International Financial Reporting Standards are an international accounting standard designed by International Accounting Standards Board. In 1st April 2001, IASB took over International Accounting Standards Committee (IASC) responsibility in setting International Accounting Standards. IFRS issued to give standardise in accounting across the European Union (EU) so that the business users can easily comparable, understandable and received reliable information. To date, IFRS has been adopted by more than 100 countries around the world including Europe, Malaysia and South Africa. Approximately 85 of those countries require IFRS reporting for all domestic, listed companies (US Securities and Exchange Commission).
http://www.sec.gov/news/press/2008/2008-184.htm
MASB
Malaysia Accounting Standards Board (MASB) is an independent authority in Malaysia that develops and issue accounting and financial reporting standards. MASB is established under the Financial Reporting Act 1997. Malaysia accounting and reporting standards or frameworks is made up from MASB and Financial Reporting Foundation (FRF).
These frameworks are independent framework comprises standard-setting structure with representation from all relevant parties in standard-setting process, including preparers, users, regulators and the accountancy profession. MASB perform under the scope of act that are to:
Issue new accounting standards as approved accounting standards and to review, revise or adopt existing accounting standards as approved accounting standards.
Issue statements of principles for financial reporting.
Sponsor or undertake development of possible accounting standards.
Conduct public consultation as necessary.
Develop a conceptual framework for the purpose of evaluating proposed accounting standards.
Make such changes to proposed accounting standards as considered necessary.
Seek the view of the FRF in relation to new and existing standards, statement of principles, and changes to proposed standards.
Determine scope and application of accounting standards.
To perform such other function as the Minister of Finance may prescribe.
(Source: Malaysia Accounting Standards Board)
SME
To categories company under Small and medium sized entities (SME) has different requirements in each countries. Usually in SME, revenue generated, and assets and liabilities are relatively small. SME usually owned and managed by small number of individuals rather than comprehensive ownership. Thus they relatively have small number of workforce. The business is usually less complex business or undertakes less complex transaction.
For instance in Malaysia, SME can be categorise into three groups which are micro, small and medium. These groupings are decided if meet one of these:-
The numbers of employees OR
The total sales or revenue generated by a business in a year.
Each of the grouping are further divided into three activities which are agriculture, manufacturing and services sector. In each of the business activities have different requirements to categorise under SME.
Number of Employees
Primary Agriculture
Manufacturing*
Services**
Micro
Less than 5 employees
Less than 5 employees
Less than 5 employees
Small
Between 5 to 19 employees
Between 5 to 50 employees
Between 5 to 19 employees
Medium
Between 20 to 50 employees
Between 51 to 150 employees
Between 20 to 50 employees
Annual Sales or Revenue Generated
Primary Agriculture
Manufacturing*
Services**
Micro
Less than RM200,000
Less than RM250,000
Less than RM200,000
Small
Between RM200,000 and less than RM1 million
Between RM250,000 and less than RM10 million
Between RM200,000 and less than RM1 million
Medium
Between RM1 million and RM5 million
Between RM10 million and RM25 million
Between RM1 million and RM5 million
*Including Agro-Based and Manufacturing-Related Services
** Including Information and Communication Technology (ICT)
(Source: SME Info Malaysia)
http://www.smeinfo.com.my/index.php?option=com_content&view=article&id=69&Itemid=820&lang=en
IFRS SME
IFRS SME is a full set of accounting standards of IFRS but customised to match SME due to size of the business. IFRS for recognising and measuring income and expenses, and assets and liabilities has been simplified to match with SME business. Irrelevant IFRS to SME has been removed and requirements of disclosures have been significantly reduced.
One of the main reasons of IFRS SME is introduced are to provide reliable financial information to external users such as banks, investors and suppliers. Besides that, IFRS SME improved comparability for users of accounts. Moreover, IFRS SME will also decrease the costs for the country in maintaining accounting standards. IFRS SME is use as a platform to the business in preparing to enter the public capital markets later on as the stringent requirement set by stock exchange (MASB).
http://www.masb.org.my/index.php?option=com_content&view=article&id=1453%3Amasb-publishes-proposed-standard-for-smes-26-march-2010&catid=59%3Apress-release-2010&Itemid=37
History of Accounting for SME in Malaysia
Before IFRS for SME is issued, Malaysian companies are subject to Malaysian Financial Reporting Standards (MFRS) or Private Entity Standards (PERS) framework. In 2006, due to complexities in IFRS, MASB decided to change from single-tier to two-tier financial reporting framework. This will help the business to reduce burden in smaller companies. Therefore, the companies have given two options to comply either MFRS or PERS.
PERS was issued for temporary in that period before the MASB develop new standards that cater SME. PERS was issued accordance to simplify of MFRS so that it will become more appropriate and relevance to SME. This set of MASB standards are issued based on IASB prior to its Improvement Project in 2003 (MASB, 2012).
