This is an opportune moment to contribute to the revisions that are being proposed to the IFRS for SMEs Standard.
The Small and Medium-Sized Entities (SMEs) accounting standard is undergoing a review and the reviews will affect SMEs in South Africa. Changes to the SME Standard range from rewriting accounting requirements for revenue transactions to introducing the expected credit loss impairment model for certain financial assets and updating the definitions of assets and liabilities.
Some of the proposed changes may require SMEs to begin reviewing existing legal agreements related to revenue transactions or may trigger the need to consider the impact on debt covenants. While it may have financial statement and business implications, the revisions are expected to improve the quality of financial information that SMEs provide in their financial statements to users of those financial statements, such as creditors, investors, or financial institutions.
A new revenue recognition model is being introduced that is a simplified version of the revenue model that was adopted under International Financial Reporting Standards (IFRS) in 2018. Entities with simple revenue transactions, such as those that transact in cash, feel the impact. However, those in industries such as the construction sector may need to consider whether the new requirements will not affect the timing of revenue recognition and therefore affect year-over-year earnings.
SMEs will appreciate the relief provided in relation to the impairment of receivables, as the incurred loss model can still be applied to these financial assets. The incurred loss model, which is currently being applied, makes it possible to recognize impairment losses when a credit event has occurred. The new expected credit loss (ECL) impairment model will be applicable to all other financial assets measured at amortized cost, except for debtors and contract assets. The ECL model requires impairment losses to be recognized much earlier, as they may need to be recognized throughout the life of the instrument and not just when an indicator of impairment exists.
SMEs in the agricultural sector will see a change in the accounting of bearer plants, since they will have the option to depreciate these plants during their useful life, while under the current Standard, these are measured at fair value less cost of sale, with value changes recognized in results.
Updates to the definitions of assets and liabilities have not been spared since these are based on the conceptual framework published more than three decades ago. The inclusion of guidance on measurement, presentation and disclosure is intended to help SMEs apply judgment in developing accounting policies when the IFRS for SMEs Standard does not specify requirements for a particular transaction. SMEs may need to assess whether the changes to the definitions, as well as the additional guidance provided, will have an impact on their financial statements.
Those SMEs that enter into lease transactions will continue to apply the current lease accounting model, which requires entities to classify leases as operating or finance leases. The alignment process with this equivalent IFRS Standard (IFRS 16 – leases) will be deferred to a later date. The proposal to defer the effective date is the result of a call by the constituents to postpone alignment with IFRS 16 until the post-implementation review of this IFRS standard is complete.
These proposed changes will result in additional financial commitments due to adjustments of systems to accommodate the new requirements, training of staff on the new requirements, or appointment of consultants to support SMEs during implementation. The importance of financing requirements may vary from one entity to another.
Those charged with governance within SMEs will need to be aware of upcoming changes before the amendments become effective to ensure they understand the business and financial statement implications of such amendments.
This is an opportune time to contribute to the revisions that are being proposed to the IFRS for SMEs Standard to ensure that any final amendments that are made are simple and easy to implement in an SME environment. Similarly, the new requirements should help SMEs to provide useful information to users of their financial statements.
In the South African context, the SMEs that will be affected by the proposed changes to the IFRS for SMEs Standard are closely held companies and corporations with a public interest score below 350, as determined under the Companies Act 71 of 2008, which have chosen to apply the IFRS for SMEs. Other entities that are not required to comply with a prescribed financial reporting framework but have chosen to apply the IFRS for SMEs will also be affected.
Comments on the draft amendments to the IFRS for SMEs Standard should be submitted to the International Accounting Standards Board by March 2023.
For more information visit www.saica.co.za
About SAICA
The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognized as one of the world’s leading accountancy institutes. The Institute provides a wide range of support services to more than 50,000 members and associates who are certified public accountants (CAs).[SA]), as well as associate general accountants (AGA[SA]) and accounting technicians (ATs[SA]), who hold positions as CEOs, CEOs, board directors, business owners, CFOs, auditors, and leaders in all spheres of business and industry, and who play an important role in business and economic development highly dynamic nation.
Chartered Accountants are highly valued for their versatile skill sets and creative lateral thinking; that’s why the top 100 global brands employ CPAs.
Bongeka Nodada is SAICA Corporate Reporting Executive
