SME DEFINATION IASB

1
ACCOUNTING STANDARDS FOR SMEs ISSUES
PERSPECTIVES
Y. H. MALEGAM
SAFA CONFERENCE CHENNAI SEPT.2006
2
PROGRESS OF PROJECT

• Project suggested by SAC in 2002
• Board appointed Working Group
• Discussion Paper June 2004
• Staff Questionnaire April 2005
• Discussions with SAC, Standard Setters,
  Round-Table Meetings
• Consideration of Staff Draft by IASB
• Expected Issuance of ED last quarter 2006

3
ISSUES FOR DISCUSSION

• What is need for separate IFRSs for SMEs?
• How should SMEs be defined?
• What are implications of a single Global
  Standard?
• How should exemptions for SMEs be determined?
• Is the suggested arrangement by topics
  appropriate?
• Should SMEs have a choice not to avail of
  specific exemptions?

4
THE SMALL SCALE SECTOR IN INDIA

• Production value Rs. 4,71,244 crores (approx
  41.49 of total)
• Employment 294.9 lakhs persons (approx 74.94 in
  organized sector)
• Exports in 2003-04 USD 21,249 million (approx
  33.28 of total)
• (SourceRBI Handbook of Statistics of the
  Indian Economy 2005-06)

5
COMPOSITION OF SMALL SCALE SECTOR IN INDIA

• 
  (percentage)
• Sole Proprietorship 95.80
• Partnership 1.90
• Private Companies 0.68
• Co-operatives 0.14
• Others 1.48
• 100.00
• (Source 3rd All India Census of Small Scale
  Industries 2001-02)

6
CLASSIFCATION BY MICRO, SMALL AND MEDIUM
ENTERPRISES DEVELOPMENT ACT, 2006

• Classification Investment in Plant Machinery
• Micro Not Exceeding Rs. 25 lakhs
• Small Rs. 25 lakhs but not exceeding
• Rs. 5 crores
• Medium Rs. 5 crores but not exceeding
• Rs. 10 crores

7
FACTS HIGHLIGHTED BY STATISTICS

• Small Scale Sector constitutes a large part of
  Indian economy in value and overwhelmingly large
  part in number
• Wide range in size among micro, small and medium
  enterprises
• Very small percentage of small scale industries
  in corporate sector but probably large majority
  of medium scale enterprises in corporate sector

8
DEFINITION OF SME IN DRAFT

• SME is entity that-
• (i) does not have public accountability and
• (ii) publishes general purpose financial
  statements for
• external users.
• Entity has public accountability if-
• (i) it is a listed entity or
• (ii) it holds assets in a fiduciary capacity
  e.g.
• bank, mutual fund etc.
• No size-test but criteria to be decided by
  individual jurisdictions.

9
RESERVATIONS ABOUT A SINGLE GOLBAL STANDARD

• Separate set of IFRSs presupposes that-
• SMEs may not have capability to implement full
  IFRSs.
• Cost of full implementation may not be
  commensurate with benefit.
• Topics considered in full IFRS may not be
  relevant for SMEs.
• However, these considerations cannot be same for
  all SMEs within a national jurisdiction and even
  more so across the globe. Draft recognizes this
  when allowing individual jurisdictions to define
  SME

10
RESERVATIONS ABOUT A SINGLE GOLBAL STANDARD
CONTD

• Even within individual jurisdictions, diversity
  may be so large as to require sub-divisions, e.g.
  tiny, small and medium.
• Board justification is that absence of global
  standard could create following problems
• - Claims of extraction from, convergence with,
  alignment with or similarity with IFRSs are
  often somewhat exaggerated.
• - National standards would not necessarily be
  consistent with the IASB Framework or Standards.
• - National standards would not necessarily
  address the needs of external users.

11
RESERVATIONS ABOUT A SINGLE GOLBAL STANDARD
CONTD

• - Financial statements would lack comparability
  across national boundaries or even within a
  country.
• - National standards would not necessarily allow
  for an easy transition to full IFRS for entities
  that wish to enter the public capital markets.
• These claims can be seriously challenged.
• Single global set of standards does not
  adequately address the issue that regulatory
  framework in all countries is not the same.

12
ISSUES ARISING OUT OF ORGANISATION OF STANDARDS
BY TOPICS

• Whereas SME standards cross-referenced to IFRS,
  no cross-referencing of IFRS to SME
• Board has accepted there will be occasions when
  SMEs will have to look to full IFRS, viz.,
• (i) SME standard provides simpler option but
  SME free to use more complex option
• (ii) SME standard omits an accounting topic in
  full IFRS and SME encounters situation
  envisaged in full IFRS

13
ISSUES ARISING OUT OF ORGANISATION OF STANDARDS
BY TOPICS CONTD.

• (iii)SME encounters a transaction, event or
  condition not provided for or cross- referenced
  in the standard and needs to consult the full
  text of the full IFRS
• Significant differences in language between SME
  standards and full IFRS

14
ISSUES ARISING OUT OF NEED TO FOLLOW STANDARDS IN
ENTIRETY

• Conflicts with Board decision to permit SMEs
  choice of alternatives
• Option not to avail of exemptions would
  facilitate progression to full IFRS
• No encouragement to improve quality of accounting
• Does not recognise that accounting capability
  within SMEs in a country can significantly vary