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IFRS for SMEs in South Africa:

a giant leap for accounting, but too big for


smaller entities in general
HA van Wyk J Rossouw
Centre for Accounting Centre for Accounting
University of the Free State University of the Free State

Abstract
According to generally accepted accounting practice, the objective of financial
statements is to provide useful information to the primary user groups of such
statements, regardless of the size of the entity. The primary users of the financial
statements of SMEs are the owners, South African Revenue Services (SARS) and
bankers.
The recognition, measurement and disclosure requirements of full IFRSs do not
result in cost-effective and useful information being provided to the users of the
financial statements of SMEs (non-listed companies, close corporations and other
small entities, irrespective of their legal form), because these users do not need the
extensive and complex information provided in general purpose financial statements.
Consequently, an accounting standard is required to differentiate between general and
limited purpose financial statements.
The International Accounting Standards Board (IASB) issued an exposure draft
(ED 222) on IFRS for SMEs in February 2007. These stipulated modifications relating
mainly to relaxed disclosure requirements and are more applicable to medium-sized
entities. According to a survey among preparers of financial statements in June 2007,
these developments may not be adequate for the purposes of smaller entities,
irrespective of their legal form. Accordingly, the study recommends that a formal,
separate set of simplified differential reporting standards be developed for smaller
entities.
Key words
Differential reporting Limited purpose financial statements
IFRS for SMEs Micro-entities
Generally Accepted Accounting Practice Small and medium-sized entities

1 Introduction
In the last decade, the burden placed on small and medium-sized entities (Stainbank &
Wells 2007:32) to comply with the principles of statements of Generally Accepted
Accounting Practice (GAAP), which basically constitute the International Financial

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IFRS for SMEs in South Africa: a giant leap for accounting, but too big for smaller entities in general

Reporting Standards (IFRSs), has raised concerns among accounting practitioners across
the globe. Various countries tried to address this problem by issuing reporting standards on
differential or limited purpose reporting principles. These standards, however, were based
on different principles for the identification of qualifying entities, limitations on disclosure
requirements and modifications on measurement and recognition principles. In February
2007, the International Accounting Standards Board (IASB) issued an exposure draft on the
International Financial Reporting Standard (IFRS) for Small and Medium-sized Entities
(SMEs) (IFRS for SMEs), which was also immediately issued in South Africa as an
exposure draft. The exposure draft was seen as a positive development and an effort to
harmonise the approaches of different countries. In October 2007, South Africa became the
first country in the world to approve this proposed standard as a Statement of GAAP for
SMEs (SAICA 2007a). In this article, this document will be referred to as the IFRS for
SMEs.
In the IFRS for SMEs, small and medium-sized entities (SMEs) are defined as entities
that do not have public accountability and publish general purpose financial statements for
external users (IASB 2007a:par.1.1). Entities are regarded as not having public
accountability if they do not file their financial statements with any securities commission
or regulator for the purpose of issuing any class of instruments in a public market (IASB
2007a:par.1.2). However, general purpose financial statements are directed towards the
common information needs of a wide range of users who are not in a position to demand
reports tailored to meet their particular information needs (IASB 2007a:par.P7-P9).
The above definition of SMEs is rather broad and only refers to “entities” (in general). It
does not distinguish between different legal forms (e.g. non-listed companies, close
corporations, etc.). The IASB also did not want to describe the class of entities for which
this standard would be intended. It was left to the national regulatory authorities and
standard-setters (IASB 2007e:par.BC33), and the South African Accounting Practice Board
issued guidelines on which South African entities could apply the South African Statement
of GAAP for SMEs (the IFRS for SMEs) (Circular 09/07 of SAICA 2007b:par. 10).
Although companies may apply the IFRS for SMEs, other entities (such as close
corporations, etc.) may also apply the standard if they deem it appropriate. In the IASB’s
staff overview of the IFRS for SMEs (IASB 2007b:3), mention is made of “companies”, but
one should keep in mind that “companies” in the international context not only refer to a
“company” as per the South African Companies Act, but also “generally, a company may
be a ‘corporation, partnership, association, joint-stock company, trust, fund, or organized
group of persons, whether incorporated or not … ’” (Black’s Law dictionary 2001 in
Wikipedia 2008). Furthermore, the South African National Small Business Act (South
Africa 1996:par.1) describes a “small business” as “… a separate and distinct business
entity, including cooperative enterprises and non-governmental organisations, managed by
one owner or more … and which can be classified as a micro-, a very small, a small or a
medium enterprise”. This research will therefore focus on any SMEs (“entities”) in the
South African context in general, instead of only on non-listed “companies” specifically
(previous related research by Stainbank and Wells 2007:41 also included close
corporations).
The IFRS for SMEs follows a “one-size-fits-all” principle and does not distinguish
between “small” and “medium”-sized entities (IASB 2007b:5). For the purpose of and in
the context of this article, the term “micro-entities” should be read in its general sense as

