Full IFRS FOR SMES and IFRS : Key Differences and Applicability

In an increasingly interconnected and globalized world, international transactions and foreign operations are becoming commonplace for many companies. Both International Financial Reporting Standards (IFRS) and the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) are critical references. While related, they serve different needs. This article dives into the world of financial accounting, clarifying the difference between IFRS for SMEs and IFRS, discussing their objectives, history, and scope. and highlighting their relationship and impact on financial statement preparation.  

What are International Financial Reporting Standards (IFRS)?

International Financial Reporting Standards (IFRS) are a comprehensive set of accounting standards issued by the International Accounting Standards Board (IASB). These standards aim to standardize how financial statements are prepared and presented for companies worldwide, thereby enhancing the transparency, reliability, and comparability of financial information. IFRS are used by companies in over 140 jurisdictions, including the European Union, Australia, Canada, and many countries in Asia, Africa, and South America.

International Accounting Standards Board (IASB): An independent international body based in London, responsible for developing IFRS.

What is the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs)?

The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) is a simplified set of accounting standards derived from full IFRS, specifically designed to meet the needs and capabilities of small and medium-sized entities (SMEs). The IFRS for SMEs aims to provide a high-quality, understandable, and easily applicable accounting framework for SMEs, while reducing the burden and cost compared to full IFRS.  

Who are Small and Medium-sized Entities (SMEs)?

The IFRS for SMEs defines SMEs as entities that:

• Do not have public accountability: This means their debt or equity instruments are not traded in a public market, and they are not in the process of issuing such instruments for trading in a public market.
• Publish general-purpose financial statements for external users.

The Difference Between IFRS for SMEs and IFRS:

Here’s a breakdown of the key differences between IFRS for SMEs and IFRS:

1. Size and Scope:
   • IFRS: A comprehensive set of standards covering all aspects of financial accounting and reporting, suitable for large and complex companies, especially those listed on global stock exchanges.
   • IFRS for SMEs: A self-contained standard, specifically designed for SMEs, simpler and smaller in volume than full IFRS.
2. Measurement Basis:
   • IFRS: Tends to use fair value more extensively, especially for financial instruments and certain non-financial assets.
   • IFRS for SMEs: Tends to use historical cost more extensively, with limited use of fair value.
3. Topics Not Covered in IFRS for SMEs: Some complex topics are excluded from IFRS for SMEs, such as:
   • Accounting for derivative financial instruments and hedging relationships: SMEs using these instruments must refer to IFRS 9 or IAS 39.
   • Accounting for deferred income taxes: IFRS for SMEs provides a simplified approach to accounting for income taxes.
   • Segment reporting: IFRS for SMEs does not require disclosure of information about operating segments.
   • Earnings per share: IFRS for SMEs does not require disclosure of earnings per share.
   • Non-current assets held for sale and discontinued operations: IFRS for SMEs does not have specific requirements for this topic.
   • Financial reporting in hyperinflationary economies: IFRS for SMEs does not address this topic.
4. Disclosures:
   • IFRS: Requires comprehensive and detailed disclosures about various items in the financial statements and the accounting policies used.
   • IFRS for SMEs: Requires simplified and significantly fewer disclosures than full IFRS.
5. Updates:
   • IFRS: Full IFRS are updated frequently to keep pace with developments in the business environment.
   • IFRS for SMEs: IFRS for SMEs are updated less frequently, typically reviewed every three years.
6. Policy Choices:
   • IFRS: offers limited policy choices in several areas.
   • IFRS for SMEs: IFRS for SMEs offers simplified policy choices in some areas, making the application process easier for SMEs.

