A cost-benefit analysis is never far from any decision by individual companies to implement a major programme. Unfortunately, in cost-benefit analyses of International Financial Reporting Standards (IFRS) adoption, benefits are less tangible than costs and more difficult to quantify.
A cost-benefit analysis is never far from any decision by individual companies to implement a major programme.
Unfortunately, in cost-benefit analyses of International Financial Reporting Standards (IFRS) adoption, benefits are less tangible than costs and more difficult to quantify.
This is more so for Small and Medium Enterprises (SMEs) that demand quick and tangible returns on any investment they make.
In countries such as Rwanda, where SMEs dominate the business scene, the question that has always plagued IFRS is whether the effort of full compliance is worth the investment. A solution to this question is now available in the form of IFRS for SMEs.
The IFRS for SMEs is a less complex self-contained standard, designed to meet the needs and capabilities of SMEs. The standard was issued almost two years ago in response to growing international demands for high quality and common set of accounting standards for smaller companies. It focuses on the needs of users of SMEs financial statements for information about cash flows, liquidity and solvency. Compared to full IFRS, the standard requires significantly fewer disclosures and simplifies many principles for recognising and measuring assets, liabilities, income and expenses.
Since its issue two years ago, many governments around the world have been considering whether to allow or even prescribe the SME standard for non-listed entities, or whether they would prefer to continue with local accounting standards.
For example, South Africa has fully embraced the standard and some countries in South and Central America are very supportive and are considering quick adoption of the SME standard. Some countries in South East Asia have already made the step towards the SME standard.
In Europe, the UK may adopt a ‘tweaked’ version of the standard while France, and to some extent Germany, have rejected the SME because it does not fit with their integrated tax and accounting frameworks. Overall, according to the International Accounting Standards Board (IASB), some 60 jurisdictions have adopted the SME standard or have made a public statement that they plan to adopt it.
Its use by Rwanda’s SMEs has obvious advantages. It can play an essential role in helping SMEs gain access to capital and credit since it improves the quality of financial reporting to the level demanded by financial institutions and investors.
At the same time, it reduces the burden of adopting full IFRSs, now required under the Company’s Act for companies not defined as ‘small private limited companies’. Additionally, the IFRS for SMEs improves the overall confidence in the financial statements of SMEs, an important intangible benefit when dealing with key stakeholders, for example financiers or the tax authorities.
Generally, any company of any size is eligible to use the IFRS for SMEs, provided it does not have public accountability. An entity has public accountability, and therefore should be using full IFRSs, if its securities are publicly traded (in our case at the Rwanda Stock Exchange) or it is a financial institution.
Although there is no quantified size test in the IFRS for SMEs, the trend in many countries is for the relevant authorities, in coordination with the body of accountants, to define the applicable size threshold for entities that can adopt the standard.
In the case of Rwanda, ICPAR, working with the government, should define the implementation guidelines for the standard, including on which entities qualify to use the standard.
This will complement the current phase of ‘doing business’ reforms which focuses on SMEs.
Samuel Kariuki is a Manager with PwC Rwanda.