CPA Australia-Corporate Governance & Financial Reporting Centre Survey on Accounting for Small & Medium Entities (SMEs)

Transcription

1 CPA Australia-Corporate Governance & Financial Reporting Centre Survey on Accounting for Small & Medium Entities (SMEs) SINGAPORE REPORT

2 TABLE OF CONTENTS Headings Page Executive Summary 1 Introduction 6 Survey Methodology 7 1. Profile of Respondents (a) Primary Position of the Respondents (b) Size of the Organisations of the Respondents (c) Industry Represented Definition of SMEs Desirability of IFRS for SMEs (a) Description about IFRS for SMEs (b) Users of Financial Statements of SMEs Content of IFRS for SMEs (a) Simplification of Accounting Treatments for SMEs (b) Content of the Financial Statements (c) Simplification of Recognition and Measurement Methods (d) Disclosure Principles Implementation of IFRS for SMEs (a) Authority for Defining a SME (b) Support for the Proposed IFRs for SMEs (c) Transitional Arrangement and Updating of the IFRS for SMEs

3 Executive Summary A questionnaire survey was conducted among members of the CPA Australia in Australia, Hong Kong, Malaysia and from 18 June 2007 to 6 July 2007 (with the exception of Australia which was granted an additional week) to gather members views on the project by the International Accounting Standards Board (IASB) to prescribe International Financial Reporting Standards for Small and Medium-sized Entities (SMEs). The IASB has released an Exposure Draft IFRS for Small and Medium-sized Entities (hereafter called the proposed IFRS for SMEs) for public comments as part of the due process. A total of 465 responses were received with 92 responses from Australia, 126 responses from Hong Kong, 117 responses from Malaysia and 130 responses from. The respondents held primary positions from a wide range of responsibilities, with 81% of the respondents from the accounting profession (: 75%). They also came from a wide spectrum of other industries. The majority of the respondents belonged to organisations with less than US$3m in turnover or total gross assets. 63% of the respondents (: 58%) belonged to organisations with less than 50 full-time staff. The major findings of the survey for are summarised below. 1. Definition of a SME 41% of the respondents (: 42%) agreed with the definition of a SME entities that do not have public accountability; and publish general purpose financial statements for external users in the proposed IFRS for SMEs and 21% (: 28%) disagreed with it. 58% of the respondents (: 63%) believed that large unlisted companies that do not have public accountability should also be covered by the proposed IFRS for SMEs. If the proposed IFRS for SMEs were to apply to unlisted companies that do not have public accountability, 40% of these respondents (: 45%) opined that the proposed IFRS should be called IFRS for Private Entities. Turnover, total gross assets and number of employees are all considered relevant quantitative measures in defining a SME. 77% the respondents (: 81%) selected a threshold of US$10m or below in turnover as the quantitative measure for defining a SME. For total assets, 81% of the respondents (: 84%) selected a threshold of US$10m or below as the 1

4 quantitative measure for defining a SME. More than half of the respondents also selected less than 50 full-time employees as the appropriate manpower measure for a SME. 2. Desirability of the IFRS for SMEs There is general agreement on the desirability of the proposed IFRS for SMEs. In fact, the majority of the respondents believe that the proposed IFRS for SMEs would: be better able to meet the needs of users of financial statements of SMEs (: 75%; : 72%); serve to reduce the financial reporting burden for the SMEs that want to use global reporting standards (: 79%; : 69%); and serve to reduce the audit burden of SMEs (: 65%; : 59%). 69% of the 64 respondents (: 58% of the 207 respondents) who answered the openended question said that the proposed IFRS for SMEs will save cost and time in the preparation of financial statements for SMEs. Respondents generally agree that IFRS for SMEs should be variations of the Full IFRS. Most respondents expressed a need to have a choice between IFRS for SMEs and Full IFRS but believe that there should not be a combination of both. Respondents were concerned that the application of IFRS for SMEs may result in non-comparability between SMEs and between SMEs and non-smes. Finally, in the event where IFRS for SMEs is adopted, the majority of the respondents expressed the need for the IFRS for SMEs to be updated at least once in every two years or as and when there are changes in the Full IFRS. Interestingly, only 49% of the respondents (: 43%) agree that the IFRS for SMEs should be a standalone accounting standard. The respondents indicated that the probable users of financial statements of SMEs, in order of likelihood, are: banks that make loans to SMEs, shareholders or owners, and credit rating agencies. Hence the proposed IFRS for SMEs should produce financial statements which would meet the needs of these users. 2