Advantages of Applying IFRS for SMEs:

• Ease of Understanding and Application: IFRS for SMEs is simpler and easier to understand and apply than full IFRS.
• Lower Cost of Application: Applying IFRS for SMEs leads to lower financial reporting costs compared to applying full IFRS.
• Suitable for the Needs of SMEs: IFRS for SMEs takes into account the needs and capabilities of SMEs and provides them with a high-quality accounting framework without burdening them with complex standards.
• Improved Quality of Financial Reporting: IFRS for SMEs helps improve the quality and reliability of financial information provided by SMEs.
• Enhanced Transparency and Comparability: IFRS for SMEs enhances the transparency and comparability of financial statements of SMEs.
• Easier Access to Finance: Applying IFRS for SMEs may facilitate access to finance from banks and financial institutions for SMEs.

Disadvantages of IFRS for SMEs:

• Less Comprehensive than IFRS: IFRS for SMEs does not address all the topics covered by full IFRS, which may make it unsuitable for some SMEs with complex activities.
• May Not Meet the Needs of All Users of Financial Statements: Some users of financial statements, such as investors in financial markets, may find that IFRS for SMEs does not provide sufficient information for their needs.
• Potential for Differences in Interpretation: Although IFRS for SMEs is simpler than full IFRS, there is still room for differences in the interpretation and application of some of its provisions.

Choosing the Appropriate Standard:

The choice of the appropriate standard (IFRS for SMEs or IFRS) depends on the size and complexity of the entity and the needs of the users of its financial statements. In general:

• Entities that issue debt or equity instruments traded in a public market must apply full IFRS.
• Entities that do not issue debt or equity instruments traded in a public market and are not considered to have public accountability may apply IFRS for SMEs.

An entity should consider the following factors when deciding whether to apply IFRS for SMEs:

• Size of the Entity: IFRS for SMEs is generally more suitable for smaller entities.
• Complexity of Operations: If the entity engages in complex activities, such as transactions with derivative financial instruments, it may be more appropriate to apply full IFRS.
• Needs of Users of Financial Statements: The entity should consider the needs of users of its financial statements when choosing the appropriate standard.
• Cost of Application: The cost of applying IFRS for SMEs should be compared with the cost of applying full IFRS.
• Future Plans of the Entity: If the entity plans to go public in the future, it may be more appropriate to apply full IFRS.

Transitioning from IFRS to IFRS for SMEs:

An entity that applies full IFRS can switch to applying IFRS for SMEs if it meets the eligibility requirements. The transition requires applying IFRS for SMEs retrospectively, i.e., restating the comparative financial statements as if IFRS for SMEs had always been applied.

Transitioning from IFRS for SMEs to IFRS:

An entity that applies IFRS for SMEs must switch to applying full IFRS if it no longer meets the eligibility requirements, or if it chooses to do so voluntarily. The transition requires applying IFRS 1, “First-time Adoption of International Financial Reporting Standards.”

Importance of IFRS for SMEs and IFRS:

Both IFRS for SMEs and IFRS are essential tools for standardizing the language of financial accounting globally. These standards contribute to improving the quality, transparency, reliability, and comparability of financial information, which enhances the efficiency of capital markets and facilitates the decision-making process for investors and other stakeholders.

Role of Technology in Applying IFRS for SMEs and IFRS: Accounting software’s and ERP systems help in applying IFRS for SMEs and IFRS effectively and accurately through:

• Automating accounting processes based on the standard of choice.
• Providing tools to double check accuracy, and compliance with the standards.
• Generating financial reports with ease in accordance with the IFRS for SMEs and IFRS requirements.
• Facilitate the transfer between IFRS for SMEs and IFRS if necessary.

Conclusion:

Both IFRS for SMEs and IFRS provide a high-quality accounting framework for preparing and presenting financial statements. IFRS for SMEs is a suitable option for small and medium-sized entities that do not have public accountability, as it provides them with a simplified and easy-to-apply standard that meets their financial information needs without burdening them with complex standards. Each entity must carefully assess its needs and circumstances to choose the most appropriate standard for it.

Understanding the difference between IFRS for SMEs and IFRS is essential for all those interested in financial accounting, whether they are accountants, auditors, investors, or financial analysts. Choosing the appropriate standard and applying it correctly contributes to enhancing the quality of financial reporting and supporting the efficiency of capital markets