In June 2006, MASB decided to develop its own set of standards, Exposure Draft (ED) 52 Private Entity Reporting Standards while setting up separate standards that focusing SME. These standards are comprehensive set of accounting standards for private entities and prescribe the cost bases to measure principle for the assets and liabilities. Besides that, the standards also remove certain disclosures as MASB believes that it is onerous for private entities to comply.
During the finalisation of ED 52 in 2007, IASB has issued an Exposure Draft on IFRS which cater SME. Therefore MASB has decided to defer the introduction of ED 52 and evaluating of IFRS for SME as there is a development was taking place in IASB.
In July 2009, IFRS for SME has been issued by IASB and later Exposure Draft 72 is issued in March 2010. Malaysia Institute of Accountants (MIA) has conducted seven roadshows and survey to get feedbacks from the local constituents about setting up of accounting framework for SME. The roadshows and survey to seek the best interest of SME whether to continue existing PERS or to finalise ED 52 PERS or to adopt ED 72 IFRS for SME. The result has shown that ED 72 IFRS for SME the most preferred and followed by existing PERS and ED 52 PERS respectively (MASB 2012).
World Bank's Bank suggests to Malaysia that priority should be given to the development standards for private entities or SME (World Bank, 2012). "The changes to the accounting standards and reporting framework should be based primarily on the needs of the users of the financial statements and public interest considerations. Also the changes should be introduced in conjunction with the clarification of the nature, scope and quality of services being provided by the accounting and auditing profession to private entities", World Bank, February 2012. Therefore MASB has issued ED 74 as response to address public accountability such as subsidiaries of public listed companies in December 2010. Hence should not be subjected to same reporting requirements as the rest of the non-private entities.
Under ED 74, it will allow SME or private entities to make recognition and measurement requirements that are similar to IFRS Framework but provide with lesser disclosures requirements. The reason of ED 74 was issued for non-publicly accountable subsidiaries, associates or joint-controlled entities whose parent or investor or venture are not a private entity and before IFRS for SME is become effective in 2013.
The ED was issued to address SME to comply accounting standards. The principle of recognition and measurement are similar to full accounting standards but with lesser disclosures. However as a result, the financial information become insufficient and may affect the usefulness of the report for decision making by the intended users.
http://www.worldbank.org/ifa/rosc_aa_malaysia2011.pdf
Effect Introducing the IFRS for SME
For non-SME companies required to prepare and publish their account based on IFRS which are really complex. The full IFRS consists of 37 reporting standards and approximately almost 3000 disclosures points (Kaplan 2012). Accounts prepared and reported under IFRS SME can avoid the complexity and reduced disclosures. Under IFRS SME, company only adhered to approximately 300 disclosure points. That's a huge different! South Africa is the first country to implement IFRS for SME on 13th August 2009.
Besides that, several IFRS has been removed to tailor for SME which are Asset Held For Sale (IFRS 5), Segmental Reporting (IFRS 8), Earnings Per Share (IAS 33) and Interim Reporting (IAS34). The reason of these standards has been removed are because the benefits enjoyed are less than the cost of preparing and reporting information.
Reporting standards also has been simplified for SME. The IFRS SME principles have been simplified further and reduce complexity in measurement and recognition of an item or transaction. Thus most of the treatments for an items or transaction are simpler. The treatment are Research and Development are always expense, Goodwill are amortised for 10 years, no revaluation for Property, Plant and Equipment and Finance Costs never capitalised.
As a result IFRS SME, certain reporting standards has been removed and simplified would lead to reduce in cost of preparing and reporting information to intended parties. Time can be saved from waiting the results in revaluation of Property, Plant and Equipment. Furthermore, under IFRS for SME, the company does not require to produce Statement in Changes in Equity (KPMG, 2010). These are a few differences between full IFRS and IFRS for SME.
On the next page is a table that shows the main differences between IFRS for SME and MFRS.
Subject Matter
IFRS for SME (ED 72)
MFRS (Full IFRS)
Intangible Assets
Development cost incurred will be expensed off
Development cost to be recognized as asset if specified recognition met
Property, Plant and Equipment (PPE)
Revaluation of PPE is not permitted.
Revaluation of PPE is allowed.
Investment Property (IP)
IP will be measured at Fair Value through Profit and Loss if without undue cost or effort.
IP will be measured at cost or fair value
Borrowing Costs
All borrowing costs will be expensed off.
Permits capitalisation of borrowing costs that are directly attributable to the acquisition, construction or production of qualifying asset as part of the cost of the asset
Income Tax
Tax basis is the consequence of the sale of an asset or settlement of a liability.
Tax base is dependent on the expected manner of recovery of an asset or settlement of a liability.
