Specific accounting rules for small and medium-sized entities – The ”IFRS for SMEs”-Standard of the IASB in comparison to the proposed Swedish accounting standards for SMEs

2.1 The IASB standard ”IFRS for SMEs”

According to IFRS-SME 1.2 the IFRS-SME is intended for use by SMEs. SMEs are defined as entities that

• do not have public accountability, and

• publish general purpose financial statements for external users.

The term of public accountability itself is defined in IFRS-SME 1.3. According to this an entity has a public accountability if its debt or equity instruments are traded in a public market or the entity is in the process of issuing such instruments, or it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses, such as a bank, insurance entity, securities broker/dealer, pension funds, mutual fund or investment bank entity.

The IASB does not propose any quantitative criteria for the size of the entities which should apply the regulations of the IFRS-SME because the IASB is aware that its standards are used in over 100 countries. Due to the different economical conditions the IASB concluded that it is not feasible to develop quantified size tests that would be applicable and long-lasting in all of those countries.4 Instead of this the IASB decided that the national jurisdictions or national standard-setters may prescribe quantified size tests based on the economic significance of entities.

Although the size of the entities is not decisive for the application of the IFRS-SME, nevertheless the IASB had to focus on entities for which the simplifications in recognition, measurement and disclosure in comparison to the full IFRS should mainly apply. According to the ”Basis of Conclusions” which accompany the ”Exposure Draft for IFRS for SMEs” (ED-SME) the Board decided to concentrate on a typical entity with about 50 employees.5 In earlier stages of the project the IASB used also a size of 10 Mio. € net sales as an orientation guideline.6 In this context the IASB discussed also the question if the IFRS-SME is also suited for very small entities (so-called micros) which employ at least only one employee. The IASB holds the IFRS-SME also for micros for suitable without any restrictions. External users such as lenders, vendors, customers, rating agencies and employees need specific types of information but are not in a position to demand reports tailored to their particular information needs. So they must rely on general purpose financial statements. Moreover, as in many countries, the full IFRS are required for all or most limited liability companies, including micros, the IASB concluded that the IFRS-SME is therefore suitable also for micros.7

2.2 Swedish accounting rules for SMEs

In Sweden, the general accounting rules for companies that are not subject to the IFRS-regulation are given in the Annual Accounts Act.8 Apart from this act, the Swedish accounting rules for SMEs to large extent emerges from so-called ”good accounting practice”, in English often unofficially called ”Swedish GAAP”. The good accounting practice for SMEs is mainly regulated in the accounting recommendations from the Swedish Accounting Standards Board (BFN).9 Since the year of 2004, the BFN started a new approach in producing accounting recommendations.10 Earlier recommendations were aiming at different subjects, for example ”stock” or ”non-current assets”.11 The new recommendations that are being prepared are aimed at special forms of enterprises, i. e. private firms, partnerships and limited companies of different sizes. In order to facilitate for the BFN, the legislator has modified several rules in the BFL and the ÅRL and given new classifications of enterprises of different sizes.12 These classifications have commonly been described as the ”four categories”, which are subject to different accounting recommendations. ”Category One” contains private firms with a turnover of maximum three millions SEK. The second category regards smaller limited companies. The scope of the third category is ”larger” companies, but these are anyhow normally to be seen as SMEs. The dividing line between the smaller and larger companies was drawn at 50 employees a year, assets for 25 million SEK on the balance sheet or a turnover of 50 million SEK.13 However, from November of 2010 and on, these numbers will be changed to 50 employees a year, assets for 40 million SEK on the balance sheet or a turnover of 80 million SEK.14

If two out of these three requirements have been fulfilled during the last two years the company is recognised as a larger company. It is interesting to compare with the approximation of ED-SME for companies with around 50 employees. The forth category contains companies that have to establish consolidated financial statements according to the IFRS-regulation. This category is obvious not the main concern of the BFN, but the board still thinks there might be a demand for accounting recommendations concerning accounting in companies belonging to a group that sets up consolidated financial statements according to IFRS. However, accounting standards for this category are set up by the Swedish Financial Reporting Board.15 These standards are mainly focused on the financial statements in the listed parents companies, but to some extent also on the consolidated statements in these companies.16

It is obvious that not all kind of enterprises are compromised in these four categories, for example private firms with a turnover above three million SEK or partnerships. The BFN is planning to adopt accounting standards for these categories later on. As far as this point, the BFN has adopted one accounting standard for Category One, concerning private firms.17 A draft has been published for a standard for NGO, churches and similar with an annual turnover not more than three million SEK a year.18 In Category 2, two standards have been published by the BFN, concerning smaller companies and economic associations.19 As already mentioned, a draft for a standard for larger companies belonging to Category 3 was published in June 2010. The draft will be used as basis for the following discussion in this article.

