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Accounting for SMEs


Accounting for SMEsIn the EU, the use of International Financial Reporting Standards (IFRS) is intended mainly for the consolidated financial statements of "Public interest Entities" (PIEs, read more about accounting for PIEs). Complying with the requirement of the full IFRS involves significant costs, which would be an excessive burden on smaller firms. As a result, small and medium-sized entities (SMEs), which are estimated to make up more than 95% of all business entities, are generally subject to a less complex set of reporting requirements.

To the Financial Reporting Topics page

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In the EU, accounting requirements under the acquis communautaire are set out in the EU's Fourth and Seventh Company Law Directives. These directives require the preparation of annual financial statements ("annual accounts" or "annual consolidated accounts"), that include a profit and loss account, a balance sheet and a range of notes to the financial statements; in addition, an independent auditor is required to produce a statutory audit of the accounts for limited liability companies. However, individual EU member states can put in place easier reporting regimes and more relaxed audit requirements for SMEs. The European Parliament has recently approved proposals to reduce further the accounting and auditing requirements for the smallest firms (see Recent Developments section below).

While PIEs in the EU have been required since 2005 to compile their consolidated accounts using International Financial Reporting Standards (IFRS), smaller and less economically important firms generally compile their financial statements using national reporting standards.

The International Accounting Standards Board (IASB), which produces the full IFRS, published an International Financial Reporting Standard for Small- and Medium-Sized Entities (known as the "IFRS for SMEs") in July 2009. Economies can adopt IFRS for SMEs independently of whether they have adopted the full IFRS and can also set their own size thresholds for SMEs. However, even the simplified IFRS for SMEs still imposes a significant reporting burden, making the IFRS for SMEs a relevant option mainly for medium-sized firms and for rapidly-growing enterprises that expect to adopt full IFRS in the future.

There are a limited number of inconsistencies between the IFRS for SMEs and the current EU acquis and no EU member state has yet adopted the IFRS for SMEs to replace its existing system of national reporting standards. However, Bosnia and Herzegovina and Macedonia have adopted the IFRS for SMEs and several other countries in the ECA region are considering adopting the standard.


Recent developments/current issues

Financial Reporting requirements for the smallest – "micro" - firms
The European Commission proposed in February 2009 that the very smallest limited liability firms ("micro" enterprises) should be exempt from all EU financial reporting requirements. The Commission’s proposals were opposed by some member states as they feared this would undermine the single European market.

After a lengthy period of discussion between the European Commission, the European Parliament and the member states, a compromise proposal to simplify the financial reporting requirements on the smallest firms was approved by the European Parliament on 13 December 2011. This revised proposal creates micro entities as a distinct category of enterprise and allows EU member states to relax for micro enterprises many of the financial reporting requirements currently imposed by the Accounting Directives. In particular, member states will be able to allow micro enterprises to produce a very simplified profit and loss account and balance sheet, and only a very small number of disclosures are required. Member states will also be able to relax the current multiple publication requirements for micro firms’ financial reports by allowing them to designate a single competent body to receive this information and to handle requests for its publication.

The revised proposals on micro firms will need to be approved by the European Council, representing the member states, before they become part of the EU’s legal framework. This process is expected to be completed in early 2012.

European Commission proposals to reform the Accounting Directives
In November 2011, the European Commission presented its proposals for a new Accounting Directive to replace and modernize both the Fourth and Seventh Directives. The Commission’s proposals are intended to simplify reporting requirements for smaller companies and to improve the comparability of company financial statements within the EU.

For small companies, the Commission is proposing to establish a “mini-regime”, involving a simpler profit and loss account and balance sheet and a limited number of accompanying notes. Small companies would also no longer be obliged to have an audit, while small company groups would be exempted from the obligation to prepare consolidated financial statements.

The Commission is also proposing to raise the company size thresholds for small and medium-sized companies to reflect the general rise in prices since 2006 (the last time that these thresholds were set) and to harmonize them across the EU (currently some EU member states have thresholds which are significantly lower than the thresholds suggested by the Commission).

