Johannes Guigard / Via Napo Torriani 31 – Milan – Italy UNIVERSITY OF MOSCOW 13/17 October 2008 Accounting Regulations for Small and Medium Entities Johannes Guigard Chartered Accountant Italy and ACCA

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy IFRS for SMEs  THE NEEDINGS  THE PROCESS  THE DEVELOPMENT  THE ROLE OF UNCTAD/ISAR

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy IFRS for SMEs IASB Exposure Draft (ED)  Organised by topic  38 Sections + Glossary  The whole paper is 392 pages: Exposure draft 254 pages Financial statements Disclosure checklist 80 pages Basis for conclusions 48 pages  Issued: 15 February 2007  Translated: 5 languages  Comment deadline: 30 November 2007

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy IFRS for SMEs : Field Tests  116 very small companies globally  20 countries  Questionnaire in English, French, Spanish  162 comment letters  Restatement of most recent annual Finstats using IFRS for SMEs  Main issues:  Determining fair values  Computing deferred taxes  First time adoption

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy IFRS for SMEs: Next Steps  Analysis of comments and field tests: Presented to the IASB Board March and April 2008  Final Standard: approval by end of 2008  Effective: Whenever adopted locally  Training materials: Mid-late 2009

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy IFRS for SMEs: DEFINITION  IFRS FOR SMEs (originally)  IFRS for Private Entities (IASB new definition)  Other possible definition?

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy Why Standards for SMEs Are Needed  SMEs have not same needings/exposure as listed Co. have  Many benefits as an effect of global standards  Comparability in a globalized world  Improve quality of reporting as compared to existing GAAP  Ease burden where full IFRSs or full national GAAP are now required  Access to capital  Auditing efficiencies

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy Objective of IFRS for SMEs General purpose financial statements for external users, including:  Non-manager owners  Existing and potential lenders, vendors, creditors, customers  Credit rating agencies  Understand and compare performance, financial position, and cash flows  Auditor opinion on fair presentation

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy IFRS for SMEs: Pretended Simplifications Five kinds of simplifications based on user needs and cost-benefit tradeoffs as a result of consultation process: 1. Some topics in IFRSs omitted if irrelevant to private entities 2. Where IFRS has options, include only simpler option 3. Recognition and measurement simplifications 4. Reduced dislosures (no disaggregation, no pubblic capital market disclosure) 5. Simplified drafting

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy What’s wrong with IASB ED for SMEs  Make the scope 100% clear: change the label. How can SMEs be defined?  Make the final standard a truly stand-alone document: no cross reference to the full IFRSs should be allowed  Carry out a thorough analysis of users’ needs  Adjust recognition and measurement requirements to those needs  Make a real cost-benefit analysis  Decide further simplifications  Set the IFRS for SMEs as a standard in its own right

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy Our perceptions of users’ needs  Less complex and sophisticated financial reporting  One single, simple set of accounting standards for SMEs with technology driven presentation  Standardisation in the preparation and presentation of accounts  Greater focus on the ability to generate positive future cash-flows in the normal course of business  Greater need to assess the effectiveness of management and of selected strategies

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy The IFRS for PEs: what the IASB should do (1/3)  Carry out the necessary users’ need analysis  Reconsider rules which have no justification, either in terms of cost/benefit or users’needs  Keep all existing IFRS options in the IFRS for PEs  Refrain from « updating » the IFRS for PEs prior to finalisation and without any specific due process when reaching conclusions in active IFRS projects (revised IAS 1, ED9, concepts etc…)  Do not anticipate change to full IFRSs

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy The IFRS for PEs: what the IASB should do (2/3)  Historical cost model should be default: Fair value – reduce and clarify  Income taxes – taxes payable only?  Consolidation – reduce or delete  Amortise goodwill & other intangibles (no annual impairment test)  Pensions –measure at liquidation amount? Actuarial gains/losses

