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AF301

Seminar
by

Madhukar Singh

on 3 September 2015

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Transcript of AF301

AF301 Seminar Presentation
Topic 2 IFRS for SMEs in Fiji
Presentation Outline
Research Objectives and Methodology
Introduction
Theoretical Underpinnings
Literature review
Analysis & Findings
Limitations
Recommendations
Conclusion

Research Objectives
Brief history leading up to the adoption of IFRS for SMEs in Fiji?

Advantages of using IFRS for SMEs

Disadvantages of IFRS for SMEs

Topics of IFRS for SMEs that are not applicable in Fiji

Theories applied to explain the non-applicability of the IFRS for SMEs in Fiji
Research Methods
Internet research - obtain articles for Literature Review

In person interviews - carried out at accounting firms and companies

Telephone interviews also carried out with bank officials and entities using IFRS for SMEs
Madhukar Singh
Sherlin Prasad
Nancy Finau
Sheenal Devi
Farrah Demaure

Introduction
In July 2009, the IASB issued IFRS for SME’s

It is a self contained standard designed for small businesses

The IASB estimates that the SMEs make up 95 percent of all businesses around the world

Small and Medium Enterprises are entities that:
“Do not have public accountability"
"and publish general purpose financial statements for external users”
(IFRS for SMEs, 2009, p.10).

"Irrelevant topics to the SMEs have been left out of IFRS for SMEs"
Theoretical Underpinnings
Theories of Regulation

Public Interest Theory
Private Interest Theory
Regulatory Capture Theory

Agency Theory
Theories of Regulation
Public Interest Theory

“The intervention by the ___________ in various _______ to prevent and eliminate market _______.

(Failure, Markets, Governments)
Godfrey, et.al 2011, p. 57

What do you think are some reasons for market failure?
Theories of Regulation
Private Interest Theory
In the market for regulation, the _____ that will be the _______ bidder in terms resources and money will use the power of the __________ for own advantage

(Regulators, Highest, Group)

Therefore, Private Interest Theory explains why the regulations serve particular interest groups and not the whole society

Do you think IFRS for SMEs was adopted as a result of Private Interests?
Theories of Regulation
Regulatory Capture Theory

States that the “________ comes to control the _________ either by direct or indirect methods.”

(Regulator, Regulatee)
Godfrey, et.al 2011, p. 57

A possible reason for Regulatory Capture is that regulation affects interests of regulated industries who do not want regulation.

Do you think the accounting profession in Fiji has captured the FIA?
Agency Theory

“gives a framework in which to study contracts between principals and agents and to predict the economic consequences of the accounting standards.”

Proponents argue that the firms will provide information even without mandatory disclosure requirements

The principals sign contracts with their agents that will force the management to disclose information to these users of information.
LITERATURE REVIEW
Paul Pacter, 2009,
"IFRS for Most Private Companies Goes Live"

IFRS for SMEs was developed
“in response to an overwhelming demand from regulators, national standards setters, small companies and auditors"

These demand of various stakeholders fall in two categories.

He believes one is the Public Interest that fuelled demand for a simpler set of accounting standard for small companies.

The other category is the Self Interest (private Interest) of the SME’s itself.
LITERATURE REVIEW
Paul Pacter, 2009,
"IFRS for Most Private Companies Goes Live"

"There are 117 jurisdictions that require listed companies to use full IFRS with 80 of those allowing unlisted firms to also use full IFRS”.

These unlisted firms do not have public accountability and are usually small and they find it costly to adopt full IFRS for reporting purposes.

The users of the financial statements of SMEs stated that they do not look for information based on the long term but look for short term information on the SMEs thus full IFRS is not applicable to SMEs.

Benefits of applying IFRS for SMEs
Access of capital markets for the SMEs
Less complicated as it omits irrelevant topics in the full IFRS.
LITERATURE REVIEW
Professor Michael White and Parmod Chand, 2007,
"A Critique of the Influence of Globalization and Convergence of Accounting Standards in Fiji "

“The IASB’s initiative to develop an SME Standard may also prove to be of limited relevance to Fiji, both from a domestic and international perspective”

The size of the Fijian economy is so small that all reporting entities are considered small enterprises.

