The International Financial Reporting Standards (IFRS) are an attempt to harmonise accounting practices on a global scale, with the ultimate aim of making it easier for companies to assess potential cross-border activities. Promoted by the International Accounting Standards Board (IASB), the IFRS are principles-based standards designed to increase accounting transparency and interoperability from country to country. The development of IFRS includes both the standards issued by the current International Accounting Standards Board (IASB) as the former international standards (IAS) issued by the predecessor entity (IASC).
The IASB is developing SME standards by extracting the fundamental concepts from the IASB Framework and the principles and related mandatory guidance from IFRS’s (IASB, 2004b, and p. 3). The IASB argues that it is better to have a single set of accounting standards for SME’s based on IFRS’s developed by the IASB rather than many different sets developed by individual countries (Price Waterhouse Coopers, 2005, p. 12). This is more of an issue for developing economies like Fiji where predominantly entities are ‘small and medium’ in size.
The primary objective of this study is to identify ways in which countries can distinguish between large entities and SMEs. Fiji has already adopted the IFRSs and has illustrated how it is faced with further complications by the issuance of SME IFRSs. Identification on the ways in which Fiji could embrace both the IFRSs and SME IFRSs together is being. The Fiji Institute of Accountants (FIA)] decided to develop a set of accounting standards that would be subject to quinquennial updating to benchmarks set by the IASB.
At that time it was expected that this would require a considerable but not huge effort to move from the existing set of Fiji Accounting Standards to a new set. With the task being undertaken fairly infrequently, it was expected that the FIA would not be forever preoccupied with the need to update their practices. Users and producers of financial reports would have time to obtain and apply an authoritative understanding of the regulatory framework which governs financial reporting.
Since adopting the IFRSs in 2002, the FIA has been most diligent in conducting professional education sessions on the new and refined standards produced by the IASB, particularly on those accounting standards, which pose the greatest challenges in application to the FIA members. With the adoption of IFRS the IASB has made numerous changes to its IASs and issued new IFRSs since establishing its ‘stable platform’ of standards in 2004. The Fiji Accounting Standards (FASs) almost matched their international equivalents at the beginning of 2002.
However, by the end of 2006, this can only be said of IAS 26 equivalent of FAS 26 Accounting for Retirement Funds, a standard that applies to only one operating entity in Fiji. Additionally, FAS 26 only have a guidance status. The FIA draws back from the updating exercise in part owing to the sheer enormity of the task. The rate of change in regulation internationally can discourage continuing professional education (CPE) locally with respect to keeping abreast with accounting regulation. There are reservations over the direction in which change is taking.
Even though according to the IASB Conceptual Framework (1989), financial reports are to be prepared for a variety of users. The IFRS’s are more inclined towards providing accounting information to the investors, rather than to other stakeholders. As of for the Adoption of IFRS the Fiji Institute of Accountants (FIA) and the Capital Market Development Authority (CMDA)expects all those companies listed on the Fiji Stock exchange to follow either the full version of IFRS or the ‘half version’ of IFRS been used by small medium enterprises (SME’s).
SMEs are not merely smaller versions of large businesses (Wortman, 1987; Keats and Bracker, 1988; Ratnatunga and Romano, 1997; Cassar and Holmes, 2003; Altman and Sabato, 2005). SME’s usually prepare financial statements to meet the needs of their primary users which may differ significantly across countries depending on the different legal structures and social and economic environments. The benefit is also seen in Fiji as to which its reporting entities can be regarded as SMEs. 1 The FIA can then relax until the IASB produces its SME standard.
However, it seems unlikely that this approach will best serve Fiji’s economy. The need to update the financial reporting regulation is not driven by the size of reporting entities but by the nature of the business they do. The terms ‘large’ and ‘SME’ does a disservice in the context of Fiji, distracting it from the relevant distinction to draw in establishing a differential reporting framework. Multinational corporations operating in Fiji will look to report back to head office using accounting standards that are understood, if not adopted, worldwide.
Fiji’s accounting standards that were set at the beginning of 2002 will become ever more idiosyncratic in the eyes of the world as time moves on. Similarly we might expect the world in general to have an interest in the financial affairs of entities, which interact with it. Domestic entities, which seek finance or credit from overseas, would do well to produce IFRSs compliant financial reports. Overseas loan financiers and trade creditors can be expected to look askance at financial reports which are not compliant, with consequential adverse effects on financing and investment decisions.
Even exporters may find that overseas customers seek assurance on the economic viability of their suppliers. They too will expect financial reports which conform to international norms. Rather than devising an arbitrary distinction between large entities and SMEs, it would seem that Fiji will be better served by requiring entities with material international business activities to conform to full set of IFRSs. The FIA will also have the benefits of being able to observe how their counterparts, working in jurisdictions where intangible assets are commonplace, have applied IAS 38.