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy The IFRS for PEs: what the IASB should do (3/3)  Share – based payment – Intrinsic value isn’t a simplification  Leases – simplify calculations  Impairment – Allow value in use  Debt-equity classification  Further disclosure simplifications  Give greater weight to comments received (amortisation of goodwill, impairment etc…)

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy The IFRS for PE’s: towards a missed opportunity?  In the early stages, a top/down approach was widely supported:  Same conceptual framework  Same detailed requirements if appropriate But now the IFRS for PE’s appears to be limited to a by- product of the IFRS standard setting process: It should be a standard in its own right  It appears that we will end up with an “executive summary” of the full IFRSs

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy Why the IFRS for SMEs should be a standard in its own right?  To provide a standard, easy to understand, easy to implement  To make the IFRS for SMEs more attractive at a time when it will first be considered for adoption or use  To protect SMEs from the need to endure changes in their accounting practices in later periods and to bear the costs associated with those changes  …and from now on… IFRS for Private Entities (PEs)…

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy The IFRS for PEs: why similarity at the conceptual level is all what is needed  Most PEs (wider concept than SMEs) will never go public and hence may never apply full IFRS;  IFRS for PEs, being easier to implement than full IFRS, will facilitate more cost-efficient accounting and financial analysis practices;  There is little need for comparability between listed and non-listed entities; when such need for comparability arises, the option to adopt full IFRS will be available for private entities

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy The IFRS for PEs: choosing between an acceptable standard and a high quality standard  Likely that the IFRS for PEs will be widely adopted and applied  Acceptance no real sign that it is as good as it could be:  No standard-setting past experience in some jurisdictions  The international feature makes it appealing  Will bring relief where full IFRS or well advanced convergence programs have been adopted  Europe is the area where mandatory financial reporting by private entities is a long standing practice

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy IFRS for SMEs: EU’s position  It is outside the scope of IAS Regulation: only if it is fully compatible with 4th/7th Directive it will be adopted  UK e DK are in favour of the standard:  D is against: too many disclosures  F is against:  Feeling is that there is no need for this standard  Cost of training is enormous  SPAIN has implemented -effective 1st Jan a whole new accounting standard: it will be of interest to see the effects by end of the year

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy An evaluation from the EU viewpoint  First of all: simplification  Cost-benefits evaluation and user needings come first  Is it worth to underpin a fragmented system with 27 different law systems, with different rules for listed, non listed, Small & Medium, Micro, NFP, public entities, banks and insurances etc?  Greater use of IT instead than of paper  Quarterly report, available on the web, focusing on real-time information

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy IFRS for SMEs: Conclusion  EU Commission and IASB shall try to find an agreement  UNCTAD could play a major role  Great challenge for the accountants  A new world order might be established, also for accounting issues and also for SMEs burdens

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy FINANCIAL REPORTING LISTED/IFRSSMEMICRO

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy EU SIMPLIFICATION PROJECT  EU Commission wants to reduce administrative burdens by 25% by 2012 in Europe and have better regulation: Communication 14 November 2006 COM (2006) 691  Purpose of the Communication was to ask comments in order to understand how to reach the goal  The answers lead to an Action Plan in 2008  A Group of Experts (Stoiber Group) appointed in 2007 to give independent advice to Commission  Opportunity for in-depth review of Company Law, including Accounting Directives, in force from 1978/1983

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy EU SIMPLIFICATION PROJECT  UE Commission published in July 2008 a study with the aim of measuring 30 priorities  68 info obligations identified at EU level as creating 23,3Billion € un-necessary burden, of which 12Billion € relates to real admin burden, and 18,5 is for audit and publication of accounts  Great political pressure now, but it must be looked at the benefits, not only at the costs of the system  Many simplifications under review, from publication of infos related to branches to useless expert report on Merger and division of PLCs etc

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy EU SIMPLIFICATION PROJECT  Many implementations already adopted amongst whom: a) Parent companies with non-material subsidiaries no longer need to prepare consolidated accounts b) Business data not needed publication in Official Gazette c) Translation simplifications for branches in Member States d) Option to exempt medium-sized Co from disclosure of:  breakdown of turnover  formation expenses

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy EU SIMPLIFICATION PROJECT  Creation of the EUROPEAN PRIVATE COMPANY - CAPITAL REQUIREMENT: 1€ - Rules of the country of registration are applied, but free movement of legal siege is authorised - Competition among Member States to host Newcos  Creation of MICRO-ENTITIES - Annual turnover ≤ 1 Million € - Assets ≤ € - Work force ≤ 10 people Scoped out of the 4th/7th Directive?