However, some entities that have international users of it financial reports will have to adopt full IFRS which may not be beneficial.

They question why did the Fiji Institute of Accountants adopt IFRS for SMEs and the full IFRS in Fiji?
LITERATURE REVIEW
Professor Michael White and Parmod Chand, 2007,
"A Critique of the Influence of Globalization and Convergence of Accounting Standards in Fiji "

They question why did the Fiji Institute of Accountants adopt IFRS for SMEs and the full IFRS in Fiji?

They believe, that these “moves to bring Fiji’s standard financial reporting practices into line with the IASs/IFRSs are now considered in the context of theories of regulation”

Fiji is considered to have its financial reporting aligned to the ‘Anglo Saxon Model’. It is argued that the financial reporting in Fiji has

never been in the public interest.

The Fijian government never played an active role in regulating the accounting and financial reporting apart from the Companies Act which is under modification in 2012.

The Fiji Institute of Accountants has taken the responsibility of setting the financial reporting standards in Fiji. This has led to the
regulatory capture
of the standard setting in Fiji.
LITERATURE REVIEW
Professor Michael White and Parmod Chand, 2007,
"A Critique of the Influence of Globalization and Convergence of Accounting Standards in Fiji "

The multinational firms and the big 4 accounting firms in Fiji have captured the Fiji Institute of Accountants to set IFRS which provides benefit to them.

The big 4 accounting firms with the adoption of IFRS for SMEs benefit with mobility of their staff from other branches worldwide and obtain training resources to continually improve quality of service. This gives these firms an unfair competitive advantage over other smaller local accounting firms.

Full IFRS and the IFRS for SMEs is irrelevant to the financial institutions, as a user of financial reports, which provide finance to businesses in Fiji.

Banks assess the financial stability of firms based on the conservative approach (consistent with probably Historical Cost) to asset valuation. These banks impose their own set of rules for financial reporting by the reporting entity. “The banks acquire the accounting information the way they need it, without having to lobby the regulator to set reporting standards that address those needs”
ANALYSIS & FINDINGS
IFRS for SMEs in Fiji: Pre and Post Adoption

IFRS for SMEs was first released in 2009 by the International Accounting Standards Board (IASB). It was released in response to the demand of a simplified set of accounting standards for the smaller entities.

In Fiji, this IFRS for SMEs was adopted on January 1, 2011.

Before the adoption of IFRS for SMEs, the smaller entities in Fiji were using the Fiji Accounting Standards (FAS) which were adapted from the older International Accounting Standards (IASs). In fact, these FASs were quite old and needed updates to it. IFRS for SMEs were seen as this updates.

The IFRS for SMEs is around 230 pages. This is a huge leap and benefit to the smaller entities that had to use full IFRS as a last option.

The standard also specifies which firms should use it. The standard states, the new SME Standards will apply to SMEs that; (a) do not have public accountability; and (b) publish general purpose financial statements.
ANALYSIS & FINDINGS
IFRS for SMEs in Fiji: Pre and Post Adoption

A manager at one accounting firm said that this IFRS for SMEs is a totally different set of standards when compared to the FASs that were in use previously.

He further mentioned that the transition process to IFRS for SMEs was quite smooth because the full IFRS had been well accepted by the public in Fiji.

Fiji’s integration into the global village was also seen as a reason for smooth acceptance of IFRS for SMEs in Fiji. The manager also said that this new IFRS for SMEs “increased their scope of services” provided.

