Harmonising SME accounting standards

THE NEED FOR HARMONISATION OF ACCOUNTING STANDARDS FOR SMEs IN SOUTH AFRICA
by JAHDE ELIZABETH GONCALVES
This dissertation is submitted in partial compliance of the requirements for the degree of Master in Business Administration Milpark Business School
Supervisor: Dr. Jan Meyer JOHANNESBURG April 2011
The need for harmonisation of accounting standards for SMEs in South Africa
Declaration I declare that this dissertation, The need for harmonisation of accounting standards for SMEs in
South Africa is my own unaided work and that each source of information used has been
acknowledged by means of a complete reference. This dissertation has not been submitted before for any other research project, degree or examination at any university.
. JAHDE GONCALVES
. Date
JOHANNESBURG, SOUTH AFRICA
Dedication Not a single action is possible without God, and my actions are dedicated to Him. To Milpark Business School, I would like to thank the entire staff for supporting me during my studies with them. Their willingness to meet my needs will not be forgotten. To my dissertation supervisor, my sincere thanks for your guidance and patience throughout this learning process.
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Acknowledgements This opportunity is taken to acknowledge the valuable research provided by Drs Rossouw and Van Wyk, from the University of the Free State, in the field of accounting standards in South Africa.
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Abstract The International Accounting Standards Board (IASB) issued the International Financial Reporting Standards (IFRS), which have been adopted and legislated in South Africa for publically accountable entities. These listed entities are now required to present their annual financial statements using the IFRS standard. Not only has this standard been adopted by South Africa, but by most of the industrialised countries including the major economies of the G-20 countries. The standard has brought with it high quality financial standards that are providing listed companies with access to international capital markets, thus increasing trade capabilities for these entities. In response to the IFRS standard, countries from around the world called on the IASB to produce such a standard for Small and Medium Sized Enterprises (SMEs). The standard developed, in response to these requests, is IFRS for Small and Medium Sized Enterprises and an exposure draft (ED) was launched in February 2007. South Africa adopted this standard for use in 2009 and it has been viewed as a positive development in an effort to harmonise the approaches in different countries. In South Africa, SMEs traditionally produced financial statements using Generally Accepted Accounting Principles (GAAP) for a variety of independent reasons. Research was performed around the specific area of the accounting standards used to produce financial statements for the purpose of obtaining finance from lenders. The research looked at three groups involved in the process of SMEs obtaining finance. The three groups included the input group (the SMEs), the intermediary group (the accounting professionals) and the user group (the banks). The paper then viewed each of these groups in terms of accounting harmonisation and what the possible benefits could be for the parties involved. Information was gathered from sources domestically and abroad for inclusion in the study as the harmonisation of accounting standards has become a global subject. Both primary and secondary researches were employed during the course of the study due to time and resource constraints. It was hoped that this paper would open a door for future research to be conducted with the focus on multiple stakeholders in the lending process.
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During the research, the three stakeholder groups were researched in terms of their roles in the lending process. The studies found that the input group (the SMEs) indicated that the harmonisation of the accounting standard would benefit their short- and long-term interests in terms of both trading and borrowing activities. Further, a study performed with the intermediary group (the accounting professionals) indicated that in South Africa, respondents believed that IFRS for SMEs would ease the burden of compliance with the standards, whereas a small percentage of accounting professionals did not believe this to be the case. However, in the early stages of the standards being used by the intermediary group, it was recommended that further research should be conducted as more experience is gained by the accounting professionals through using the accounting standard. The third stakeholder group, the banks, were then researched in terms of their lending practices as well as how the harmonisation of accounting standards could benefit their lending relationships with SMEs. Interestingly, it was found that lenders were engaged in what were perceived to be internally focused lending criteria, which did include the review of financial statements presented by applicants. However, their feedback is a cautious view of placing additional merit on financial statements. Importantly, they indicated that the use of harmonised accounting standards would become a point of radical departure from their traditional mistrust in financial statements based on industry standards. Further, they indicated that applications accompanied by financial statements based on IFRS for SMEs would provide an important quality and comparability dynamic that may decrease the cost of capital and provide a platform for comparisons in the future. Thus, the harmonisation of accounting standards in South Africa means that legislation should be put in place to achieve uniformity of the financial position and performance of SMEs in order to provide high quality financial statements to their lenders and improve the ability of SMEs to obtain finance and in so doing stimulate economic activity and promote confidence internationally .