3.1 The IASB Standard ”IFRS for SMEs”

The primary objective of the SME financial statements is to provide information about the financial position, performance and cash flows of the entity that is useful for economic decision-making by a broad range of users who are not in the position to demand reports tailored to meet their particular interests.20 Beneath the information function the financial statements show also the results of the management’s stewardship for the resources entrusted to it.21 Therefore the financial statements have got also a control or accountability objective to fulfil.22 The most important external user groups of the financial statements of SMEs are investors which are not represented in the management, creditors, banks, credit rating agencies, customers, vendors, employees and the local authorities.23 The owners of SMEs which are in a management function and also the tax authorities are in a position of obtaining tailored financial information and are not solely dependent on the information of general purpose financial statements.

Although the objectives of the financial statements for SMEs are nearly identical24 with the full IFRS the IASB discusses in the IFRS-SME – Basis for Conclusions the application of the IFRS-SME also for taxation purposes and for determining the distributable profit under national laws and regulations:

IFRS-SME. Basis for Conclusions. par 51 sent. 3.

”Tax authorities often look to financial statements as the starting point for determining taxable profit, and some have policies to minimise the adjustments to accounting profit or loss for the purpose of determining taxable profit.”25

Unmentioned is in this statement that in a lot of countries the taxation is linked immediately to the financial statements according to local GAAP and not to financial statements prepared in accordance with international accounting standards.26 Disregarding a close relationship between the determination of the taxable profit or the distributable income and the financial statements according to local GAAP, the IASB intends obviously to establish the IFRS-SME also as a general starting point for fulfilling these functions. For these functions reconciliations could be developed at a national level.27

3.2 Swedish accounting rules for SMEs

In Swedish accounting tradition, the close connection between the accounting rules and the taxation has definitely made an impact on the designing of the accounting standards for SMEs. Traditionally, the Swedish GAAP has to some extent been designed very similar to the tax rules.28 The linkage between accounting and taxation in Sweden has in recent years been questioned and an official committee has proposed a disconnection of the linkage.29 A close relationship between accounting and taxation is usually supposed to lead to a great emphasis on the principles of carefulness and realisation and of measurement according to costs model. Measurement at fair value is equally supposed to be difficult to apply in a system based on such a relationship. Anyhow, in some cases measurement at fair value is already accepted in Swedish tax law.30

The major scope with the standard for ”Category Two” is to simplify the accounting standards for the smaller companies that are affected by this recommendation. Of course, this is a component of a general trend towards simplification for business activities in the EU area. The draft is generally based on the principles of carefulness and realisation and of measurement according to a cost model. It must in this respect be emphasised that the ÅRL also is based on measurement to historical costs and that to this date only in few cases measurement at fair value has been accepted by the legislator.31 A major part of the simplification is the aim to avoid options to choose between different accounting solutions. The standard for ”Category Two” is supposed to be an almost complete standard where most answers could be found regarding accounting issues in smaller companies. These companies have anyhow the option to adopt the proposed ”Category Three” standard in order to achieve a more qualitative accounting. They can still in many cases benefit of the simplifications made in the ÅRL regarding smaller companies.32

The draft for ”Category Three” was originally to large extent intended to be based on older accounting standards from BFN and the standards from the now dissolved Accounting Council (Redovisningsrådet). The later where primarily aimed for companies subject to stock exchange prior to the adoption of IFRS, but could also be used by non listed companies.33 Later, a scope was also added to consider the IFRS for SMEs standard.34 A further ambition was to achieve a regulation that was short and user friendly. The draft contains 232 pages, but this is also including comments to the proposed standards. It must however be noted, that the possibility for the BFN to adopt a standard more or less influenced by the IFRS for SMEs standard eventually is limited by binding rules in the ÅRL, for example regarding measurement at fair value.35

4.1 The IASB Standard for ”IFRS for SMEs”

According to IFRS-SME 3.17 a complete set of financial statements shall include:

• a statement of financial position (balance sheet),

• a statement of comprehensive income (either a single statement of comprehensive income showing separately the profit or loss as a subtotal or a separate income statement and a separate statement of comprehensive income starting with the profit or loss and disclosing all income and expenses recognised in the other comprehensive income)

• a statement of changes in equity,

• a statement of cashflows, and

• notes, comprising a summary of significant accounting policies and other explanatory information.

