The International Accounting Standards Board (IASB) has published International Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs), the self contained accounting standard containing simplified measurement and recognition criteria with reduced disclosures for non-publicly accountable entities.

Simplifications include:

• financial instruments meeting special criteria are measured at cost or amortised cost with all others measured at fair value through profit or loss
• goodwill and other indefinite-life intangibles are amortised over 10 years or their estimated lives where reliably determinable
• equity accounting of associates and joint ventures may be measured at cost
• joint venture entities cannot be proportionately consolidated
• all research and development costs and borrowing costs are expensed
• certain income tax accounting principles are consistent with the approach set out in the recent Exposure Draft issued by the IASB
• review of the residual values, useful lives, and depreciation/amortisation for property, plant and equipment and intangible assets need only be conducted upon indication that a change may have occurred since the previous period
• investment property may be carried and treated as property, plant and equipment that is measured at cost if fair value cannot be measured reliably without undue cost
• impairment of goodwill calculations simplified property, plant and equipment must be carried at cost.
  

It is now up to the Financial Reporting Council and Australian Accounting Standards Board to determine the scope of entities to which the standard will be made available.  At its June 2009 meeting, the FRC determined that “...the issue was of considerable importance, and might have unintended consequences in Australia (i.e. to increase the regulatory burden for certain entities)... a special meeting on the topic should be organised as soon as practicable so that the main issues and stakeholders could be canvassed.”

Whilst there are benefits in simplification of accounting requirements, there are likely to be entities that will not be attracted to the IFRS for SMEs standard because of the detrimental effects that it may have on its financial statements.  For entities with tight banking covenants, this may be of particular concern. 

Having regard to the potential implementation costs to entities, the current economic climate, and the accounting restrictions that certain entities will encounter on adoption, it is presently debatable that this standard represents an improvement on the current differential reporting model in Australia to an extent that warrants it’s immediate support.