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truly entities of a small size. This research will not attempt to define a “micro-entity”
(similar to the IFAC [IFAC 2006:7-8] and the IASB [IASB 2007e:par.BC46]), but will use
the “guideline” of, say, fewer than 10 employees (IASB 2007b:6). However, it is accepted
that “small and medium entities” may be differentiated even further between micro-entities,
small entities and medium-sized entities (IFAC 2006:7-8). Micro-entities are thus included
in the SME classification and concerns were raised whether the accounting for micro-
entities is adequately catered for (IASB 2007e:par.BC47). This article will also explore the
suitability of the IFRS for SMEs for micro-entities.
In the first section of the article, the research objectives and methodology will be briefly
outlined. The next section will deal with the need for differential reporting and recent
developments in GAAP for smaller entities, following which some aspects of the IFRS for
SMEs will be addressed in detail. The results of the empirical research will be discussed in
the last section of the article.

2 Research objectives and methodology


The purpose of this article is to
□ identify whether accounting practitioners believe that the proposed IFRS for SMEs
(Statement of GAAP for SMEs) will ease the burden of financial reporting by SMEs
□ explore whether the 50-employee guideline used by the IASB for setting up the IFRS
for SMEs is in line with typical South African small and medium-sized entities in
general
□ identify certain additional topics that could be considered for omission from the IFRS
for SMEs
□ identify certain areas in which the recognition and measurement principles could be
simplified
Another consideration relating to this research would have been to test the practitioners’
perceptions of the simplified disclosure requirements of this standard. However, this was
beyond the scope of this research. Carsberg (1985:2, in Stainbank and Wells 2007:34)
concluded in previous related research that disclosure itself adds little to the burden of
financial reporting by SMEs. For the purpose of achieving the last two research objectives,
as stated above, the focus of this article is rather on the accounting principles of recognition
and measurement. To achieve these research objectives, a literature review was conducted
to determine the need for differential reporting, identify recent developments in specific
accounting principles for smaller entities and discuss the various aspects of the IFRS for
SMEs.
Empirical research was also conducted to achieve the research objectives formulated.
Accounting practitioners were selected as the population for the empirical research because
they are assumed to be knowledgeable in accounting and understand the clients (SMEs)
information needs with regard to financial reporting (also compare Stainbank & Wells
2007:39). In June 2007, a survey was conducted among accounting practitioners to elicit
their opinions on whether they considered the then ED 222 to be applicable to and suitable
for SMEs, and micro-entities in particular. The aim of the empirical research was also to
identify further simplifications and limitations that might be required for smaller entities.
Questionnaires were completed by the delegates at various accounting update seminars

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presented by the authors across South Africa. The authors held these on behalf of the South
African Institute of Professional Accountants (SAIPA) the Central Region of the South
African Institute of Chartered Accountants (SAICA) in various regions. A significant part
of the seminars was devoted to presenting the detailed concepts of and requirements for the
IFRS for SMEs (the then ED 222). In order to obtain unbiased responses from the delegates,
the presenters (authors) did not the express their own views on the ED. The delegates were
therefore deemed to have sufficient and relevant knowledge of this standard to be able to
complete the questionnaire, thus providing the authors with reliable and relevant data. This
method was selected in order to obtain a larger number of completed questionnaires. In
earlier related research, Stainbank and Wells (2007:39-40) used a postal questionnaire, but
received limited feedback from only 64 respondents (a response rate of 18%). Use of this
method ensured a substantially higher number of completed questionnaires (n = 242).
The empirical research in this study was qualitative because the accounting practitioners
involved in preparing the financial statements of SMEs in general, were asked to give their
views and perceptions of the IFRS for SMEs. According to Maykut and Morehouse
(1994:56), qualitative research gains a “deep understanding of some phenomenon
experienced”. Donalek and Soldwisch (2004:354) describe qualitative research further as
“the organized, systematic exploration of some portion of human experience. It is not
concerned with the interpretation of data but rather with the discovery of common emergent
themes”. Through an organised, systematic investigation, the research will thus attempt to
gain a deep understanding of the views and perceptions of the accounting practitioners.
Since the practitioners were selected to obtain their views and perceptions, the sampling
was purposeful. The authors regarded the practitioners as a suitable source that could
provide information-rich data (Maykut & Morehouse 1994:56) because they are involved in
the financial reporting of SMEs (irrespective of the legal form).
In previous related research (Kruger 2004:156), questionnaires were sent to the preparers
and users of financial statements, but the response rate from the users was extremely low.
To counter this, the authors believed that sufficient empirical feedback would be obtained
from practitioners (preparers of financial statements/auditors) who are involved in
accounting transactions of smaller entities on a daily basis. Hence, the practitioners
attending the above-mentioned accounting update seminars were supplied with
questionnaires. The authors did not involve the users of financial statements in the research
because they felt that the questions in the questionnaires might be too technical for them,
owing to the fact that the questionnaire referred to the detailed principles of the individual
accounting standards (IFRSs).
All the delegates who were involved in the accounting practice for small and medium-
sized entities were used as a sample for this research and were asked to complete the
questionnaires. In total, 242 completed questionnaires were received, 95% of the
respondents being public practice. The details of the response and of the cities in which the
seminars were presented are provided in the table below.

