The use of IFRS for SMEs in Latin America and the Caribbean: Summary analysis

The use of IFRS for SMEs in Latin America and the Caribbean: Summary analysis

Introduction

 As it is well known, small- and medium-sized entities (SMEs) are a very important player in the global economy. However, in many cases, SMEs’ resource providers say, “I do not trust their financial statement figures”. This is a double-sided problem. First, those who need capital might not gain access to it, or at least not on the best terms. Second, those who provide capital do not have the relevant information they need to make capital allocation decisions in regard to SMEs.

 In July 2009, the International Accounting Standards Board (IASB) issued the International Financial Reporting Standard for SMEs (IFRS for SMEs) to address this problem.

 The IASB believes “[the IFRS for SMEs] can play an essential role in helping SMEs gain access to capital”, since it gives a better basis for those providing resources to SMEs to make sound capital allocation decisions.

 After some years of experience in applying this standard (with more than seventy countries using it or planning to use it), the IASB undertook a comprehensive review and in May 2015, issued limited amendments to the IFRS for SMEs.

 This article provides a summary analysis of the use of IFRS for SMEs in Latin America and the Caribbean. The views expressed are my own and not necessarily those of the organizations with whom I work or am affiliated.

 IFRS for SMEs adoption in Latin America and the Caribbean: Status report

 Countries in Latin America and the Caribbean have shown a significant interest in adopting IFRS for SMEs. According to the IFRS Foundation, of the seventy plus jurisdictions that either require or allow, or have plans to adopt, IFRS for SMEs, twenty-eight (39%) are from the region.

 The adoption process in the region differs country by country. Some countries, like Ecuador and Peru, have adopted IFRS for SMEs but added quantitative parameters to determine whether an entity qualifies as an SME. Other countries, like Brazil, in addition to adding quantitative parameters, have made changes to the requirements (e.g., the use of the equity method in separate financial statements) in order to adopt it. And yet other countries, like Argentine, have adopted IFRS for SMEs as an option, in addition to allowing local GAAP, which are generally used by SMEs.

 Challenges in implementing IFRS for SMEs

 In addition to many differences in approach to adoption, there appear to be significant differences in understanding as to the objective of IFRS for SMEs across the region. The objective of the IASB was to develop a user-needs-based standard that would support global economic development. The root cause of misunderstanding in the region is that most entities, and most professional accountants, perceive the IFRS for SMEs to be an entity-based standard.

 As a consequence of this misunderstanding, the interlocutors in the adoption process were, in general, legal authorities that use SMEs’ financial reporting for specific purposes (e.g., collation of statistics or calculation of tax liabilities). No others, such as bankers or rating agencies, who are typically the main users of SMEs’ financial reporting when making capital allocation decisions, were involved.

Why are SMEs interested in adopting a financial reporting standard (including IFRS for SMEs)? SMEs that perceive that the information provided is necessary to gain access to finance on better terms adopt the standard. Other SMEs adopt not because of any tangible business benefits that are worth the additional cost to comply, but because of concerns such compliance with tax and regulation.

 Benefits of adoption

 Many of you may now be wondering: have there been any benefits to adopting IFRS for SMEs in Latin America and the Caribbean so far? In my view, yes. The process of adoption has extended a new financial reporting paradigm across our region, using a simple set of financial reporting standards that will be used by the majority of enterprises and accountants for years to come. The ultimate goal is global harmonization of high-quality SME financial reporting: SMEs worldwide speaking the same financial language.

 However, to improve the process it may be necessary to change the focus of the efforts: the accounting profession has to convince banks and other SME financial resource providers of the quality and utility of IFRS for SMEs. The IASB’s SME Implementation Group should perhaps expand its role and take this on.

 Conclusions

 Since the IFRS for SMEs was issued, countries across Latin America and the Caribbean have made significant progress in the adoption and implementation of IFRS for SMEs. However, there is still much work to be done, not least in raising awareness and understanding as to the role of SMEs’ financial reporting to economic development. The process is imperfect, but perfection can be the enemy of the possible. It is necessary to review what we have done to learn from our experience. Please share your own experiences and views below.

 [cryout-button-color url=»http://incp.org.co/Site/2015/publicaciones/eglobal/a-guide-to-the-ifrs-for-smes.pdf» color=»#47AFFF»]A Guide to the IFRS for SMEs[/cryout-button-color]

 Source: IFAC Global Knowledge Gateway – By Hernan Pablo Casinelli

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