5 3. Content of IFRS for SMEs a. Simplified Accounting Treatments The respondents disagree that the cashflow statement is not required in the IFRS for SMEs. The two areas in which simplified accounting treatments are accepted by the respondents are: not to use mark-to-market for financial assets and liabilities in general and the recognition of foreign exchange gains and losses and revaluation increases in profit and loss. Some areas that may require additional guidelines are: first time adoption of accounting standards; accounting for impairment, share-based payments, compensation and share payout; fair value accounting; and accounting for goodwill. b. Content of Financial Statements of SMEs The respondents agree that the financial statements of the SMEs should include those areas covered by the Full IFRS except for the following areas where the respondents are generally neutral (in order of decreasing usefulness): Share-based Payment; Specialised Industries Construction Contracts; Discontinued Operations and Assets Held for Sale; Earnings per Share; Specialised Industries Insurance Contracts; Specialised Industries Extractive Industries; Specialised Industries Agriculture; Financial Reporting in Hyperinflationary Economies; Segment Reporting; and Interim Financial Reporting. The respondents said that the topics covered by the proposed IFRS for SMEs are generally comprehensive. c. Recognition and Measurement Methods The respondents generally believed that the IFRS for SMEs is relatively comprehensive in addressing both the recognition and measurement issues of SMEs. The respondents were 3

6 generally supportive of all the simplified recognition and measurement methods in the proposed IFRS for SMEs although a majority of the respondents are slightly neutral to the following proposed methods: To invoke the impracticality exemption (impractical to restate the opening balance of the balance sheet) for first time adoption. To use the fair value of the rights and obligations under a finance lease to value the leased property. To recognise actuarial gains and losses in full for defined benefit plans in profit or loss when they occur. To use IFRS 2 Share-based Payment in accounting for all share-based payment transactions. To recognize actuarial gains and losses in full in profit and loss when they occur. The most popular suggestion for simplification of the recognition and measurement methods by the respondents is a return to the cost method. d. Disclosure Principles The respondents show strong support for the disclosure principles used by IASB in the proposed IFRS for SMEs. Respondents did not make any suggestions when asked to provide additional disclosure not found in the proposed IFRS for SMEs. 4. Implementation of IFRS for SMEs a. Authority for Defining a SME The survey found that 51% of the respondents (: 52%) believe that the operational definition of a SME as provided in the IFRS for SMEs should be the authoritative definition of a SME. On the other hand, 42% of the respondents (: 32%) believe that the local national regulator is responsible for defining a SME. b. Support for the proposed IFRS for SMEs 79% of the respondents (: 70%) indicated support for the promulgation of an IFRS for SMEs. Interestingly, 85% of the respondents (: 71%) indicated support for the proposed IFRS for SMEs by the IASB. The major reasons provided for the support of an IFRS for SMEs are: cost and benefits of compliance for SMEs; simplicity of the accounts of SMEs that requires a simple set of IFRS; 4

7 useful for consistent reporting and comparison purposes; and reports that are more useful to users For those respondents who objected to the promulgation of IFRS for SMEs, the two reasons given were that: it is too tedious for SMEs to comply with the standard; and the current Full IFRS is sufficient. With respect to the comprehensiveness of the proposed IFRS for SMEs, 38% of the respondents (: 37%) expressed an unqualified support for the proposed IFRS for SMEs while 44% (: 45%) said they were unable to express an opinion. Finally 74% of the respondents (: 70%) believed that SMEs should be given a choice to adopt either the Full IFRS or an IFRS for SMEs. With respect to the time and cost savings that may arise from the introduction of IFRS for SMEs, 69% of the respondents (: 58%) replied positively while 16% (: 27%) replied negatively. c. Transitional Arrangement and Updating of IFRS for SMEs 39% of the respondents (: 42%) believed that the transitional provisions in the proposed IFRS for SMEs are adequate but a relatively high 32% of the respondents (: 37%) do not think that the transition provisions are adequate. In addition, 34% of the respondents (: 33%) believe that the IFRS for SMEs should be updated annually while 27% of respondents (: 19%) expressed a desire that the IFRS for SMEs should be updated once every two years. Finally, 21% of the respondents (: 21%) believe that the IFRS for SMEs should be updated as and when changes are needed or necessary. 5