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Table 1: Demographic information of the respondents


Number of
Cities/towns Percentage
respondents
Bloemfontein 50 21%
Cape Town 31 13%
Durban 23 9%
George 14 6%
Johannesburg 19 8%
Kimberley 9 4%
Klerksdorp 7 3%
Mafikeng 11 5%
Nelspruit 6 2%
Polokwane 13 5%
Port Elizabeth 14 6%
Potchefstroom 15 6%
Tshwane 17 7%
Rustenburg 13 5%
Total 242 100%

Table 2: Professions of the respondents


Number of
Profession Percentage
respondents
SAICA (CA (SA)) 52 22%
SAIPA 163 67%
Both CA(SA) and SAIPA 13 5%
Other professional membership 8 3%
Non-member 6 3%
Total 242 100%

It is clear from the above information, that the respondents were representative of the
practitioners dealing with SMEs across South Africa. Most respondents were SAIPA
members who traditionally deal more with accounting services for smaller (and non-listed)
entities. It should be noted for the purpose of this article, that SMEs refer to all non-listed
entities in general, regardless of their legal form, as mentioned in the introduction above.
In the next section, a literature review is conducted with specific reference to the need for
differential reporting and recent developments.

3 Literature review
3.1 The need for differential reporting
For too long, SMEs were ignored in the development of accounting standards. General
purpose accounting standards, which were developed in the past, focus specifically on
larger entities with public accountability, and in particular, IFRSs are developed to help
participants in the various capital markets of the world and other users of the information to
make economic decisions (IASB 2007c:par.6). Obviously, the users of financial statements
of small and medium-sized entities do not fall into this category.
SMEs are too significant in the global economy to have been ignored for so long by the
international accounting standard setters (Coetzee 2007:32). Since only one set of general

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purpose IFRSs was developed, SMEs have suffered the cost burden of preparing financial
statements based on full IFRSs (Cleminson & Rabin 2002:342) and there has been, and still
is, a constant plea for a SME-friendly set of accounting standards (De Beer & Prinsloo
2002:8; Sehoole 2001:39).
IFRSs are generally referred to as bulky, complex and difficult to comprehend (Lavigne
1999:49-50, Paterson 2001:96; Stainbank & Wells 2007:31). They are sometimes also
regarded as being too theoretical and difficult to implement (Topazio 2007:30). Barcelo
(2007:25) refers to the standards overload as a “blues” song that accountants who work
with SMEs readily sing. Furthermore, these standards are also continuously adjusted
according to new developments and “politically” influenced by the convergence process
with the USA accounting standards (Shearer 2006:77; Barcelo 2007:26). Owing to the
constant development of accounting standards, the financial reports, as the final product of
the accounting process, tend to be too technical and complex for serving their purpose
(Kruger 2004:2).
In addition, the content volume of some annual reports has increased substantially in
order to satisfy the information needs of the users of the financial statements and to comply
with disclosure requirements in accounting standards (Joubert 1993:4). Since the users of
financial statements of SMEs are not regarded as “professional users” (experts), such
statements are often prepared for the wrong audience because these users normally do not
understand the technical information required by the IFRSs. The increase in the volume and
complexity of the accounting standards led to the question whether or not companies with
few external users should be required to apply accounting standards primarily intended to
meet the needs of users of the financial statements of listed companies. Hattingh (2001:49-
50) argues that 90% of unlisted companies prepare financial reports only for three groups of
users, namely owners, banks and tax authorities (cf. also Coetzee 2007:32). Since all of
these users are also in a position to obtain additional financial information (Lavigne
1999:59-50), the need for complex financial reports, which are based on IFRSs, diminishes.
According to the International Accounting Standards Board, the financial statements of
SMEs should be consistent with the objective of meeting the needs of the users (IASB
2002:1). While there is a body of research on the needs of the users of the financial
statements of large companies, much less is known about who uses the financial statements
of small entities and the information they require (Dugdale 1998:50). Dugdale, Hussey and
Jarvis (1997:32) therefore conclude that there is a profound lack of knowledge about who
in fact uses the financial statements of SMEs and the actual purpose of the information.
Since the objective of financial statements is to provide useful information to the users of
these statements (IASB 2007d:par.12), Wilson (1995:93) contends that the needs of users
of financial statements should determine the objectives of financial reporting, leading
ultimately to the form and content of financial statements. Furthermore, if the users do not
regard the financial statements as useful and reliable, reporting has no value (Stegman
1994:50). Hence, McAleese (2001:18) concludes that the information needs of the users
should be prioritised in designing a new format for financial statements, involving
extensive consultation with both the users of the financial statements of small entities and
the small and medium-sized accountancy practices, which deal with these entities on a day-
to-day basis. According to Hepp and McRae (1982:56), this problem will not be fully and
finally resolved until consideration has been given to whether and to what extent the needs
of users of financial statements of small or closely held businesses differ significantly from

