Although the debate on the process and methods of simplification is still on, the benefits of a global common accounting standard is enormous for Indian SMEs, pretty evidently. In what could potentially become the business language of the SMEs, the International Accounting Standards Board (IASB) has issued International Financial Reporting Standards for the Small and Medium-sized Entities (IFRS for SMEs). According to the IFRS, the SMEs are those entities without a public accountability and those publish general purpose financial statements for external users. A listed company in no circumstances can use IFRS for the SMEs. This 230 pages text is a simplified version of full IFRS, omitting everything not relevant for the SMEs and covers all of the recognition, measurement, presentation and disclosure requirements for the SMEs.
The benefits of the simplified, common accounting principles are manifold. As the very description says, the IFRS is prepared sans the complexity of the full version and is written in a language that is quite comprehensible for the SMEs, while offering a system that is simple to implement compared to the existing Indian accounting standards. On the other hand, it takes the SMEs to the global platform whereby multinational financial institutions, that provide loans across borders, will be able to assess them. They will be able to easily understand their customer/supplier’s financial health during the process of a potential long-term business relationship. With IFRS, credit rating agencies will be able to work uniformly globally.
In short, IFRS for the SMEs will:
- Improve comparability for users of accounts.
- Bring in improved confidence in the accounts of the SMEs.
- Reduce costs associated with maintaining standards on a national basis.
- Offer a platform to growing businesses to prepare themselves for adopting full IFRS.
Some of the key difference between IFRS for the SMEs and Full IFRS versus Indian GAAP are:
- According to the existing Indian Generally Accepted Accounting Principles (GAAP), the SMEs are not required to prepare consolidated financial statements; however, under IFRS, it is mandatory for an SME that has subsidiaries.
- IFRS does not permit proportionate consolidation method for investments in Jointly Controlled Entities (JCEs).
- In IFRS, all borrowing costs are to be recognized as an expense in profit and loss in the period in which they are incurred while Indian GAAP requires borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset to be capitalized as part of the cost of that asset.
- IFRS considers cost of inventories of a service provider as production cost but Indian GAAP does not deal with inventories of service provider.
While the idea is undeniably a noble one, it is not completely free of blemish. Provincialism, diverse eco-social environment, different accounting practices, and the huge disparity between developed and developing nations remain huge obstacles in the development of this standard. The enforcement of this uniform accounting practice will be received with multiple issues such as different tax laws, disclosure laws, regional laws, competition and negative cooperate attitude etc.
All that is discussed in this note is just a small segment of the bigger picture. The SMEs should look up to the benefits of IFRS and educate themselves before the system converge completely with the global accounting revolution. Head over to www.ifrs.org and get to know IFRS in detail.