The International Financial Reporting Standard for Small and Medium-size Entities (IFRS for SMEs) is an independent standard, designed to meet the needs and capabilities of Small and Medium-Sized Entities (SMEs). The IFRS for SMEs was issued by the International Accounting Standards Board (IASB) in 2009 and amended in 2015.
Through its mandate of regulating and maintaining the standard of accountancy in Uganda, the Institute of Certified Public Accountants of Uganda (ICPAU) issued Guidelines for Implementation of IFRS for SMEs in Uganda in which it defined an SME as an entity that DOES NOT have public accountability and publishes general purpose financial statements for external users.
What does ICPAU mean by public accountability? This is elaborated in the same Guidelines to include:
Entities whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or are in the process of issuing such instruments for trading in a public market. The domestic stock exchange market in Uganda is the Uganda Securities Exchange (USE). To date, there are nine domestic companies listed on the USE and these are: Uganda Clays Ltd; British American Tobacco (BAT) Uganda Ltd; Bank of Baroda (U) Ltd; dfcu Ltd; New Vision Printing and Publishing Co Ltd; Stanbic Bank Uganda Ltd; National Insurance Corporation; UMEME Limited; and Cipla Quality Chemical Industries Ltd.
Entities that hold assets in a fiduciary capacity for a broad group of outsiders as a primary business either partially or in whole. In Uganda, such entities may include: Commercial Banks; Credit Institutions; Micro-Finance Deposit-Taking Institutions; Savings and Credit Cooperative Organisations (SACCOs); Insurance and Re-Insurance Companies; Mutual Funds and Collective Investment Schemes; Security Brokers/ Dealers; Pension and Retirement Benefit Schemes; and related institutions.
Public organisations, in which the State owns the whole or part of the proprietary interest or which is otherwise controlled directly or indirectly by the State, including parastatals, state enterprises, commissions and authorities. This would scope in institutions like the Civil Aviation Authority; NWSC, National Housing and Construction Company Ltd; National Social Security Fund; and the like.
Private organisations in which the State has a non-controlling equity interest.
General purpose financial statements
These are a particular form of financial reports that provide information about an entity’s assets, liabilities, equity, income and expenses. These reports are referred to as general purpose reports in the sense that they contain general information prepared for external users without any targeted stakeholders group. External users of such financial reports may include owners; lenders; suppliers; customers; tax authorities; and regulatory bodies.
General purpose financial statements comprise the Statement of Financial Position (Balance Sheet); Statement of Comprehensive Income (Income Statement); Statement of Changes in Equity; Statement of Cash Flows; and Notes to the Financial Statement.
What the Preparers need to know
The IASB developed the IFRS for SMEs after recognising the costs undergone and difficulty involved in preparing fully compliant IFRS information by small private entities.
Based on the definition provided above, preparers of financial statements should note that using the IFRS for SMEs does not in any way speak to the size of one’s business. Surprisingly, despite the title of the standard, most entities that do not consider themselves to be SMEs still could be within its intended scope. According to a research conducted by the IASB, up to 95% of the companies worldwide are eligible to use IFRS for SMEs. In Uganda the SMEs’ are estimated to contribute to over 90% and 70% of the country’s employment and GDP respectively. This simply demonstrates the coverage, spread and importance of SMEs to National Growth. If your company is not among those listed in the definition above, and you have not yet adopted the IFRS for SMEs, here is a summary of what you are missing out on.
The IFRS for SMEs is tailored to suit the financial reporting needs of SMEs. It addresses user needs for information about the entity’s cash flows, liquidity, and solvency.
The costs involved in preparing IFRS for SMEs compliant financial statements are quite lower compared to those of the full IFRS.
Furthermore, the IFRS for SMEs is a much smaller standard set out on only 244 pages compared to the 3,000 pages for the full IFRSs. This means that one has less to read and comply with.
The Standard is simpler and easier for entities to read and understand.
The IFRS for SMEs is organized by topic and requires less disclosures – imagine that! Preparers have only to provide about 300 disclosures other than the more than 3,000 disclosures required by the full IFRS. As a matter of fact, there is roughly a 90% reduction in disclosures in comparison with full IFRSs.
It should also be noted that the IFRS for SMEs provides enhanced comparability for users of accounts both within a jurisdiction and across borders leading to improved confidence in the overall financial statements of SMEs.
Apart from all the above, audit costs would be lower too. In a nutshell, SMEs that adopt the IFRS for SMEs may have more time, money and resources to focus on their business operations; this will eventually help in enhancing the entities’ productivity.
What the providers of credit need to know
Unfortunately for Uganda, some financial institutions still have an image problem against the IFRS for SMEs. It should be noted that the IFRS for SMEs is an internationally recognised standard, and that the financial statements issued in its compliance will result in as much fair presentation of the financial position, financial performance and the cash flows of the entity as the financial statements issued in compliance with full IFRSs. Commercial banks and other credit institutions therefore, need not have bias over the IFRS for SME standard but rather embrace this commitment by their respective clients that long to improve their financial reporting as they grow their businesses. Trusted and sustainable business growth is usually evidenced by a transparent and comparable form of financial reporting.
As a way of updating and further simplifying the SME standard, there are ongoing consultations of how to improve the standard. ICPAU would be glad to receive any comments about the SME standard in order to enhance jurisdictional application and relevance of the same. These can be submitted via email at email@example.com
Access the IFRS for SMEs
To access the full text of the standard, sign up on the IFRS Foundation website. Entities that have adopted the standard may also find it useful to consult the IFRS for SMEs training modules that were developed by the IFRS Foundation.
BY: CPA NOOR NAKABUGO NAKATO
Technical Officer, ICPAU