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the needs of the users of financial statements of large, public companies, and whether the
costs of implementing some standards exceed the benefits derived from the information
they produce.
Walton (1998:2) questioned the overriding requirement of fair presentation in the
financial statements: "If the financial statements are supposed to give a true and fair view,
how can one say that some entities have a different kind of true and fair view than others?"
Coppin (1996:12) elaborates as follows on the question of fair presentation: "If different
standards apply to smaller entities, it could result in the situation that disclosures provided
by larger enterprises may not be regarded as fair presentation, but exactly the same
presentation will be considered fair presentation in smaller enterprises." This would mean
that fair presentation is viewed not against a standard that is common to all entities, but
against some arbitrary criterion which distinguishes between the sizes of entities.
Accordingly, it will therefore be difficult to harmonise the needs of the users of financial
statements with the requirement of fair presentation.
From the literature study above it is clear why the need for different accounting standards
for SMEs forced various countries to embark upon the development of differential
reporting and also compelled the IASB to release an exposure draft on the IFRS for SMEs
(2007). The next section highlights recent developments in differential reporting standards
for SMEs.

3.2 Recent developments


The section above explained the need for differential reporting and indicated that this led to
certain developments in some accounting guides/standards for SMEs, which will be briefly
discussed in this section. Countries such as the UK, Australia, Canada and New Zealand
apply differential reporting standards to SMEs. SMEs are identified according to size or
whether or not they have public accountability (Heymans 2000:31). Kruger (2004:151) lists
the different methods, guidelines and standards that various countries developed and
implemented for differential reporting purposes. However, this topic does not fall within
the ambit of this article.
Differential reporting was first introduced in South Africa when Discussion Paper (DP)
16, Limited Purpose Financial Statements, was released by the South African Institute of
Chartered Accountants (SAICA) in May 2000. The purpose of DP 16 was to determine
whether the respondents supported differential reporting and the proposed reduced
disclosure requirements. Generally, the responses to the recommendations contained in DP
16 were favourable, and all the respondents welcomed the move towards differential
reporting (Cleminson & Rabin 2002:336).
As part of the development process, a subcommittee, the Limited Purpose Financial
Reporting Committee of SAICA, prepared Exposure Draft 163, Framework for the
preparation and presentation of limited purpose financial statements. The draft was
published in June 2003, providing further guidelines on the development of limited purpose
financial statements (SAICA 2003:13). As a consequence of related international
developments, which will be discussed below, further work on ED163 was put on hold.
During the second half of 2003 and early in 2004, the IASB launched a project to
develop accounting standards suitable for SMEs. This project resulted in the issuance of the
discussion paper, Preliminary views on accounting standards for small and medium-sized

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entities in June 2004 (IASB 2004:11), which subsequently led to the IASB issuing ED 222
IFRS for SMEs in February 2007.
Amongst all the above developments, are the proposals in the new Corporate Law Act of
2007, which will be applicable in South Africa in the near future. The Act distinguishes
between “public interest (widely-held) companies” and “limited interest (closely-held)
companies” and also introduces separate accounting standards for the latter. In terms of
section 285A(2), limited interest companies must comply with accounting standards
developed for such companies (South Africa 2007). Circular 09/07 SAICA (2007 b:par. 10)
lists the different kinds of entities that may use the Statement of GAAP for SMEs and
includes “limited interest companies” and any other entity that does not have public
accountability. The next section deals with the empirical results of the survey regarding the
usefulness of the IFRS for SMEs.

4 Empirical results of the usefulness of IFRS for SMEs


4.1 General aspects of the IFRS for SMEs
The IFRS for SMEs basically recommends the removal of choices for different accounting
treatments; eliminates certain topics that are not generally relevant to SMEs; and simplifies
the methods for recognition and measurement. The IFRS for SMEs consists of a draft, basis
of conclusions and an implementation guide, and reduces the volume of full IFRSs by more
than 85% (Pacter 2007:76). The proposed standard is structured according to topics and in a
user-friendly manner (Pacter 2007:76-77; Sheaver & Sleigh-Johnson 2007:78).
One of the goals of the IASB in issuing the IFRS for SMEs was to reduce the burden of
preparing SMEs’ financial statements (Pacter 2007:76; Stainbank & Wells 2007:32). In
section 3.1 above, it was indicated that the cost burden of preparing financial statements for
SMEs on full IFRSs was one of main incentives for the development of differential
reporting. As part of the empirical research, the respondents were asked whether they felt
that the proposed IFRS for SMEs would save time and effort for the preparer(s) of financial
statements in the future. Despite the fact that this was one of the IASB goals in issuing the
IFRS for SMEs, the respondents were not convinced that the desired effect would be
achieved. The results of the empirical research are indicated in table 3 below.
Table 3: Respondents’ opinions on whether IFRS for SMEs would reduce the burden
of preparing financial statements for SMEs
Percentage of
respondents
Yes 45%
Moderate 29%
No 13%
Uncertain 13%
Total 100%