IFRS for SMEs has been adopted in 80 countries around the world. In Fiji, this year, 2012, will be the first year when financial reports are released based on the IFRS for SMEs by the smaller entities It is yet to be seen to some extent if the IFRS for SMEs will deliver benefits as expected in Fiji.
ANALYSIS & FINDINGS
Advantages of Using IFRS for SMEs
Compared to FASs and the Full IFRS

According to the IASB, this new IFRS for SMEs standard has many advantages

More simplified version of the full IFRS.
The IFRS for SMEs is around 230 pages long and is standalone compared to the full IFRS which is over 3000 pages long.

There are also less disclosure requirements when compared to the full IFRS. Another official of an accounting firm stated that the major benefit that he sees in IFRS for SMEs is that it requires “fewer disclosures and less complex disclosures” by the entities.
“Due to the new IFRS for SMEs, smaller entities have the opportunity to reduce disclosures based on risk management”. “The small entities suffered a lot in terms of huge disclosures on risk management.”

IFRS for SMEs allows the small entities a choice between using the Fair Value Accounting or the Cost Accounting to value various assets in the business. By allowing the choice, the small firms are able to save costs on valuation fees.
ANALYSIS & FINDINGS
Advantages of Using IFRS for SMEs
Compared to FASs and the Full IFRS
Thirdly, the smaller entities have the owners who run the businesses. They are more concerned with short term rather than long term forecast provided by the full IFRS. IFRS for SMEs provides the short term view to them.

Omissions of topics that are irrelevant to the smaller entities. Some examples of topics removed are related to the shares.

IFRS for SMEs over the FASs is that it will be reviewed and updated every 3 years. FASs were not updated and were quite old. By adopting IFRS for SMEs, regular updates became possible as IASB will carry out this review itself.

The Big 4 respondents stated that they in Fiji have benefitted from IFRS for SMEs adoption. “Due to the adoption, the office in Fiji can access materials and guidance from other territories worldwide.” They further mentioned that this has actually increased mobility of its staff to move to other territories around the world.

However, all of the respondents from accounting firms mentioned that their clients are unable to absorb the benefits that IFRS for SMEs provide because they lack knowledge and training on the new IFRS for SMEs.
ANALYSIS & FINDINGS
Disadvantages of Using IFRS for SMEs
Compared to FASs and the Full IFRS
In the course of our interviews, it was found that clients using IFRS for SMEs are not trained and educated on this new standard, therefore show resistance to it. “The clients see IFRS for SME as a burden to them in terms of cost”.

IFRS for SMEs require restatement of previous year’s figures based on it during the transition phase which is costly for the small firms in Fiji to absorb.

The Banks are considered the major financiers of these small firms with their micro loans. However interviews with bank personnel got us to find that IFRS for SMEs financial reports do not meet the full information needs of the respective banks in Fiji.

The Banks use their criteria to obtain the required information from the small firms. This makes the small firms to prepare and bear costs of two sets of financial reports. One based on IFRS for SMEs and one tailored to meet Bank needs of information. This finding is consistent with the empirical evidence that is discussed in the preceding sections.
ANALYSIS & FINDINGS
Topics That Are Irrelevant to Fiji

In the course of our research it was found that there exist some topics that are irrelevant in the Fijian context. However, the main issue is that it is not representative to every business in question.

Out of all the accounting firms that were interviewed, it was found that, topics of IFRS for SMEs that are irrelevant depend on a case by case basis.

This effectively means that each SME need is different to another SME. One of the middle tiers accounting firm under study said it had small clients but none have adopted IFRS for SMEs as it was not applicable to the needs of the users.

In this case we can say that the whole IFRS for SMEs is irrelevant to many small firms in Fiji. The Big 4 accounting firm that we interviewed said that it had less than 10 clients who are using IFRS for SMEs as their reporting framework and the topic relevance of the IFRS for SMEs differed from client firm to client firm.

However, valuing assets at fair value is an issue in a country like Fiji as there are no active markets for some assets in Fiji which can be cross referenced with to value assets. Thus, fair value, which is the backbone of IFRS for SMEs, use is limited.
ANALYSIS & FINDINGS
The Theories of Regulation and the Agency Theory Applied

The Respondents from the Banks stated that their policies are such that they do not fully rely IFRS for SMEs standards for their information needs.

