[sbinews] Article on different Accounting system for SME

  • From: sbistcbangalore@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Mon, 22 Dec 2003 20:45:17 +0500

In the current maelstrom accounting standards, there has been one consistent 
voice that is — accounting standards should not apply to small and medium 
enterprises (SMEs) in the way they apply to large enterprises. This 
overwhelming need has been expressed not only in India but also across the 
world, so much so, the IASB has made the SME project a top priority in its 
agenda. A point to be noted is that in most countries, a large part of the GDP 
is contributed by enterprises that are not listed on the stock exchanges. 

The main drive for the introduction of differential reporting comes from the 
fact that the users of financial statements of SMEs do not require many of the 
sophisticated measurement and disclosure compliances. Keeping accounting 
requirements simple and straight would also considerably reduce cost of 
compliance, besides the fact that SMEs in many cases may not even have access 
to accounting expertise. 

Existing evidence suggests that users of SME financial statements are 
predominantly owner managers and providers of finance, for example, banks and 
financial institutions. In most cases, the owner-manager and the provider of 
finance would find a full compliance with accounting standards unnecessary. A 
number of complex issues need to be dealt with before introduction of a SME 
standard. Whilst most agree that the SME issue be addressed, they debate and 
disagree on the detail. At the core are two significant problems; how does one 
define a SME; what kind of relaxation should be granted to the SMEs in respect 
of compliance with mandatory standards. Further, in defining a SME, should 
there be just two categories such as small enterprises and big enterprises, or 
should there be more than two categories. 

Theoretically, a SME can be defined based on users of financial statements; 
simplistically as listed and unlisted enterprises; consumption of public 
capital; significance of the enterprise to the economy —public interest 
argument; size of the enterprise, for example, turnover, asset value, number of 
employees, etc, a combination of the above. 

Each of those options will have their own complications, advantages and 
disadvantages. For example, how does one define consumption of public capital? 
If the enterprise is listed, public capital is definitely being used. But if a 
private company borrows money from a listed bank, would that amount to 
consumption of public capital? 

The other problem is in defining the relaxation that should be granted to the 
SME. Should only disclosure standards such as segment disclosures, related 
party disclosures, etc be exempted or even complicated measurement standards 
such as accounting for deferred taxes, impairment, etc should be exempted. 

Needless to say, any decision on these issues should be taken after a full 
debate and careful consideration of various issues. In the Indian context, most 
accountants were expecting that the SME standard would exempt several 
disclosure and measurement requirements, but they are in for a surprise with 
the recently issued announcement on SME. This announcement is discussed in the 
following paragraphs. 

For the purpose of defining the applicability of accounting standards, 
enterprises are classified into three categories, Level I, II and III. Level I 
are required to fully comply with the accounting standards, which is absolutely 
fine. However, there is no relaxation in respect of the measurement standards 
to both Level II and III categories, which is definitely a disappointment. 

Now, even a very small enterprise will have to comply with measurement 
standards such as accounting for deferred taxes, impairment, etc. This is 
unfair since these enterprises may not be able to afford compliance; more 
importantly compliance with those standards may not be very relevant to them. 

Besides, internationally, regulation does not force small enterprises to comply 
with all the standards. Would that not mean that we are putting our own Indian 
enterprises to a disadvantage compared to their international counterpart? If 
rules are meant to promote overall good, the Indian SME standard clearly falls 
short of that requirement. 

Worse still, the existing disclosure requirements have not only been retained 
but extended to several other types of enterprises as well. For example, 
disclosures in respect of related party transactions and segment disclosures 
were earlier applicable to listed enterprises and enterprises with an annual 
turnover exceeding Rs 50 crore. Now, they are applicable to these enterprises 
plus other enterprises, for example, those that have borrowed in excess of Rs 
10 crore. 

It does not matter that the borrowing may be privately funded and the lenders 
may not need full compliance with accounting standards.Further, an enterprise 
that has an annual turnover exceeding Rs 50 crore is categorised as Level I and 
consequently, would be required to fully comply with all the standards. It does 
not matter whether this enterprise is privately funded with no users (of 
financial statements) that would demand full compliance with all the mandatory 
accounting standards. 

Why should accounting standards be made mandatory to such enterprises? The 
IASB’s draft position is that application of a standard to an SME should be 
based on the characteristics of the SME. 

Quantitative criteria do not necessarily reflect the characteristics of SMEs. 
These characteristics should reflect the needs of the SME and the users of 
their financial reports. 

In other words, qualitative criteria should be preferred over quantitative 
criteria. The quantitative criteria do not necessarily reflect the absence of 
need from the enterprises stakeholders for full compliance with accounting 
standards.Whilst these and several other points will engage professionals on 
the SME debate, what was expected of the standard setters was to issue an 
exposure draft (like they do for other accounting standards) before an 
announcement on this matter was made. 

Clearly, there was no extensive debate before the issuance of the SME 
announcement. The standard setters could have also waited for the international 
pronouncement, since that could have given us some ideas on the way forward. 

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