SMEs and Financial Reporting: simplify and modernize Natalie Manuilova Senior Financial Management Specialist The World Bank s Centre for Financial Reporting Reform Kyiv, 16 December 2014
Presentation Outline Growing need in differential financial reporting Keep it simple for small and medium business SMEs role in the European Union What other countries do Why relevant for Ukraine 2
Financial reporting system: 3 key dimensions International standards/ good practice Simplification agenda (SMEs) Curricular reform CPD Requirements Capacity Certification Compliance Enforcement by financial regulators Audit quality assurance and oversight 3
Financial reporting requirements Establishing adequate and sustainable systems Laws Regulations By-laws of key institutions One size does not fit all Introducing differential financial reporting requirements Raising the standard for public-interest entities (PIEs) Simplifying requirements for SMEs and micro-enterprises International (and EU) standards: central role Adoption of int l/eu standards The only sustainable option in most cases Not an option for EU accession countries Quality local-language translations 4
Differential Financial Reporting: Background Accounting standards historically developed with a focus on publicinterest entities (PIEs) or public companies Increasing complexity of transactions (financial instruments, securitization, structured investment vehicles, business combinations, etc.) lead to the growing body of accounting standards, difficult to understand by most accountants Proposals emerged to develop a separate or parallel set of standards for smaller entities Key principle behind differential reporting: cost-benefit equation in defining the financial reporting requirements Until recently, most countries followed the one-size-fits-all approach 5
Differential financial reporting: structure Complexity IFRS Companies listed on regulated markets Financial institutions Etc. PIEs IFRS for SMEs Simple accounting system closely interrelated with tax reporting Large to medium-sized privately-held companies Alternative investment markets Small and microenterprises Number of companies 6
Differential financial reporting: keep it simple for SMEs Objective: make country systems amenable to the needs of SMEs No one-size-fits-all approach Simplification, think small first approach Building countrywide capacity to provide SMEs with professional services in accounting and tax returns Equipping SME with skills to help them translate business ideas into fundable, sustainable proposals Training of trainers / consultants on relevant standards Increased bankability / ability to secure capital funding from private investors, commercial banks, donors, etc. Reduced cost of doing business 7
Differential financial reporting: examples In most EU countries: One set of standards compliant with the Accounting Directive (2013) IFRS for companies listed on regulated markets (Reg. 1606/2002) Spain: Two separate accounting systems (large v. SMEs) plus specific accounting requirements for microenterprises UK: Three levels: IFRS, UK GAAP and FRSSEs each set is self-contained Switzerland: Swiss GAAP for all companies, IFRS for listed companies, IFRS for SMEs accepted Kazakhstan: full IFRS for large companies; IFRS for SMEs for medium size entities, and simplified accounting rules based on tax records for small businesses Georgia: full IFRS for financial sector and regulated entities; micro entities - tax basis only; rest of the market = IFRS for SMEs starting 1.01.2015 8
SMEs role in the European Union 9
EU Financial Reporting Landscape Medium sized companies (2%) Small companies (22%) ~8000 listed companies (0.1%) Large companies (1%) IFRS EU Regulation directly applicable to listed companies (and more: up to each Member State) ACCOUNTING DIRECTIVE Transposed in 28 national jurisdictions (national GAAP) Micro entities (75%) Source: European Commission 10
SMEs role in the EU 90 80 70 60 50 SMEs Large 40 30 58% of total turnover = 14.000 billion/a Source: European Commission 20 10 0 Construction Hotel & restaurants Business Services Distribution/Retail Manufacturing Mining & Quarrying Transport & Communication Utilities 11
SMEs role in the EU SMEs provide employment 33% Share of private employment 29% 17% 21% Micro Small Medium Large SME employment share 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% EL PT IT ES EE LV BG LT HU PL NO CZ IE NL BE AT DK SI SE DE FR RO FI SK UK 85% of new jobs are created by SMEs Source: European Commission 12
Think Small First: Accounting Directive and SMEs New Accounting Directive entered into force in July 2013 (2013/34/EU): Merging and modernising the previous Accounting Directives (4 th and 7 th ); Introducing uniform size categories (and define small companies); Harmonised simple regime for small companies; optional ultra-simplified regime for micro entities The Accounting Directives are referenced in Chapter V and Annex XXXV of the Ukraine-EU Association Agreement. 13