Only 45% of the respondents believed that the IFRS for SMEs would indeed reduce the
burden of preparing financial statements for SMEs. This conclusion is in line with previous
empirical results in Ireland, where McAleese (2001:18, in Stainbank & Wells 2007:34)
concluded that the Financial Reporting Standards for Small Enterprises had not relieved the
financial reporting burden faced by small entities. The respondents’ relative scepticism
could perhaps be attributed to the fact that they believe that standards do not apply fully to

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their clients (micro-entities) as outlined below. However, the proof of the pudding lies in
the eating, and only time will tell whether the IFRS for SMEs has in fact reduced the burden
of preparing financial statements of SMEs.

4.2 Sizes of the IFRS for SMEs and micro-entities


Of concern, is the fact that the IASB did not cater for micro-entities, and the IFRS for SMEs
focuses on entities that do not have public accountability, regardless of their size. When the
IFRS for SMEs was prepared, the IASB had a “typical” entity of about 50 employees in
mind to help it to decide on what kinds of transactions, events and conditions normally
occur in such an entity (IASB 2007b:6). The 50-employee guideline is not intended to be a
size test for identifying an SME, but merely a guide to identify topics to be included in or
excluded from the proposed standard (Pacter 2007:76). To test the relevance of the 50-
employee guideline in the South African business context, the respondents were asked to
indicate what percentage of their clients employs 50 or more employees. One should keep
in mind that the purpose of this research was to test the perception of the accounting
practitioners on the suitability of the IFRS for SMEs for any small and medium-sized entity
in South Africa, regardless of its legal form (see the introduction in section 1). Of the 242
respondents, 227 (94%) completed this question, and the empirical results for various
percentages of clients indicated by the respondents are as follows:
Table 4: Percentage of clients of respondents with more than 50 employees
Number of Percentage of clients with more Percentage of Cumulative
respondents than 50 employees (intervals) respondents percentage
112 0 49.34% 49.34%
33 0-1 14.54% 63.88%
47 1-5 20.70% 84.58%
13 5-10 5.73% 90.31%
15 10-25 6.61% 96.92%
3 25-50 1.32% 98.24%
1 50-75 0.44% 98.68%
3 75-100 1.32% 100.00%
227 Total 100%
Weighted average % of clients with more than 50
employees 4.6%

From the above table it is clear that the majority of the clients of the respondents do not
have 50 or more employees, which was the guideline used by the IASB. The majority of the
respondents (49%) indicated that 0% of their clients have 50 or more employees. A total of
64% of the respondents indicated that 1% or less of their clients have 50 or more
employees. The average percentage given by the respondents is only 4.6% of their clients
employing 50 or more employees.
It is therefore clear that the guideline followed by the IASB to determine a “typical”
SME is totally out of line of the “typical” smaller entities in South Africa, and that the
guideline could be significantly lower in the case of South Africa. This could imply that the
contexts in which the IFRS for SMEs was written, is not totally relevant to SMEs in South
Africa, and that other accounting principles may be relevant and applicable to these smaller
South African entities. This is in contrast to two of the IASB goals for the IFRS for SMEs,
namely, “to provide a simplified, self-contained set of standards that are appropriate for

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smaller, non-listed companies …” and to “develop a standard that will be suitable for, and
easily applied by, even the smallest of SMEs – the so-called micro-sized entities with just a
few employees” (IASB 2007b:5).
The IASB also states that it does not intend developing a standard for micro-entities
because a lower-level standard would impair fair presentation and not meet the requirement
of the usefulness of financial statements (IASB 2007 e:par.BC49-BC50). In the IASB’s
staff overview of the IFRS for SMEs, the question is posed whether this standard is suitable
for micro-sized SMEs (those with, say, fewer than 10 employees). The IASB staff’s
response was “most definitely” (IASB 2007b:6). However, according to Sheaver and
Sleigh-Johnson (2007:79), the proposed standard will not be widely regarded as useful for
micro-entities with 10 or fewer employees. They added that even for a typical 50-employee
company, the requirements of the IFRS for SMEs are still bulky and in some places far from
simple. Their argument is indeed in line with the empirical results presented above. In a
more recent development of IFAC, a paper on micro-entity reporting revealed some
empirical evidence in favour of more relaxed reporting requirements for micro-entities
(IFAC 2008). The need for specific accounting principles for micro-entities was also
recently addressed by SAICA, this being one of its current (August 2008) research projects
(SAICA 2008).
In light of the IASB’S view that micro-entities will also have to comply with IFRS for
SMEs, the respondents were asked to give their opinion on whether they thought that there
is a need for an accounting standard or guide for micro-entities, separate from the proposed
IFRS for SMEs. In contrast to the IASB’s view, as stated above, 70% of the respondents
held that there is indeed a need for separate accounting standards for the smaller entities
(smaller than 50 employees) in South Africa, while only 25% agreed with the IASB and 5%
of the respondents were uncertain.