8 Introduction The International Accounting Standards Board (IASB) has embarked on a project to develop financial reporting standards for Small and Medium-Sized Entities (SMEs) in order to: provide high quality, understandable and enforceable accounting standards suitable for SMEs globally; reduce the financial reporting burden on SMEs that want to use global standards; and meet the needs of users of SME financial statements. The objective is to develop an International Financial Reporting Standard (IFRS) tailored to meet the needs of external users of entities that (1) do not have public accountability and (2) publish general purpose financial statements for external users, i.e. SMEs. Examples of such external users include owners who are not involved in managing the business, existing and potential creditors (such as lenders and vendors), customers, and credit rating agencies. The IASB released its Exposure Draft, IFRS for Small and Medium-sized Entities (hereafter called the proposed IFRS for SMEs) on 26 February 2007 as part of the due process. Comments are to be sent to IASB by 1 October The Corporate Governance and Financial Reporting Centre (CGFRC) in collaboration with CPA Australia designed a survey to seek members views on the proposed IFRS for SMEs. This survey assesses the views of CPA Australia members on accounting issues facing SMEs. The survey covers their perceptions and attitudes towards key areas of accounting standards covered in the proposed IFRS for SMEs from IASB. Members of CPA Australia in Australia, Hong Kong, Malaysia and were invited to participate in the survey. As CPA Australia members hold different positions, such as directors, CEOs, CFOs, senior executives, investors and practitioners, the survey will reflect the views of different stakeholders. The results of the survey can be used as a basis of a CPA Australia s submission to IASB or to inform any submission by each division in the respective country to its local standard-setting authorities. The survey was led by A/P Mak Yuen Teen, Director of the CGFRC and A/P Ho Yew Kee, Vice Dean (Finance and Administration) of NUS Business School. 6

9 Survey Methodology The survey was distributed through an to the sample group inviting them to participate and providing a link to the web site hosting the survey. The sample was selected from approximately 112,000 members of CPA Australia as at June The initial sample was approximately 10,000. The sample consisted of members with an address who were in public practice or working in SMEs and were promoted to members at relevant SME events and relevant Board Committee Members. The online survey was augmented by participants in a CPA conference in during the survey period. The survey was opened on 18 June 2007 to 6 July 2007 (with the exception of Australia where a one-week extension was provided to compensate for the survey not initially being open to Australian respondents until 21 June 2007). A total of 465 responses were received, representing a response rate of approximately 4.9%. This is consistent with surveys of this nature. The number of respondents is sufficiently large (in total and by country), to provide very useful insights into the accounting for SMEs. The responses from each country were: Australia 92 Hong Kong 126 Malaysia Total 465 This report presents the findings of this survey using responses from and comparing these to the responses from the region. 7

10 1. Profile of Respondents a. Primary Position of the Respondents Figure 1: Primary Position of the Respondents Auditors 26% 34% Chief Financial Officers / Accountants / Finance Directors / Finance Managers 47% 49% Directors Managing Directors/ Chief Executive Officers 2% 3% 1% 3% Owners of the Business / Partners Others 11% 11% 6% 8% Figure 1 shows the position of the respondents. The largest group of respondents (81%) is from accounting-related jobs, namely, auditors and finance personnel. 11% of the total respondents are owners of business or partners while 1% of them are chief executive officers. There is a significant 6% in the Others category, which includes: general managers, academics, IT and systems managers, among others. The composition of the responses from is not significantly different from the region, albeit the fact that there is a slightly higher percentage of auditors from (34% as compared to 26% for the region). b. Size of the Respondents Organisations Respondents were asked to indicate the size of their organisations in terms of turnover, total gross assets and total number of full-time permanent employees. For turnover and total gross assets, the dollar equivalent of the US dollar amount of US$1 = S$1.5 was used. 8

11 Figure 2a : Size of the Respondents Organisations (Turnover) 36% 37% 19% 15% 15% 14% 4% 6% 7% 4% 9% 7% 9% 6% 7% 5% <US$1m US$1m to US$3m US$3m to US$5m US$5m to US$10m US$10m to US$50m US$50m to US$100m US$100m to US$500m >US$500m 36% of the respondents belong to organisations which have less than US$1 million in turnover (see Figure 2a) and 50% belong to organisations which have less than US$1 million of total gross assets (see Figure 2b). In fact, 51% and 60% of the respondents belong to organisations which have less than US$3m in turnover and total gross assets respectively. Approximately 43% of the respondents belong to organisations that have less than 20 employees (see Figure 2c). The majority of respondents (63%) belong to organisations with less than 50 employees. The above characteristics of the respondents are relatively similar to the region. 9