These further shown at Table 1 are the differences of three standards on accounting treatment between ED 52, ED 72 and ED 74.
Table 1: Comparison of the Options
Example of Trade and Other Receivables financial statements disclosures under ED 52, ED 72 and ED 74
1. Exposure Draft 52 Private Entities Standards (PERS)
http://i.imgur.com/moJUs.png
2. Exposure Draft 72 Financial Reporting Standards for Small Medium-sized Entities (FRS for SMEs)
http://i.imgur.com/fcpWs.png
3. Exposure Draft 74 Amendments to Financial Reporting Standards arising from Reduced Disclosure Requirements (RDR)
http://i.imgur.com/l3xbp.png
(Source: Malaysia Accounting Standards Board)
http://www.masb.org.my/index.php?option=com_content&view=article&id=1725:future-framework-for-private-entities&catid=67&Itemid=94#_ftn2,/
Advantages and Disadvantages of IFRS SME
Advantages
By adopting IFRS SME, it will enhance comparability of accounts with other business that has adopted IFRS SME. Therefore it will provide useful information to intended users. Thus this will help the users to make good decision such as investment decision or business decision to implement strategy.
Besides that, it will increase confidence of the users of the information if the business has adopted IFRS SME. Furthermore it will help the business to comply certain requirements with high regulated bodies such as tax authority or public capital market. Moreover, it will help the business to seek investor or fund easier whether locally or internationally as the business has comply IFRS SME.
By having IFRS SME, the business able to comply IFRS at reduced costs, time and at the same time enjoying almost the same benefit.
Disadvantages
By changing from local financial reporting standards to IFRS would lead to additional cost to the company. The company has to revalued or re-measured items accordance to the standards. These costs have to bare by the company and further it takes time to do.
The company requires having a good knowledge of IFRS for SME before adopting. Thus the company are require to send their employees to the training or seminar in order to acquire the latest knowledge about IFRS for SME. This would lead to increase in cost to the business.
The IFRS set for SME is too huge for small companies (Sunway 2012). Sometimes the company is too small and irrelevant to adopt IFRS SME due to size, business activities or revenue generated but requires complying IFRS for SME as it will be used by the intended users.
Relevance of IFRS SME in Malaysia
In 2012, Malaysia's SME accounts for 99.2% of the three main business activities which are agriculture, services and manufacturing (The Edge, 2012). Malaysia is advanced emerging countries (FTSE, 2010) and towards as developed country by 2020. According to Tan Sri Mohamed Yakcop, Minister in Prime Minister's Department, Malaysia could achieve developed country as early as 2018 under Vision 2020 plan (The EDGE, February 18th, 2013). By implementing IFRS SME will help Malaysia realizing the Vision 2020 plan and in becoming a globalization country or industry.
Malaysia has faced decelerated growth in the private's sector investment in the past year's (MASB, 2012). Therefore Malaysia need seek investors and funders to accelerate the growth. By implement IFRS for SME will help the business to seek investors or funders as the information published as accordance to international standards that are comparable and understandable.
The IFRS for SMEs is expected to be issued during the first half of 2013 and effective for annual periods beginning on or after 1 January 2016 (IAS Plus, March 2nd, 2013). The sooner Malaysia implements IFRS for SME and the better position Malaysia as becoming a competitive country.
Currently SME contribute 32% of total GDP in Malaysia and the government target to increase to 41% of total GDP by 2020. According to Lim, Group CEO of Malaysia SME, said that "SME businesses form a very large part of Malaysia's economy but their contribution to GDP still slightly lacking as compared to developed countries" (The Edge Financial Daily, July 5th, 2012). He also proved that smaller companies have grown at very fast rate due to globalisation. According Najib Tun Abdul Razak, Prime Minister of Malaysia, SME's annual growth is at 9.2% and more than country's GDP growth (The Star). Najib also comment that, SME in Malaysia need a lot of funding to ensure their growth. By adopting IFRS for SME will help SME to seek funding for growth or to expand their business. Furthermore, it will help SME industry in Malaysia to face globalisation and become more competitive.
(Source: Request for Views on Private Entities, the Way Forward, MASB, 2012)
The Edge Financial Daily, July 5th, 2012
The Star Newspaper, February 13th, 2010
http://thestar.com.my/news/story.asp?file=/2010/2/13/nation/5669846&sec=nation
http://www.theedgemalaysia.com/business-news/216479-smes-to-account-for-41-of-gdp-by-2020.html
http://www.iasplus.com/en/news/2013/03/masb-pe-framework
http://www.ftse.co.uk/Indices/FTSE_Emerging_Markets/index.jsp
http://www.theedgemalaysia.com/political-news/230848-malaysia-may-be-developed-nation-by-2018-says-minister.html