4.3 Types of entities and financial reporting


For the purposes of this article, an SME was considered to be any small and medium-sized
entity, irrespective of its legal form, having no public accountability (see the introduction in
section 1). As part of the empirical research, the respondents were asked to indicate what
percentage of their clients operates in the various legal forms. A total of 224 respondents
(93% of the 242 completed questionnaires) answered this question. The spread for the
average percentages of the various types of businesses is as follows:
Table 5: Average percentage of clients of respondents in various business forms
Business form Average percentage
of clients
Public accountable entities(including widely held companies) 3%
Closely held companies (private companies) 15%
Close corporations (CCs) 50%
Other (e.g. partnerships, sole proprietors, trusts) 32%
Total 100%

From the table it is clear that, on average, 82% of the clients of the respondents operate in
the less formal type of entity (close corporations and others). These results relate to data
presented by the Department of Trade and Industry (DTI) as part of its information sessions
on the Companies Bill (DTI 2007:4). According to DTI statistics, 40% of all entities
(registered and unregistered) are close corporations. Sole proprietors represent 22%, entities

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in the informal economy 24%, private companies 13% and listed companies 1% of all
entities in South Africa. The total percentage of the less formal type of entity is therefore
86%, which relates closely to the 82% of the clients of the respondents in this research. In
general, most close corporations, sole proprietors and especially those in the informal
economy tend to be small and medium-sized entities, if not micro-entities, which is in line
with the SMEs considered in this article (see the introduction in section 1). This
corresponds to the results presented in section 4.2 above, where, on average, only 4.6% of
the respondents indicated that their clients had more than 50 employees.
The IFRS for SMEs is meant to apply to all general purpose financial statements of
SMEs. General purpose financial statements are directed towards the common information
needs of a wide range of users who are not in a position to demand reports tailored to meet
their particular information needs (IASB 2007a:par.P7-P9). As part of the empirical
research, the respondents were asked to indicate for what purposes financial statements are
prepared for SMEs and to rank the uses of these statements. For some obscure reason, only
179 respondents answered this question. The results are as follows:
Table 6: Average percentage of clients of respondents for various business forms
Purposes for which SMEs use financial statements Ranking % of respondents
To acquire new finance (i.e. banks) 2 65.4%
For tax purposes (i.e. tax authorities) 1 76.6%
For management purposes (i.e. owners/managers) 3 60.3%
Other uses 4 38.0%

It is clear from the above table, that the primary users are tax authorities, banks and the
managers/owners. The financial statements of SMEs are indeed for a limited purpose.
In the sections above, the results of the empirical research relating to the size and type of
entity were presented and discussed. The next section analyses the empirical results relating
to the specific topics of IFRSs.

4.4 Details of the topics included in the IFRS for SMEs and
simplification of recognition and measurement
In section 4.1, it was indicated that the IFRS for SMEs document reduced the volume of full
IFRSs by more than 85%. This was mainly achieved by eliminating certain topics that are
not generally relevant to SMEs because the IASB believes that typical SMEs are not likely
to encounter such transactions or conditions. To address the issue of whether more
simplifications would be necessary, the respondents were given a list of the topics (IFRSs
equivalent standards) that were still included in the IFRS for SMEs. In the section on the
research methodology (see section 2) it was indicated that the respondents attended a
GAAP update seminar at which the detailed requirements of the IFRS for SMEs were
presented. The authors believe that this would have enabled the respondents to complete the
questionnaire.
The respondents were asked to indicate which topics are “fully applicable” (i.e. the topic
should be applied as is), “partly applicable” (i.e. some aspect of the topic is applicable, but
certain requirements should be amended) and “not applicable” (i.e. the topic is not
applicable in full). A high response for “partly applicable” would indicate that the
respondents maintain that certain additional recognition and measurement principles should
also be considered for simplification (the second question of the IASB referred to above). A
high response for “not applicable” would indicate that respondents believe that the relevant