12 Figure 2b: Size of the Respondents Organisations (Total Gross Assets) 50% 49% 10% 5% 3% 14% 4% 12% 11% 9% 7% 5% 4% 5% 5% 7% <US$1m US$1m to US$3m US$3m to US$5m US$5m to US$10m US$10m to US$50m US$50m to US$100m US$100m to US$500m >US$500m Figure 2c : Manpower Size of Respondents Organisations 45% 40% 43% 41% 35% 30% 25% 20% 20% 18% 15% 10% 12% 11% 10% 13% 13% 10% 5% 3% 2% 2% 2% 0% <20 20 to <50 50 to < to < to < to <1000 >1000 The above size profile of the respondents organisations suggests that the respondents are significantly involved in the management and operations of SMEs. 10

13 c. Industry Represented Figure 3 shows that a large number of the respondents belong to the Service industry (35%) and this is followed by those from the Accounting industry (11%) and Manufacturing industry (9%). Generally the survey covers a wide spectrum of respondents from different industries. Figure 3: Industries Represented by the Respondents 9% 35% 11% 21% 10% 29% 11% 18% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Asset Management Education Hotels/Restaurants Manufacturing Regulator Transport/Storage/Comm Commerce Finance Insurance companies Multi-Industry Security dealers and brokers CPA Firm/Public Accountants/CPA/Audit Firm Construction Government Banking Properties Services Other 2. Definition of SMEs The respondents were asked whether they see the IASB s description of SMEs, i.e. entities that do not have public accountability; and publish general purpose financial statements for external users, as an effective operational definition which can be applied easily. 41% of the respondents in agree with the description of a SME in the proposed IFRS for SMEs as an effective operational definition (see Figure 4) and 21% disagree with it. 11

14 Figure 4: Description of SME in Proposed IFRS 42% 41% Strongly Agree/Agree Figure 5 shows that 58% of the respondents think that the proposed IFRS for SMEs should be applicable to large unlisted companies that do not have public accountability. For the region, 63% of the respondents think that the proposed IFRS for SMEs should be applicable to large unlisted companies that do not have public accountability. Figure 5: Responses to the Applicability of IFRS for SMEs to Large Unlisted Companies 58% 42% 63% 37% Yes No Given the responses that IFRS for SMEs should be extended to include large unlisted companies that do not have public accountability, only 38% of the respondents in think that IFRS for SMEs is a suitable title for the new IFRS (see Figure 6). For the remainder, 12

15 Figure 7 shows the choice of title for the new IFRS. It can be seen that IFRS for Private Entities is preferred in general, followed closely by IFRS for Entities With No Public Accountability. Figure 6: Suitability of title for the new IFRS 38% 33% Figure 7: Suggested Titles for the New IFRS IFRS for Unlisted Entities 20% 28% IFRS for Entities With No Public Accountability 24% 38% IFRS for Private Entities 40% 45% Other 2% 3% The respondents were asked to rate the relevance of the three size measurements in defining a SME: turnover, total assets and number of employees, using a scale from 1 to 5 with 5 being the most relevant and 1 being the least relevant. Figure 8 provides the summary statistics of 13

16 the respondents. All the size measurements obtained a summary statistic of more than This suggests that these three size measurements are relevant in defining a SME. Comparatively, the turnover of the organisation is the most relevant of the three size measurements while the number of employees is the least relevant among the three measurements. Figure 8: Relevance of the Size Measurement for SMEs Turnover of the organisation Total assets of the organisation Number of employees The respondents were asked to select the most relevant quantitative measure in relation to the above size measurements (see Figures 9a-9c). For the turnover and total assets size measures, 77% and 81% of the respondents selected a quantitative measure of US$10 million and below as an appropriate definition of a SME respectively. For the manpower measure, 59% of the respondents selected less than 50 full-time employees as the appropriate quantitative measure. Therefore, the results suggest that a quantitative definition of a SME that is generally acceptable is one in which the turnover and total assets are below US$10 million and one which has less than 50 employees. 14

17 Figure 9a: Turnover of the Organisation 40% 36% 35% 30% 30% 29% 25% 22% 26% 20% 15% 15% 16% 13% 10% 5% 7% 6% 0% <US$1m <US$5m <US$10m <US$50m <US$100m Figure 9b: Total Assets of the Organisation 40% 35% 34% 30% 25% 28% 23% 24% 30% 26% 20% 15% 10% 5% 12% 11% 7% 5% 0% <US$1m <US$5m <US$10m <US$50m <US$100m 15

