Study Zone

Little Miss IFRS

IASB has published an IFRS for SMEs, so is this the beginning of the end for UK GAAP? And do acronyms rule?

Clare Finch is PQ’s special lady of letters

One of the common dilemmas facing a modern accountancy student is which stream to take. “Should I take the UK route or move to IFRS?” is an oft-heard question. Well, 9 July 2009 saw the International Accounting Standards Board (IASB) issue an International Financial Reporting Standard (IFRS) designed for use by small and medium-sized entities (SMEs), which are estimated to represent more than 95% of all companies.

So what is the relevance for the choice of IFRS or UK?
The UK Accounting Standards Board (ASB) has been committed to harmonisation with IFRS since 2000. Indeed, all UK companies already have a choice of using either UK GAAP or filing their accounts to IFRS. UK listed companies have had to use IFRS for their accounts since 2005 and the UK public sector are currently in the process of conversion to IFRS.

Harmonisation
The big stumbling block for complete harmonisation with IFRS has been the lack of an international equivalent of the UK’s FRSSE (Financial Reporting Standard for Small Entities). It is estimated that 95% of UK companies use the FRSSE as requiring that they adopted full IFRS was considered too onerous. The UK has therefore operated a three- tier system for four years – some companies on IFRS, some on full UK GAAP and many on the FRSSE.

Consistency and Comparability
Given that two of the key qualitative characteristics for financial statements are consistency and comparability, this three-tier system cannot be seen to continue into the future. The publication of the International FRSSME (Financial Reporting Standard for Small and Medium Entities) is now removing the remaining barrier for complete adoption of IFRS by the UK.

The future of UK accounting
In April 2007, the ASB issued a consultation paper on the IASB’s exposure draft of its IFRS for small and medium sized entities (SMEs). In the consultation paper, the ASB expressed the view that the IFRS for SMEs would play a central role in the structure of accounting requirements for UK entities. The initial suggestion for the future of UK accounting was:
• Full IFRS: all entities that are deemed to have public accountability.
• IFRS for SMEs: to be used by the middle tier.
• FRSSE: for the smallest tier.
The ASB has not published detail of the cut-off points between the tiers, nor defined ‘public accountability’. We also need to be aware of the impact of the EU.

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