International Financial Reporting Standards (IFRS) are considered to be universal accounting standards, which are used by organizations to prepare their financial statements, such that they can be presented in a unified manner.
IFRS includes a detailed guide and a breakdown regarding the accounting treatment for all the state of affairs of the company. In this regard, it is also important to consider the fact that there is a distinction between the accounting treatment, and approach adopted either by larger corporations, as well as Small and Medium Enterprises (SMEs).
Why is there is a difference between Full IFRS and IFRS for SMEs?
The underlying difference between Full IFRS, as well as IFRS for SMEs, lies because of the nature of the business involved. The nature of business for SMEs is relatively shorter paced, as compared to the nature of business for companies that have a substantial size of operations.
Apart from the differences in human capital, there are certainly other differences too, that need to be factored in. Small and Medium Enterprises are not required to issue their financial statements for the perusal of external stakeholders and shareholders.
Therefore, they are not required by law to prepare financial statements considering their usage as a decision-making tool by the external stakeholders.
Hence, it makes sense to have slightly different accounting treatments for both, large scale companies, as well as companies that have a considerably smaller scale. This facilitates small and medium enterprises to prepare their financial statements with relative ease.
Differences between Full IFRS and IFRS for SMEs
Certain differences exist between the accounting treatment for IFRS, as well as for SMEs. These differences are mentioned below:
- Financial Statements: As far as differences in financial statements are concerned, both, large enterprises, as well as SMEs need to prepare financial statements with proper compliance. Statement of Changes in Equity are required for both, larger corporations, as well as smaller corporations. The only existing difference in this aspect is the fact that SMEs need to prepare Statement of Changes in Equity only if the changes are resulting from profit and loss, payment of dividends, as well as correction of prior-period errors, or changes in the accounting policy of the company.
- Business Combinations: In case of Full IFRS, transaction costs are excluded. All contingent considerations are supposed to be included in the financial statements. In the same manner, transaction costs are included as acquisition costs. Similarly, contingent considerations are also part of the acquisition costs, in the case where it is probable. On the other hand, transaction costs are included as acquisition costs as far as SMEs are concerned.
- Investment in Associates and Joint Ventures: As far as Full IFRS is concerned, investments in associates are considered to be accounted for under the equity method. The cost and the fair value in this regard are not always incorporated except for in separate financial statements. Alternatively, SMEs are supposed to account for its investment in associates, or jointly controlled entities, using either the cost model, the equity model, and the fair value using profit or loss model.
- Expense Recognition: In full application of the IFRS, Research Costs are expensed as they are incurred. On the other hand, development costs are capitalized and amortized. However, this only holds true when specific criteria pertaining to expense recognition is duly met. For SME’s, all research and development costs, as well as borrowing costs are recognized as an expense.
- Non-Financial Assets, and Goodwill: For Non-Financial Assets, and Goodwill, Full IFRS option allows a choice in accounting policy between cost model, and the revaluation model. For SME’s, only the cost option can be used in order to test for goodwill, and other intangible assets. Similarly, for intangible assets, the life of an asset is either described as finite, or indefinite. For indefinite assets, no amortization is required. On the contrary, for SMEs, there is no distinction between assets contingent on their life. The amortization approach, does not apply to intangible assets.
- Employee Benefits: For IAS 19, Employee Benefits and gains can be recognized immediately or amortized into profit or loss over the expected remaining life of the employee. However, for SMEs, immediate recognition is required. Both, employee benefits, as well as gains are split into different expense accounts into different components.
- Income Taxes: Under Full IFRS, deferred tax is supposed to be recognized to the extent that it turns out to be probable that there are sufficient future taxable profits that enable recovery of the deferred tax asset. For SMEs, a valuation allowance is created that enables to bridge the gap between deferred tax asset, and the highest amount of tax unlikely to be recovered.
- Financial Instruments and Investments: Under Full IFRS, IAS 39 provides a complete layout for recognition and measurement of all the financial instruments. In the same manner, for SMEs, there are two separate sections that primarily deal with basic financial investments (including payables and receivables), and more complex financial instruments. For most basic financial instruments, amortized cost is used as a measure, whereas for other complex instruments, fair value through profit or loss is used as a measure.
Similarities between Full IFRS and IFRS for SMEs
Regardless of the existing differences between IFRS and SMEs, it can be seen that multiple different similarities are the same for both, IFRS, as well as for SMEs. These similarities are mentioned below:
- Fair Presentation: Under both, Full IFRS, as well as IFRS for SMEs organizations are required to oblige under the fair presentation principles laid out under the accountants. This requires that financial statements present a true and a fair view of the financial position of the company, which also includes the changes caused as a result of IFRS related changes in the financial statements.
- Offsetting: Under both the IFRS regimes, offsetting of assets and liabilities, as well as income and expenses is allowed under the system.
- Compliance: Regardless of the fact that SMEs might not have a need to issue their financial statements to the outer public, yet they are still required to comply with the accepted accounting principles, so that the actual picture of the profitability of the company can be properly gauged as a result of this.
- Accounting Principles: There are several accounting principles that are borne in mind by accountants before preparing the financial statements. For example, Matching Principle, and Accrual Principle. Additionally, concepts like depreciation, and Allowance for Bad Debts are also equally relevant for both, full IFRS companies, as well as SMEs. Therefore, these accounting rules and concepts equally apply to both companies, under the same IFRS. These concepts are assumed to be equally implied universally across all companies, regardless of their size or stature.
To summarize the points made above, it can be seen that the basic accounting principles are the same for both, larger corporations, as well as for SMEs. It needs to be understood that accountants in both these companies need to comply with the existing policies and the framework, to ensure that there is proper compliance with the required accounting laws.
The main purpose of the IFRS framework is to ensure that accounting standards are unified, which plays to the advantage of not only the internal decision-makers of the company, but also the stakeholders, and investors who want to inspect the financial statements before deciding whether to invest in the company.