18 Figure 9c: Number of Full-time Permanent Employees 45% 40% 35% 35% 38% 34% 30% 25% 20% 20% 26% 15% 15% 10% 9% 8% 8% 7% 5% 0% <10 <20 <50 <100 < Desirability of IFRS for SMEs a. Description about IFRS for SMEs Respondents were asked to provide their level of agreement with statements describing IFRS for SMEs. Table 1 reports the percentage of respondents in agreement. 16

19 Table 1: Description of IFRS for SMEs 1. IFRS for SMEs is necessary and desirable to provide a specific framework for financial reporting by SMEs. 2. IFRS for SMEs will reduce the financial reporting burden for SMEs that want to use global financial reporting standards. 3. IFRS for SMEs will better meet the needs of users of SMEs financial statements. 4. IFRS for SMEs will reduce the financial reporting burden on all SMEs in general. 87% 81% 79% 69% 75% 72% 71% 58% 5. IFRS for SMEs will reduce the audit burden of SMEs in general. 6. IFRS for SMEs should be in the form of clearly written variations found in the Full IFRS. 7. SMEs should choose between IFRS for SMEs or Full IFRS and not a combination of both. 65% 59% 75% 72% 70% 63% 8. SMEs should have the choice to apply the IFRS for SMEs or any applicable IFRS from the Full IFRS that they deem applicable and appropriate. 69% 65% 9. If SMEs are able to choose between adoption of Full IFRS or IFRS for SMEs, there are potentials for non-comparability 74% 65% between SMEs. 10. The application of IFRS for SMEs can result in noncomparability between SMEs and other non-smes which 58% 53% prepare their financial statements under the Full IFRS. 11. IFRS for SMEs should be updated whenever there is an update in the Full IFRS or a new IFRS. 82% 77% 12. IFRS for SMEs should be updated annually or on a two-year cycle. 58% 51% 13. IFRS for SMEs should be standalone accounting standards. 49% 43% There is a generally a positive response to the IFRS for SMEs. The responses in are generally more supportive than the region. 87% of the respondents in agree that the IFRS for SMEs is necessary and desirable (Table 1, item 1). The majority of respondents also feel that it will serve its function to reduce the financial reporting burden for SMEs that want to use global financial reporting standards (79% - Table 1, item 2); better meet the needs of users of SMEs financial statements (75% - Table 1, item 3); reduce the financial reporting burden on all SMEs in general (71% - table 1, 17

20 item 4); and will reduce the audit burden of SMEs in general (65% - Table 1, item 5). The responses generally support the added benefits of having IFRS for SMEs. There is support for IFRS for SMEs to be in the form of variations found in Full IFRS (75% - Table 1, item 6). 1 70% of the respondents (Table 1, item 7) agree that there should be a choice between IFRS for SMEs or the Full IFRS but not a combination of both. Interestingly, respondents have also indicated that there are possible concerns of noncomparability in the application of the IFRS for SMEs between SMEs (74% - Table 1, item 9) and between SMEs and non-smes which prepare statements under the Full IFRS (58% - Table 1, item 10). 82% of the respondents (Table 1, item 11) agree that IFRS for SMEs should be updated as and when there are updates in the Full IFRS while 58% were of the view that the IFRS for SMEs should be updated annually if not on a two-year cycle basis (Table 1, item12). Finally, only 49% supported having the IFRS for SMEs as a standalone accounting standard (Table 1, item 13). b. Users of Financial Statements of SMEs The respondents were asked to indicate the likelihood of the various users of general purpose financial statements for decision making with respect to SMEs. Figure 10 shows clearly that banks that make loans to SMEs will most likely be users of the financial statements of SMEs. This is followed by shareholders and credit rating agencies. Interestingly, the general opinion of the respondents is that customers are less likely to use the financial statements of SMEs. From a policy perspective, banks that make loans to SMEs, shareholders or owners and credit rating agencies are the most likely users of the financial statements of SMEs and hence, the proposed IFRS for SMEs should produce financial statements which would meet the needs of these users. 1 Full IFRS is the current full set of IFRS released by IASB for reporting entities 18