The banks has its own criteria to obtain financial data and do analysis of its own using the data obtained directly from the business clients.

This research finding is quite significant as it shows an argument in favour of the Agency Theory. In this case the Banks are the principals and management of small business the agents. The banks even without the financial statements based on IFRS for SMEs can obtain information directly from the business clients due to the contractual relationship they hold.

IFRS for SMEs is seen as regulation to small firms in order to communicate information to the stakeholders. If the regulation fails to meet adequate information needs of these stakeholders, it may not be applicable to adopt such a standard without modification to the Fijian environment.
ANALYSIS & FINDINGS
The Theories of Regulation and the Agency Theory Applied

It is quite evident from our research that the IFRS for SMEs was adopted without putting public interest at heart.

All the accounting firms that were interviewed identified negligible benefits to the small entities who have adopted IFRS for SMEs in Fiji. However all the Big 4 firms under study, said they benefited from the IFRS for SMEs adoption in Fiji.

The benefits to these firms include; access to training and other resources from its branches in other countries, increased mobility of its staff and increased competitive advantage of these big 4 over the medium tier firms in Fiji.

Using the Private Interest Theory and the Regulatory Capture Theory, the outcomes of our result indicate the validity of these two theories for Fiji.
Currently it is argued that the Fiji Institute of Accountants has been captured by the Big 4 accounting firms in Fiji.

On the contrary, the public interest theory did not predict the adoption of IFRS for SMEs in Fiji.
LIMITATIONS

Research is not on a large scale due to time and resource constraints.
However, with the research we carried out, it clearly shows that IFRS for SMEs is applicable in Fiji but not to all the users of financial reports.

The interviewees were unavailable to give us time to interview them and as a result we had to use telephone interviews to save time for both the parties.

IFRS for SMEs accounting standards is relatively new in Fiji because it was implemented on January 1, 2011. This year 2012 will be the first time the small entities will use IFRS for SMEs to prepare the financial reports. It is still premature to make any conclusions about the inapplicability of the IFRS for SMEs accounting standards in Fiji.
RECOMMENDATIONS

The IFRS for SMEs was adopted from 2011 and the businesses who adopt it have little or limited knowledge on this accounting standard. Our first recommendation is for the Fiji Institute of Accountants to carry out extensive training programs for the businesses that are to accept and apply IFRS for SMEs.

Harmonise instead of wholesale adoption of IFRS for SMEs. T the FIA should integrate the information requirements of the Banks with IFRS for SMEs. During harmonisation, the topics that are irrelevant will also be eliminated and business will find it simpler to use it.

However instead of harmonising, the Fiji Institute of Accountants can write to the IASB asking them to consider changes related to the Fijian environment of reporting.
CONCLUSION

IFRS for SMEs was first introduced in 2009 and is undergoing a review.

IFRS for SMEs is not perfect. Our research has proved to some extent that this new IFRS for SMEs is not fully serving the information needs of the primary users of financial reports.

We conclude that the IFRS for SMEs is not applicable to the information needs of the major users of financial report.

We further found that the IFRS for SMEs was adopted in Fiji in 2011 but the many small firms that have to adopt it are still waiting. It further complements our view that IFRS for SMEs is also not applicable to the small firms because they wish to rely on the old standards.

The advantages from IFRS for SMEs was not absorbed by the small firms who adopted the standard.

The topics of the IFRS for SMEs that is irrelevant differs on a case by case basis. One topic that is relevant to a small firm may be irrelevant to another small firm.

Our finding thus points us into the direction that IFRS for SMEs in Fiji was adopted due to the capture of FIA by the accounting profession

However, it is still premature to make any judgements because it was adopted in 2011 and some businesses are yet to release their first financial reports using the IFRS for SMEs standards. Only time will tell if the IFRS for SMEs in Fiji is accepted or rejected by the firms.
THANK YOU

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