Is the IFRS for SMEs fit for purpose in the UK?

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I note there is a debate going on at AccountingWEB on the suitability of IFRS for use in the UK, and especially with regard to small and medium sized enterprises (SMEs). This is an entirely appropriate discussion, but I’m not sure that the proper reasons have been noted.

Let’s be candid about why small businesses need statutory format accounts, in law. there are, fundamentally, three such reasons. The first is to satisfy the tax authorities that they are declaring the right amount of taxable income.

The second is to ensure that if a dividend is paid it is legal – because there are serious ramifications if they are not, for both tax purposes and in company law.

Third, and not so obviously clear, but a fact none the less, is that is accounts prepared under the requirements of company law are true and fair – as they should be – then they show if the company is trading solvently or not, and that protects the directors from allegations of wrongful trading if anything then goes wrong and the company goes into liquidation. This happens to be related to the objective related to the payment of dividends – because of the company is solvent enough to pay a dividend it is also solvent enough to pay its creditors, which makes this a pretty big deal.

It is then astonishing that the International Accounting Standards Board ignores these issues when it comes to the proposed International Financial Reporting Standards for smaller entities – the so called International FRSSE. When deciding on the objectives for this standard they said:

The Board decided that determination of taxable and distributable income should not be added to the objectives of financial statements of private entities.

To put it another way – the accounts they’re suggesting be prepared by smaller enterprises under the rules of their FRSSE will not be suitable as a basis for determining tax liabilities and give no clue as to whether the company is solvent or not.

The very reasonable questions can hen be asked:

– what use have they?

and

- why does small business want these accounts?

and

- would these accounts be legal under UK company law?

Perhaps Sir David Tweedie would like to comment.

Or any member of the UK Accounting Standards Board who seem sold on this project, come to that.