21 Figure 10: Most Likely Users of Financial Statements of SMEs 70% 60% 63% 58% 50% 40% 30% 20% 10% 45% 45% 44% 38% 34% 29% 22% 19% 13% 11% 7% 7% 0% 4. Content of IFRS for SMEs a. Simplification of Accounting Treatments for SMEs Respondents were asked to indicate their level of agreement of the simplified accounting treatments in the proposed IFRS for SMEs. For purpose of simplification, the respondents generally agree that cash flow statements should be published (Table 2, item 1). The respondents also agree that consolidated financial statements should be produced and deferred taxes should be recognised (Table 2, items 2 and 3). On the other hand, the use of fair value for financial assets and liabilities and the recognition of share-based payments are only marginally supported (Table 2, items 4 to 5). Finally, the respondents said that the mark-to-market for financial assets and liabilities in general should not be required (Table 2, item 6). This finding suggests that SMEs may have difficulties complying with the more sophisticated and complex accounting standards where the costs do not justify the benefits. The suggested simplified approach for agriculture and operating leases are not well supported (Table 2, items 7 and 8). 19

22 The respondents do not support the reduction of the recognition of provisions as a suggested simplified accounting treatment for SMEs (Table 2, item 11). On the other hand, the majority of the respondents agree to the requirement for the recognition of foreign exchange gains or losses and revaluation increases in profits and losses (Table 2, item 12). Table 2: Content of the IFRS of SMEs For simplicity, IFRS for SMEs should: 1. Not require the publication of a cash flow statement. 33% 34% 2. Not require consolidated financial statements. 36% 38% 3. Not require the recognition of deferred taxes. 38% 40% 4. Not require the use of fair value for financial assets and 43% 44% liabilities after the initial recognition. 5. Not require the recognition of share-based payments. 48% 43% 6. Not require the use of mark-to-market for financial assets and 54% 48% liabilities in general. 7. Account for all agriculture using the cost model. 32% 38% 8. Account for all leases as operating leases. 40% 46% 9. Account for all long-term contracts using the completed contract method. 47% 50% 10. Account for all employee benefit plans as contribution plans. 48% 51% 11. Reduce the recognition of provisions. 37% 40% 12. Require recognition of foreign exchange gains and losses and revaluation increases in profit and loss. 75% 67% In the Open Forum of the questionnaire, respondents were asked whether there are any specific areas for which the SMEs are likely to need additional guidance. The key areas highlighted by the respondents as requiring additional guidance are: first time adoption of accounting standards; accounting for impairment, share-based payments, compensation and share payout; fair value accounting; and accounting for goodwill. b. Content of the Financial Statements The respondents were given a set of the content from the financial statements of companies under the Full IFRS. The respondents were asked to indicate their level of agreement as to whether the IFRS for SMEs should include these contents in their financial statements. 20

23 Table 3: Content of the Financial Statements of SMEs Balance Sheet 98% 96% Income Statement 97% 95% Revenue 95% 92% Property, Plant and Equipment 92% 91% Inventories 88% 86% Notes to the Financial Statements 86% 86% Equity 86% 83% Provisions and Contingencies 83% 75% Investment Property 82% 80% Income Taxes 80% 80% Related Party Disclosures 79% 70% Borrowing Costs 78% 76% Statement of Changes in Equity 78% 75% Accounting Policies, Estimates and Errors 78% 74% Statement of Income and Retained Earnings 75% 73% Leases 75% 73% Investments in Associates 75% 71% Events after the End of the Reporting Period 75% 71% Financial Assets and Financial Liabilities 74% 73% Foreign Currency Translation 72% 65% Investments in Joint Ventures 70% 70% Cash Flow Statement 70% 64% Intangible Assets other than Goodwill 68% 69% Government Grants 64% 63% First-time Adoption of IFRS for SMEs 60% 64% Business Combinations and Goodwill 59% 58% Consolidated and Separate Financial Statements 58% 54% Impairment of Non-financial Assets 55% 52% Employee Benefits 51% 55% Share-based Payment 44% 43% Specialised Industries Construction Contracts 37% 46% Discontinued Operations and Assets Held for Sale 37% 44% Earnings per Share 35% 38% Specialised Industries Insurance Contracts 33% 43% Specialised Industries Extractive Industries 29% 39% Specialised Industries Agriculture 28% 38% Financial Reporting in Hyperinflationary Economies 25% 29% Segment Reporting 25% 29% Interim Financial Reporting 21% 25% 21