IFRSs 4 and 6 are industry specific and will therefore have a limited application. Again the FIA does not need to build up expertise across the profession to deal with these. While there are some benefits for the adoption cost is also incurred. The IASB further argues that in such circumstances the entity should continue to use IASB standards for SME’s for its financial reporting, and each IASB standard for SME’s should explicitly mention the required reference to IFRS’s. The needs of domestic users of financial reports may well differ from those of the global users.
SME’s are usually reluctant to invest in improving their financial reporting until it becomes strictly necessary (Patel, 1991; Patel and Needham, 1991). For most SME’s, the costs of complying with applicable accounting standards are far greater than the benefits flowing from such compliance. The costs of compliance include the direct costs of collecting, storing and retrieving financial information and employing an accountant, as well as the indirect costs linked with diverting valuable management time towards compliance (Patel and Needham, 1991, p. 7). Consequently the appropriate reporting framework for the large entities and SMEs is expected to differ. The cost of introducing IFRS in Fiji is great as the changes generated by the IASB have been made with the financial reporting needs of large developed economies in mind, not those of Fiji. Not only Fiji has problems to this adoption Representation at the World Standard Setters Conference in London in September 2005 provided a useful insight into the progress the profession worldwide has made towards the globalisation of accounting standards.
This will help the credibility of financial reports generated in Fiji and of course the standing of the accounting profession compromised (Chand and White, forthcoming). However, Fiji has no grounds for satisfaction. The FIA’s one firm decision, which appears to have been made in the light of information obtained from the World Standard Setters Conference, is that there will be no change in accounting standards for SME’s until the IASB’s SME accounting standard project is completed (Apted, 2005). Certain other statements certainly pose challenges, but not necessarily insuperable ones.
IAS 36 Impairment, IAS 38 Intangible Assets, IFRS 4 Insurance Contracts and IFRS 6 Exploration for and Evaluation of Mineral Resources would seem to fall into this category. We can in fact expect the actual application of the mandated reporting procedures to be infrequent. For example, while the impairment test required by IAS 36 will almost certainly require the determination of present values for assets constituting cash generating units, a well run entity’s internal accounting system will have already made appropriate estimates for internal decision making purposes.
This decision of course would seem to make eminent good sense. The costs associated with the initial change can scarcely be justified. In response while the FIA is not resourced to refashion the entire set of IFRSs to meet its needs, amending one of the SME standards already available, in order to provide Fiji with an appropriate domestic regulation for financial reporting could well prove to be within its capacity. Such an approach allows the FIA to be proactive. There is much to be said for this in terms of maintaining the professional status.
Entities that interact with the rest of the world must, as far as is reasonably possible, use the global rule book. Looking to the IASB for regulatory guidance is appropriate. But nobody knows the Fiji situation better than the Fiji professionals. The FIA should at least make an attempt to develop domestic financial reporting standards to meet domestic needs. Adopting IFRSs for these entities may be appropriate. However, the FIA is not resourced to adopt the entire set of IFRSs to meet its needs. The IFRSs yet to be adopted in Fiji are not necessarily relevant.
Where they are relevant the FIA may not possess the capacities to apply them. We argue that there is no compelling reason why the FIA should adopt IFRSs in their entirety, exactly as they are compiled and approved by the IASB or to make immediate updates to its own regulations as existing IFRSs are amended and new ones are circulated. In conclusion National standard setters in many countries are working individually to provide appropriate financial reporting for SME’s. Similarly, Fiji should look to adopt a regulatory framework with domestic needs in mind, not those of the world at large.
An alternative is not to wait for the IASB IFRSs, a set of standards to be produced that Fiji may already suspect will not be suitable to their needs, when at least two alternatives are already available for consideration. It should be well within the competence of the FIA to evaluate these documents and assess their suitability to Fiji’s commercial and financial reporting environment. The implicit assumption in developing a separate set of standards for SME’s is that greater comparability in financial reports will result across countries if SME IFRSs are adopted.
The convergence experiences of countries adopting IFRS demonstrates that it is a challenging task to adopt the IFRSs and to keep up-to-date with the developments given the substantial revisions to the existing International Accounting Standards (IASs) and new IFRSs which are mandated by the IASB. Now with the issuance of the SME IFRSs the work of standard setters in countries that have adopted IFRSs is not only hectic but has been hampered (Cameron, 2004, p. 1). The IASB offers no specific direction on how to distinguish between large entities and SMEs.
The countries adopting the SME IFRS’s are allowed discretion in choosing which principles to apply based on distinctions such as public/private ownership, size, cost/benefit analyses or other criteria. The need to ensure comparatives in financial reports are compliant with standards also suggests that providers of reports will need the two years notice to ensure that compliance can be achieved. Thus to provide a better insight into the process of convergence, future studies may investigate the impact of IFRSs and SME IFRSs in various contexts.
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