Think Small First: Accounting Directive and SMEs Definition of micro, small and medium size businesses as per Accounting Directive of the EU (2013): 14
Think Small First: Accounting Directive and SMEs Small undertakings: Introduction of a mandatory «safe harbour»; Obligation to address small undertakings (<50 employees) in each Member State: best way to do this: to define this size-category; Micro-undertakings (<10 employees) are in the small size category, unless stated otherwise in the legislation of a Member State (see below) «Gold plating» is not possible: the Directive spells out which information and which statements should be prepared by small undertakings. Micro undertakings: Within the small regime, introduction of an option to simplify further; If a Member State implements one of the simplification option: need to distinguish micro-undertakings. Best way to do this: to define this sizecategory; The Directive spells out the minimal regime that can be implemented; Flexibility on the degree of simplification, depending on each Member State. 15
Think Small First: Accounting Directive and SMEs No reference to the IFRS for SMEs in the Directive The standard would not serve the objectives of simplification and the reduction of administrative burden for SMEs It is not a clear option offered to Member States No specific prohibition either: Member States may consider IFRS for SMEs as the basis for their standard However two main hurdles Main hurdle 1, for all companies: Need to check compatibility of the IFRS for SME standard (including the next version to be published in 2014 or 2015) with the new Accounting Directive In particular, the following differences need to be assessed (there may be more!): presentation of unpaid subscribed share capital in the balance sheet Amortisation of goodwill (?) The compatibility check is the Member State s responsibility Main hurdle 2, for small companies: The IFRS for SME standard is more demanding than what is permitted by the simplified regime in the Directive. For instance, no cash flow statement. In this way, some Member States may offer the IFRS for SMEs or similar standard as a voluntary option for small companies 16
What other countries do 17
Who has adopted IFRS for SME s? Over 80 countries globally have adopted or announced plans to adopt IFRS for SMEs In Europe and Central Asia: Bosnia, Estonia, Macedonia, Switzerland, United Kingdom, Ireland, Azerbaijan, Kazakhstan, Kyrgyzstan, Moldova, Turkey. European Commission has consulted on the IFRS for SMEs (19 Member States favor MS option, 6 oppose). Currently, no plans for EU-wide adoption, rather optional use. 18
Why relevant for Ukraine 19
Why would Ukrainian companies want to adopt it? IFRS for SMEs: Designed and tailored specifically for SMEs: user needs for cash flow information, liquidity and solvency costs and SME capabilities Easier to grasp: only 230 pages Completely stand-alone standard, many new concepts Same due process as for full IFRS Consistent with IFRS - high-growth SMEs can manage a future upgrade Growing international acceptance Translations are available Potentially relevant for many businesses 20
The key objectives & features of the Standard Keep it simple Omit everything in IFRS if likely to be irrelevant Use the simpler available options Make recognition and measurement more straightforward Reduce disclosures (10% of full IFRS) Make the financial statements easier to draft Where no specific guidance is included, entity may (not must) consider full IFRS requirements and guidance Once adopted, no mix and match is allowed To further reduce the burden for SMEs, revisions to the IFRS for SMEs will be limited to once every three years Available in many languages 21
Decision Tree: Who can use IFRS for SMEs Does a jurisdiction permit the use of IFRS for SMEs? Entity Not Publicly Accountable? 1) Securities not listed in regulated market 2) Not a financial institution Does entity elect to prepare General Purpose Financial Statements? IFRS for SMEs 22
Useful Links and Resources Self-study and more formal training by IFRS Foundation http://www.ifrs.org/ifrs-for-smes/pages/trainingmaterial.aspx Breaking down the language barrier: The IFRS for SMEs is currently available in Albanian, Arabic, Armenian, Bosnian, Chinese, Croatian, Czech, English, Estonian, French, Hebrew, Italian, Japanese, Kazakh, Lithuanian, Macedonian, Polish, Portuguese, Romanian, Russian, Serbian, Spanish, Turkish and UKRAINIAN. IAS Plus Website: http://www.iasplus.com/en/standards/other/ifrs-for-smes 23
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