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy EU SIMPLIFICATION PROJECT  DEFINITION OF SME: 4th Directive  Thresholds for 2 consecutive years (not yet applied by all Member States) SMALL MEDIUM Revenue: €8,8 M €35 M Assets : €4,4 M €17,5 M Work force: BUT: SEE AMENDED FIGURES  OTHER classifications also in use for other purposes (taxes, vat etc)

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy EU SIMPLIFICATION PROJECT  ACCOUNTING INFO NEEDED IN CASE OF SMEs  Needings are different from bigger companies  Users are also different  Shareholders/Partners  Lenders (Banks,suppliers)  Tax authorities  Public system info (STATS Bureau,Chamber of Commerce etc)

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy EU SIMPLIFICATION PROJECT  HOW TO EXTEND EXEMPTIONS TO SMEs  REDUCE INFO ON Y/E ACCOUNTS, NOTES, PUBLISHING IN PUBLIC DATA BASES etc  But …oversimplification can add to lack of transparency: all SMEs need in any case to file their Finstats to the Tax Authority, Bank, shareholders and partners. Comparability of data is also a useful tool  Until now SMEs can opt for Limited year-end accounts formats No consolidated accounts required No Audit required

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy EU SIMPLIFICATION PROJECT  Reduction/cancellation of options  40 Options at Member State level, nowadays  Options give flexibility, but limit harmonisation  Limitation of audits in SMEs  But watch out for public interest  What about criminal implications, i.e. money laundering  Avoid a new audit system only for SMEs  IAASB should be involved (delaying the process)  Technology: XBRL and electronic filing for taxes and any other use

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy EU SIMPLIFICATION PROJECT  OTHER ASPECTS  Are all Member States implementing IFRSs?  Are official translations of IFRSs timely, and do the terms in use have same meaning as per the original English version?  What level of education among the key players? Accounting profession Universities National standard setters

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy THE PICTURE UE ED Full IFRS IFRS for SMEs Local GAAP Listed Big Medium Small ListedFinancial entitiesSMEsMicro

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy FINANCIAL REPORTING Should we prioritise information?  Notes in different levels?  Too much focus on improving measurement of line items rather than on material issues such as Management Commentary?

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy Non listed Companies Accounting Rules Existing Options:  Directives/ Local laws  Local standards or guidelines  IASB standard for SME  New EU-rules How many set of rules can we cope with?  Must every country use resources on making local rules?

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy Frequency of Reporting  How often should SMEs report?  Annually – is that good enough?  Delays in filing allowed?  How old is the information when it is made available?  How often do interested parties receive news?  Do interested parties get it on paper only ?

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy USER NEEDS  What are the needs of SMEs Finstats users?  Does anyone really know?  Is it the same all over the world?  Should be explored!!!

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy TECHNOLOGY TECHNOLOGY is driving  Globalisation  Enhanced wealth globally But technology has NOT really improved accounting Can we think that SMEs reporting will not be affected by technology?  Preparation has been automated  Presentation and contents has developed in line with development in technology?

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy Accounting in TEN YEARS Time One single simple standard for SMEs in all the EU / World  All F/S filed on the entity’s website  Financial reports issued every 3 months  Preparation automated  Technology driven presentation

Johannes Guigard / Via Napo Torriani 31 – Milan – Italy UNIVERSITY OF MOSCOW 13/17 October 2008 Accounting Regulations for Small and Medium Entities Johannes Guigard Chartered Accountant Italy and ACCA