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IFRS for SMEs in South Africa: a giant leap for accounting, but too big for smaller entities in general

topic could perhaps also be omitted from the IFRS for SMEs (the first question of the IASB
referred to above). While filling in this section of the questionnaire, a number of
respondents failed to complete certain sections of specific standards. One may infer from
this that the respondents were uncertain or that they may not have fully understood the
specific requirements of that standard or that they do not deal with that particular aspect too
often in practice. As part of the empirical research, the respondents were asked to specify
what recognition and measurement requirements should be reduced/simplified for small
and micro-entities if they selected “limited application”. Despite this request, only a few
respondents actually responded. The responses were generally so vague and insubstantial
that no conclusion could be drawn. However, some of the comments on IAS 12 are
discussed below.
In order not to influence the respondents in any way, the topics were listed in no
particular order (although they were listed in numerical sequence, based on the IFRS/IAS
numbering, because the authors believed that the respondents would be more familiar with
this numbering than the numbering of topics in the IFRS for SMEs) or groups of related
topics. In reporting the empirical results, the topics are grouped on the basis of the
responses received (i.e. most respondents indicated “fully applicable”, etc.).
The number of respondents who completed the section for each standard is listed below,
together with the percentage completed of the total 242 respondents. The responses are then
expressed as percentages between the three alternatives. Details of the empirical data are as
follows:
Table 7: Topics with a clear indication/preference to be “fully applicable” to SMEs
(ranked from high to low)
Number of Percentage of Fully Partly Not
Topic
respondents population applicable applicable applicable
Revenue 228 94% 87% 11% 2%
Inventories 225 93% 84% 11% 5%
Property, plant and
equipment 226 93% 82% 17% 1%
Presentation of financial
statements 225 93% 77% 19% 4%
Income taxes 225 93% 76% 20% 4%
Leases 225 93% 71% 19% 10%
Cash flow statements 227 94% 69% 15% 16%
Investment property 202 83% 67% 19% 14%
Events after the end of the
reporting period 227 94% 66% 15% 19%
Accounting policies, changes
in accounting estimates and
errors 226 93% 64% 23% 12%
Borrowing costs 199 82% 61% 20% 19%
Provisions, contingent
liabilities and contingent
assets 202 83% 56% 21% 23%

The topics, for which the respondents had a clear preference (more than 50%) that are fully
applicable, are listed in table 7. The topics listed in this table can all be considered to be the
“fundamental” topics that deal with transactions that are probably all common in SMEs.

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Van Wyk & Rossouw

From the relatively high response to the fact that the topic is considered to be fully
applicable, one may infer that recognition and measurement simplifications are not really
necessary. It is interesting to note that 76% of the respondents who completed that part of
the questionnaire were of the opinion that the topic of Income Taxes is fully applicable to
SMEs. This is in contrast to the common belief that the recognition of deferred tax is not
applicable to SMEs. (This belief is unsubstantiated, although the IASB considered the
views of some stakeholders that an SME should not be required to recognise deferred tax
[IASB 2007e:par. BC84].) However, of the total number of respondents who completed this
question (n=225), 20% (n=45) stated that the standard is “partially applicable” to SMEs. Of
these 45 respondents, 24 (53%) added a comment explaining their choice. They all
indicated that deferred tax should not apply to SMEs.
Table 8: Topics with a clear indication/preference to be “not applicable” to SMEs
(ranked from high to low)
Number of Percentage of Fully Partly Not
Topic
respondents population applicable applicable applicable
Consolidated and separate
financial statements 200 83% 17% 12% 72%
Investments in associates 198 82% 21% 12% 67%
Business combinations 205 85% 23% 11% 66%
Interests in joint ventures 197 81% 23% 14% 63%

The topics for which the respondents had a clear preference (about two-thirds) that the
topics are not considered to be applicable to SMEs, are listed in table 8 (ranked from the
highest percentage for “not applicable”). It is clear that the topics listed in table 8 all relate
to the accounting within groups. It may be assumed that the typical micro-entities in South
Africa (see section 4.2 above) would not operate in a group structure. The topics on
business combinations, consolidated financial statements, associates and joint ventures
could perhaps be considered for omission from the IFRS for SMEs.
Table 9: The applicability of the topics included in the IFRS for SMEs with no
specific preference
Number of Percentage Fully Partly Not
Topics
respondents of population applicable applicable applicable
Impairment of assets 203 84% 47% 24% 29%
Related party disclosure 207 86% 46% 25% 29%
Intangible assets 202 83% 46% 23% 31%
Agriculture 202 83% 43% 20% 37%
Construction Contracts 207 86% 40% 20% 40%
Financial instruments: disclosures 214 88% 39% 22% 39%
Financial instruments: recognition and
measurement 199 82% 36% 25% 39%
Financial instruments: presentation 198 82% 34% 27% 39%
Accounting for government grants and
disclosure of government assistance 200 83% 32% 19% 49%
Non-current assets held for sale and
discontinued operations 222 92% 32% 17% 51%
The effects of changes in foreign
exchange rates 200 83% 31% 22% 48%
Employee benefits 205 85% 27% 24% 49%

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IFRS for SMEs in South Africa: a giant leap for accounting, but too big for smaller entities in general