The Commission proposals discuss the issue of adopting the IFRS for SMEs in the EU, which had previously been the subject of a Commission-initiated consultation exercise. The Commission has decided to reject the idea of requiring the adoption of the IFRS for SMEs at the level of the EU as a whole, arguing that the IFRS for SMEs in some areas imposed more of an administrative burden on businesses than do the EU Accounting Directives. However, it is proposing that individual member states could adopt the IFRS for SMEs as their national reporting standard for some (or all) unlisted companies, provided that the standard was modified to remove any conflicts between it and the Accounting Directive.

For details of how the Commission’s proposal affects larger companies, see Accounting for PIEs.

CFRR Resources

Presentations for download

Right click or option-click the link and choose "Save As..." to download these files.

General material on financial reporting for SMEs

Reference material on the IFRS for SMEs

Video Presentations

Video presentation:
Michael Wells "Overview of IFRS for SMEs"

Michael Wells presents an overview of IFRS for SMEs1. Introduction of the event and speaker by John Hegarty
2. High level overview of the requirements of each of the 35 sections of IFRS for SMEs
3. Active Q&A session with participants

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Source: IFRS for SMEs: Financial Reporting Community of Practice GDLN, 28 April 2010

Video presentation:
Michael Wells "Scope and Concepts of IFRS for SMEs"

Michael Wells presents an scope and concepts of IFRS for SMEs1. Characteristics of SMEs
2. Public accountability definitions
3. Case study
4. Active Q&A session with participants

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Source: IFRS for SMEs: Financial Reporting Community of Practice GDLN, 28 April 2010

Video presentation:
Michael Wells: Tangible and Intangible Assets under the IFRS for SMEs

Michael Wells presents an overview of IFRS for SMEs

This session explains the treatment of assets in accordance with the IFRS for SMEs, including inventories; investment property; property, plant and equipment; intangible assets; and impairment of assets.

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Source: Second IFRS for SMEs Distance Learning Event, Financial Reporting Community of Practice, 11 November 2010

Video presentation:
Saskia Slomp "EFRAG and SME: Accounting in Europe"

Saskia Slomp - EFRAG and SME: Accounting in EuropeSaskia Slomp, Director of the European Financial Advisory Group (EFRAG)

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Source: Senior Officials meet for REPARIS Workshop, 26 - 27 May 2010, Chisinau

SME Financial Reporting

JoseMariaJosé Maria Bové Montero, Chairman, SME Working Party, European Federation of Accountants.

The justification for differential reporting in national jurisdictions; What is a small and medium-sized entity?; Implications for EU Member States and candidate countries

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PowerPoint Presentation

Source: Advanced Program 2006: Module 20

International Accounting Standards for SMEs

Paul PacterPaul Pacter, Director of Standards for SMEs, International Accounting Standards Board.

Why SME standards are needed; IASB's preliminary views and IASB definition of SME; Recognition and measurement questionnaire; Draft exposure draft.

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PowerPoint Presentation

Source: Advanced Program 2006: Module 20

Addressing Common Challenges in Accounting and Auditing on a Regional Basis

David NagyDavid Nagy, Consultant, Financial Management - Europe and Central Asia, World Bank

International financial architecture; Corporate financial reporting and the role of the World Bank; Country owned reform agenda - ROSC A&A - Strategy and Action Plans - REPARIS; Outcomes of the Ministerial Conference in Vienna and challenges ahead; Case studies: Bulgaria, Romania, Macedonia, and Bosnia and Herzegovina.

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PowerPoint Presentation

Source: Advanced Program 2006: Module 21

Obstacles Faced by SMEs in Applying Accounting Standards

Annette DavisAnnette Davis, Seconded National Expert, DG Internal Market, European Commission

EU law for limited liability companies; Unlisted companies: SME criteria; Unlisted companies: accounting requirements; SME exemptions and implementation; IASB SME project: Commission view, and EFRAG / FEE joint working group.

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PowerPoint Presentation

Source: Advanced Program 2006: Module 21

A case study - Slovenia: Addressing the Needs of SMEs and Other Stakeholders

Meta DuhonikMeta Duhovnik, Senior Technical Adviser, Slovenian Institute of Auditors.

Addressing the needs of the economy in line with the Fourth EU Company Law Directive.

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PowerPoint Presentation

Source: Advanced Program 2006: Module 21

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