IFRS – make sure the framework you apply is right for YOU

Does my company have to apply the Full IFRS accounting framework, or can it be on IFRS for SME’s? A commonly misunderstood concept.

Very often when we take on new clients, we go through their most recently audited financial statements and identify that they are on the Full International Financial Reporting Standards (IFRS) accounting framework, however when we ask the question, Why? The answer is more often than not, we thought that we had to be on this framework.

In this article, I would like to give you a bit to think about when making the choice of being on either the Full IFRS accounting framework, or to be on an alternate framework, International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SME’s).

To clarify, in South Africa, it is only mandatory for entities that have public accountability such as financial institutions and listed companies to apply the Full IFRS accounting framework. For all other companies, the application of the Full IFRS accounting framework is voluntary. There is also a common misunderstanding that because your company exceeds the 350-point Public Interest Score threshold set out in the Companies Act, that it is a requirement that you must be on Full IFRS. This is not true.

There are companies in South Africa that are doing a Billion Rand plus in annual turnover and therefore exceed the PI Score threshold, yet they apply IFRS for SME’s, which they are absolutely allowed to do. We do however find that in some large unlisted companies and subsidiaries of listed companies both locally and abroad, Full IFRS is applied as it is a requirement imposed by the holding company, or other stakeholders. This is to achieve standardised reporting information, which does make the choice, the correct one.

For all other companies, it does not make commercial or economic sense to be presenting the financial statements using Full IFRS, if it is not a mandatory requirement or a requirement of the stakeholders to do so. To qualify this statement however, if your company is on a journey to ultimately be in a listed environment or an alternate environment in the near future, where Full IFRS is a requirement, then it would be advisable to be on Full IFRS currently, as it may be an expensive and a lengthy process to do a first-time adoption of Full IFRS.

The same is not necessarily true where a company that is on the Full IFRS accounting framework wants to do the first-time adoption of IFRS for SME’s. Yes, there are differences that would need to be quantified and adjusted for. However, for a company whose business is not complicated, this may be a simpler exercise and is less onerous. There are considerations that one must make in respect of accounting policy choices in the transition process and I would recommend that you consult your auditors or IFRS advisors in this regard.

As time has progressed, the gap between Full IFRS and IFRS for SME’s has grown and so does the cost of preparing the information required to comply with Full IFRS. As a side issue, as the Full IFRS accounting standards become more and more complex, the auditing of this information is becoming more expensive, so this is another issue to consider when deciding which accounting framework your company should adopt.

So the question that I leave with you … is your company applying the accounting framework which is appropriate for the journey you are on, or are you potentially incurring unnecessary compliance costs? Doing business is expensive enough, so let’s not incur costs where there are alternative options available to us. Author – Darryl Fordham Nolands Audit SA CEO