform. The knowledge gap created between the local GAAP and international best practices requires special training in Ghana to facilitate adoption of IFRS for SMEs. Tertiary institutions and the ICAG in particular need to fast-track the process of updating their curricula to ensure that the future generation of accountants are well equipped to understand and also work with these new standards.

Secondly, it is imperative that amendments are made to the existing laws to ensure enforcement of compliance with IFRS for SMEs. More importantly, existing tax laws require immediate amendments in line with the requirements of IFRS for SMEs to ensure a seamless transition and reduce the potential areas of conflict. Furthermore, there is the need for the regulators charged with the responsibility of enforcing compliance with IFRS for SMEs to keep abreast of the developments relating to the activities of the IASB. Updates and improvement projects are carried out every two years to make the existing standards responsive to new events.

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The Report: Ghana 2014

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