24 The general conclusion based on the percentages given in Table 3 is that most respondents agree that the financial statements of SMEs should include those areas covered by the Full IFRS except for the following areas in which the respondents expressed low agreement. This can be a reflection of the fact that the respondents see the following areas as having little significance or application to SMEs. In order of decreasing usefulness, the areas are: Share-based Payment; Specialised Industries Construction Contracts; Discontinued Operations and Assets Held for Sale; Earnings per Share; Specialised Industries Insurance Contracts; Specialised Industries Extractive Industries; Specialised Industries Agriculture; Financial Reporting in Hyperinflationary Economies; Segment Reporting; and Interim Financial Reporting. The Open Forum of the questionnaire asked whether there are any topics which the proposed IFRS for SMEs should include and the majority response is that the proposed standard is comprehensive. c. Simplification of Recognition and Measurement Methods The respondents were asked to indicate their level of agreement to the proposed simplification of the recognition and measurement methods proposed in the IFRS for SMEs. Table 4 contains the summary statistics on the level of agreement to statements describing the simplification of the recognition and measurement methods in the proposed IFRS for SMEs. The scale for responses is 1 for Strongly Agree, 3 for Neutral and 5 for Strongly Disagree. 22

25 Table 4: Simplification of the Recognition and Measurement Methods To use the cost-amortization method for goodwill. To use the cost or fair value method for accounting for associates and joint ventures. The choice of using the expense model or the capitalization model for borrowing costs. To use the expense or capitalization choice for accounting for Research and Development costs. To use the fair value through profit or loss model or the costdepreciation-impairment model for biological assets or agricultural produce. To use the list of indicators approach to assess impairment of goodwill if impairment is the prescribed treatment for goodwill. To use the fair value measurement for financial instruments as the default measure. To invoke the impracticality exemption (impractical to restate the opening balance of the balance sheet) for first time adoption. To recognize actuarial gains and losses in full in profit or loss when they occur. To use the fair value of the rights and obligations under a finance lease to value the leased property. To recognize actuarial gains and losses in full for defined benefit plans in profit or loss when they occur. To use IFRS 2 Share-based Payment in accounting for all share-based payment transactions. Mean Median Mode Mean Median Mode The respondents are generally supportive of all the simplified recognition and measurement methods in the IFRS for SMEs since the mean is less than 3.00 and the maximum value of median and mode measure is 3.00, which is a neutral value. Slightly less than 50% of the respondents (median score of 3.00) are neutral to the following proposed methods: 23

26 To invoke the impracticality exemption (impractical to restate the opening balance of the balance sheet) for first time adoption (Table 4, item 8). To recognise actuarial gains and losses in full in profit and loss when they occur (Table 4, item 9). To use the fair value of the rights and obligations under a finance lease to value the leased property (Table 4, item 10). To recognise actuarial gains and losses in full for defined benefit plans in profit or loss when they occur (Table 4, item 11). To use IFRS 2 Share-based Payment in accounting for all share-based payment transactions (Table 4, item 12). The use of IFRS 2 Share-based Payment in accounting for all share-based payment transactions received the least supportive agreement from the respondents. Finally, an analysis of the Open Forum of the questionnaire shows that most respondents believe that the IFRS for SMEs is relatively comprehensive in addressing both recognition and measurement issues of SMEs. There is a call by respondents to return to the cost method. d. Disclosure Principles The respondents were asked to indicate their level of agreement concerning the disclosure principles advocated by IASB to guide the disclosure requirements of SMEs. 24

27 Table 5: Disclosure Principles Advocated by IASB Users of financial statements of SMEs are particularly interested in information about liquidity, solvency and the firm s going concern potential. Users of financial statements of SMEs are particularly interested in information about the short term cash flow and obligations, commitments or contingencies of the SME. The information disclosure requirements for SMEs are different from those entities which obtain investment from the public capital markets. Users of financial statements of SMEs require information on measurement of uncertainties faced by the SMEs. Users of financial statements of SMEs require information about the SME s accounting policy choices. Users of financial statements of SMEs prefer disaggregated amounts in order to better understand the financial statements. 88% 86% 78% 74% 65% 68% 56% 57% 59% 56% 52% 51% The respondents show strong support for the disclosure principles used by IASB in the disclosure requirements for SMEs. More than 50% of all the respondents agree to the proposed disclosure principles advocated by IASB in the proposed IFRS for SMEs. Of significant interest is that 88% of respondents agree that Users of financial statements of SMEs are particularly interested in information about liquidity, solvency and the firm s going concern potential and therefore, the disclosure principles should be oriented towards this articulated need. In the Open Forum of the questionnaire, respondents were asked whether there are any specific disclosures which the proposed IFRS for SMEs should include. The general response was No. 5. Implementation of IFRS for SMEs a. Authority for Defining a SME The respondents were asked to indicate which authority should be responsible for defining an entity as a SME. Figure 11 contains the distribution of the respondents on which authority should be responsible for defining a SME. 25