Due to the qualitative characteristic of comparability an entity shall also present on the face of the financial statements, as a minimum, two of each of the required financial statements including the related notes.36

As a peculiarity of the SME financial statements can be characterised the possibility of combining the income statement and the statement of changes in equity to one combined statement of income and retained earnings if the changes to equity during the periods for which financial statements are presented arise only from profit or loss (no comprehensive income!), payment of dividends, correction of prior period errors, and changes in accounting policy.37 As in comparison to the full IFRS the IFRS-SME accounting contains significant less possibilities of transactions recognised outside profit or loss38 the condition for combining both statements will probably be fulfilled quite often in praxis.

Although the IFRS-SME mentions both, consolidated financial statements and separate financial statements, the IASB prescribes only the presentation of the consolidated financial statements. If an entity controls at least one subsidiary it has to present in general39 consolidated financial statements.40 The obligation to prepare consolidated financial statements applies independently of the size of the group of entities. A quite unique peculiarity of these consolidated financial statements is that only the parent entity and all of the subsidiaries must be consolidated. For the accounting of the jointly controlled entities and the associates the parent entity has got the option to measure the interests in these entities according to the equity method or at cost or to fair value.41

4.2 Swedish accounting rules for SMEs

The requirements for the financial statements according to Swedish GAAP are set in the ÅRL, which is primarily based on the EC accounting directives. A financial statement for a smaller company is supposed to include a balance sheet, an income statement, notes and a directors’ report.42 The latter is compulsory according to EU law in larger companies, but should according to ÅRL be presented by all companies.43 A larger company should also include a cash flow statement.42 Small companies are therefore, according to Swedish law, not obligated to set up a cash flow statement that is compulsory according to ”IFRS for SMEs”.

There is not any requirement according to Swedish law for an SME to publish a statement of changes in equity.

Also according to the ÅRL, a company that has at least one subsidiary should set up consolidated financial statements. This is however not necessary for a parent in a group with a total size not bigger than a smaller company.45

There is not a definitive obligation to record all subsidiaries in the consolidated financial statement. A subsidiary which is of very small importance in terms of compliance with the demand for a fair and true view does not need to be accounted for in the consolidated statements.46 In a corresponding way an associate could be omitted in the statements if it is in compliance with the fair and true view.47 There is no option to measure the investments in a jointly controlled entity or an associate at fair value.

(1) Accounting options by explicit accounting options identical with full IFRS

To this group of accounting policy options belong:

• accounting choice between fifo method and average cost formula for inventories which are ordinarily interchangeable and not segregated for specific projects.49 The same choice follows from Swedish accounting law.50 The lifo method is not acceptable according to Swedish law.

• measurement of investments in separate financial statements at cost or fair value.51

(2) Accounting options by explicit accounting options divergent from full IFRS

Schedule 1: Accounting choices in the IFRS-SME accounting deviating from full IFRS compared with proposed Swedish GAAP.

Although the first three mentioned accounting choices deviating from the full IFRS may indicate an additional accounting policy potential nevertheless it has to bear in mind that these accounting policies include additional accounting options only for the reason in order to simplify the IFRS-SME accounting. For example, as the IFRS-SME does not prescribe a consolidation of joint ventures and associates it does of course not prohibit the equity method; furthermore also the fair value method or the cost model are as non-consolidation accounting methods allowed.

(3) Peculiar accounting policies divergent from full IFRS

Schedule 2: IFRS-SME specific accounting policies deviating from full IFRS accounting compared with proposed Swedish GAAP.

The main reasons for the IFRS-SME specific accounting policies can be summarized as follows:

• the fair value as a measurement basis is only be used if it can be determined reliably without undue cost or effort on an ongoing basis (esp. subsequent measurement of property, plant and equipment, intangibles, investment property and non-controlling interests),

• regular amortisation for all intangibles including goodwill in order to avoid an annual review of the recoverable amount of these assets or a review if the useful life is still indefinite,

• prohibition of capitalising costs if otherwise the capitalisation would be dependent on extensive and burdensome evidences and documentations (no capitalisation of borrowing costs that are attributable to the acquisition, construction or production of a qualified asset or in general no capitalisation of research and development cost incurred for internally generated intangible assets),

• in general a simplification of the accounting due to cost-benefit considerations (e.g. no separate measurement provision for assets held for sale, no reclassification of a translation adjustment on disposal of the foreign operation, and application of the accounting concept of ED 2/2009 instead of IAS 12).53

Since full IFRS is not applicable in the single financial statements in Sweden, only a few accounting choices are explicit identical with full IFRS according to the draft for new Swedish GAAP. However, according to the ÅRL it is under some circumstances possible to measure financial instruments at fair value.54 This kind of measurement is not possible for any other kind of assets in Swedish SMEs. The cost model will therefore also onwards have a strong position in Swedish accounting.