The topics not included in the previous two tables are listed in table 9. The topics were
ranked from the highest percentage indicated for “fully applicable”, and it is interesting to
note that the inverse ranking is almost the case for “not applicable”. No specific
relationship between the individual topics exists, except for the topics on financial
instruments, which are discussed below. However, one may deduce a few possible reasons
and arguments for the respondents’ preference.
Although the respondents gave no specific indication of this, a possible reason for the
fact the topic on impairment of assets was not indicated as fully applicable to SMEs, could
be the part of the standard dealing with cash-generating units and the complexity of
calculating “value in use”, which is in fact not required under the proposed IFRS for SMEs.
A possible common feature of the next two topics is that not all entities necessarily have
related parties and intangible assets. The respondents may have felt that the topics are
applicable if those parties and assets exist in the SME.
The next two topics, with more or less the same ranking for applicability, are that of
agriculture and construction contracts. Since these industries could be considered to be
specialised, not all SMEs would typically be involved in them.
The grouping of the three topics on financial instruments so close to one another is worth
commenting on. The applicability and non-applicability were both indicated as being
between 30 and 40%, with a higher tendency towards the topic not being applicable to
SMEs. A possible reason for this is the fact that the topics on financial instruments are often
described as complex and highly technical. Even the IASB and USA Financial Accounting
Standards Board (FASB) have acknowledged that the current accounting requirements for
financial instruments are too complex and require simplification (Hafkamp 2007:30).
Furthermore, the smaller entities would probably not issue “compound instruments” (IAS
32), not meet the hedging conditions and not deal in “embedded derivatives” (IAS 39). One
can deduce that certain sections of these topics may be applicable to SMEs, while other
sections may not. The details of this is an area for future research and an area in which
standards setters could consider omitting certain sections for SMEs or in which recognition
and measurement principles could be simplified.
For the last four topics listed in table 9, about 50% of the respondents felt that these
topics are not applicable to SMEs. One may infer from this that only a limited number of
entities would receive governmental grants and this could be a reason why most of the
respondents rated the topic as not applicable. The last three topics were rated as probably
not applying to SMEs, and this could also indicate that the respondents believed that the
topics contained certain sections that may not be relevant to SMEs. The IASB should
consider the relevance of the detailed principles of recognition and measurement of these
topics to SMEs for further simplification. This is another potential area for further research.

5 Summary and conclusions


For a long time, small and medium-sized entities (SMEs) were burdened with the
application of Statements of GAAP and IFRSs in South Africa. During 2007, the IFRS for
SMEs was issued, and it omitted certain topics not applicable to SMEs, reduced the
disclosure for SMEs and simplified some of the principles of recognition and measurement.
This standard was intended to relieve the burden of preparing financial statements by
SMEs. The first objective of this article was to identify whether accounting practitioners

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Van Wyk & Rossouw

believe that the proposed IFRS for SMEs (Statement of GAAP for SMEs) would reduce the
burden of financial reporting of the SMEs. However, despite the good intentions of the
IFRS for SMEs, the results of the empirical research revealed scepticism among accounting
practitioners about whether this standard would indeed reduce the burden of financial
reporting for SMEs.
The next objective of this article was to consider whether the 50-employee guideline
used for setting up the IFRS for SMEs is in line with the typical South African small and
medium-sized entities in general. After studying some of the literature on this topic and the
empirical results, it was indicated that the IFRS for SMEs is not deemed to be relevant to
smaller and micro-entities in South Africa. The benchmark of an entity with 50 employees,
which the IASB used to determine the typical transactions of SMEs, is considered to be too
large for the South African business environment. Further research to identify the typical
size of South African SMEs and to address its unique accounting needs is recommended.
The final objective of this article was to identify certain additional topics that could be
considered for omission from the IFRS for SMEs and pinpoint a few areas in which the
recognition and measurement principles could be simplified. The topics relating to group
statements were identified as standards that the IASB could possibly consider omitting
from the accounting standards of SMEs.
The respondents also viewed some of the topics (table 9) as only “partially applicable” to
SMEs. The conclusion was drawn that SMEs may not necessarily be involved in the
industries to which these topics refer. Furthermore, certain aspects of impairment of assets,
related party disclosure, intangible assets, government grants, non-current assets held for
sale and discontinued operations, foreign exchange rates and employee benefits may not
really be applicable to SMEs. The detailed requirements of these topics are an area for
future research aimed at identifying specific elements where the IFRS for SMEs could be
simplified for SMEs.
A limitation of the research was that because the views of the users of financial
statements were not evaluated, their perceptions were not documented. Caution should
therefore be exercised in drawing conclusions from the results of the research.
Although the issuance of the IFRS for SMEs is indeed a giant leap in the right direction,
much still has to be done on the accounting standards for the typical smaller entities in
South Africa, irrespective of their legal form (whether or not it is a company). The details
of the suggested separate accounting standards for smaller and micro-entities could be a
topic for further research. The IFRS for SMEs should not be summarily, but rather be seen
as an effective starting point for further research and discussion. Because the IFRS for
SMEs is not generally regarded as useful for smaller or micro-entities, the title is misleading
and should rather be more descriptive.

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