28 Figure 11: Authority for Defining a SME 51% 52% 42% 32% 4% 2% 2% 9% 6% 1% Local national regulator Management of the reporting entity Other Operational definition in IFRS for SMEs Parliament A majority of respondents believe that the definition of a SME should ultimately be specified in the IFRS for SMEs (51%) while more than a third of the respondents (42%) believe it is the local national regulator s responsibility to define a SME. b. Support for the Proposed IFRs for SMEs The respondents were asked to indicate their support for the proposed IFRS for SMEs. Figures 12a-12d show the distribution of their responses. 26

29 Figure 12a: Would you support the promulgation of an IFRS for SMEs? 17% 4% 22% 8% 79% 70% Yes No Don t Know Figure 12a shows that 79% of the respondents will support the promulgation of an IFRS for SMEs while only 4% of the respondents will not support any proposed IFRS for SMEs. This is supported by the responses from the Open Forum in the questionnaire. 65 respondents gave reasons on why they would support the promulgation of an IFRS for SMEs. The main reasons given are relatively similar to the responses for the region and the four main qualitative responses in order of frequency were: cost and benefits of compliance for SMEs; simplicity of the accounts of SMEs that requires a simple set of IFRS; useful for consistent reporting and comparison purposes; and reports that are more useful to users. On the other hand, there were 5 respondents who objected to the promulgation of IFRS for SMEs. Overall, the following two reasons were commonly given: it is too tedious for SMEs to comply with the standard; and the current Full IFRS is sufficient. 27

30 Figure 12b: Would you support the proposed IFRS for SMEs? 11% 5% 18% 10% 85% 71% Yes No Don t Know 85% of the respondents will support the current IFRS for SMEs as released by the IASB (see Figure 12b). The response rate is much higher than the region (71%). Figure 12c: Is the proposed IFRS for SMEs comprehensive enough? 44% 45% 18% 18% 38% 37% Yes No Don t Know 28

31 Interestingly, only 38% of the respondents expressed an unqualified support that the proposed IFRS for SMEs is comprehensive while 44% of the respondents said that they could not express an opinion as to whether the proposed IFRS for SMEs is comprehensive (see Figure 12c). Respondents from the region seem to share this view. Finally, Figure 12d shows that a large number of respondents (74%) agree that SMEs should be given a choice between the Full IFRS and the proposed IFRS for SMEs. Therefore, the survey seems to suggest that the respondents are generally in favour of an IFRS for SMEs and the proposed IFRS for SMES will be supported. Nonetheless, most of the respondents prefer to have a choice between the Full IFRS and the proposed IFRS for SMEs. Figure 12d: Should SMEs be given an option to choose between Full IFRS or proposed IFRS for SMEs? 6% 8% 19% 22% 74% 70% Yes No Don t Know The respondents were asked whether the proposed IFRS for SMEs will save costs and time. In the Open Forum of the survey, 64 respondents provided qualitative response to the question. Figure 13 shows the distribution of the qualitative comments into four major groups: Yes, No, Don t Know and Probably. 29

32 Figure 13: Distribution of the Responses to Time and Cost Savings Don t Know 13% (: 13%) Probably 2% (: 2%) No 16% (: 27%) Yes 69% (: 58%) 69% of the respondents said that the application of IFRS for SMEs will result in cost and time saving. One respondent claimed that the saving can be as high as 50%. c. Transitional Arrangement and Updating of the IFRS for SMEs In the Open Forum of the questionnaire, respondents were asked whether the guidance for transition is adequate and how often the IFRS for SMEs should be updated. Figure 14 shows the distribution of the responses to the adequacy of the transition provisions. 30

33 Yes 39% (: 42%) Figure 14: Adequacy of Transition provisions Don t Know 23% (: 15%) No Comment 7% (: 6%) No 32% (: 37%) A high percentage of the respondents (39%) believed that the transition provisions are adequate but an almost equally high proportion (32%) of the respondents do not think that the transition provisions are adequate. Figure 15 provides a breakdown of the responses in the Open Forum of the questionnaire as to when the IFRS for SMEs should be updated. Figure 15 : Frequency of Updates 40% 35% 34% 30% 27% 25% 20% 21% 18% 15% 10% 5% 0% Annually As and When Two-Year Others 33% 21% 19% 28% 31

34 34% of the respondents favour an annual update of the IFRs for SMEs while 21% of the respondents prefer the standard to be updated as and when there is a need or a change in the Full IFRS. More than 50% of the respondents favour an update of no less than two years. *End* 32