Table of contents Declaration Dedication Acknowledgements Abstract Table of contents List of tables List of figures List of acronyms CHAPTER 1: Introduction 1.1 Background 1.2 Statement of the Problem 1.3 Purpose and Importance of the Problem 1.4 Research Objectives 1.5 Hypothesis 1.6 Research Methodology 1.6.1 Analytical Research (Secondary) 1.6.2 Quantitative Research (Primary) 1.6.3 Qualitative Research (Secondary) 1.6.4 Theoretical Research 1.7 Scope of the Research 1.8 Limitations of the Research Study 1.9 Structure of the Dissertation 1.10 Chapter Summary CHAPTER 2: Literature Review 2.1 International Financial Reporting Standards (IFRS) and Related Standards 2.2 Accounting Standards 2.3 IFRS Application 2.4 Companies for which IFRS for SMEs are Assigned 2.5 IFRS in South Africa vi i ii iii iv vi ix 10 11 1 1 2 4 6 7 9 9 9 9 10 11 11 12 13 14 15 16 16 16 19
2.6 Small and Medium Enterprise (SME) Reporting 2.7 Micro-Entity Financial Reporting 2.8 Needs of Users of Financial Information 2.9 Lending Institutions, SMEs and IFRS 2.10 Empirical Research on IFRS for SMEs Standard 2.11 Value-based Management and Creating Economic Value 2.12 Chapter Summary CHAPTER 3: Research Hypothesis 3.1 Research Design 3.2 Review of the Problem 3.3 Methodology 3.3.1 Research Approach 3.3.2 Data Collection 3.4 Hypothesis Links 3.5 Population 3.5.1 Primary Research 3.5.2 Secondary Research 3.6 Sample 3.6.1 Sampling Method 3.6.2 Detail of the Sample Size 3.7 Case Study 3.8 Management of Reliability and Validity 3.9 Methodological Weaknesses 3.9.1 Secondary Research 3.9.2 Survey 3.9.3 Respondent Selection 3.10 Chapter Summary CHAPTER 4: Results and Interpretation 4.1 Results and Interpretation Regarding the Accounting Standard 4.2 Results and Interpretation regarding the Input Group (SMEs) vii
20 21 25 26 29 33 35 39 39 40 40 41 41 43 44 44 44 45 45 46 51 55 56 56 56 56 56 61 61 68
4.2.1 Impact of IFRS on SMEs 4.2.2 Relationship between banks and SMEs 4.2.3 Lending to SMEs and Economic Growth 4.3 Results and Interpretation regarding the Intermediary Group 4.4 Results and Interpretation regarding the User Group 4.4.1 Understanding the User Group (lending institutions) 4.4.2 Findings from Lending Institutions 4.5 Chapter Summary CHAPTER 5: Discussion of Results 5.1 Comparison of Literature Reviewed with Findings from the Research 5.1.1 Accounting Standard 5.1.2 Input Group (SMEs) 5.1.3 Intermediary Group 5.1.4 User Group 5.2 Proof/rebuttal of any Hypotheses or Support/challenges to the Research Objectives 5.3 Hypothesis and Research Objectives Attainment Discussion 5.4 Brief Summary of the Research Study Finding 5.5 What are the Key Recommendations that will Add Value to the Organisation? 5.6 Implications and Risks to Management 5.7 Discussion of the Weakness of the Research 5.8 Further Research Opportunities 5.9 Chapter Summary REFERENCES APPENDICES Appendix A: Timetable for Document Publication April 2010 to December 2011 Appendix B: Questionnaire
70 77 78 79 81 82 85 88 91 91 91 92 96 96 99 101 102 103 104 104 105 105 i ix ix xxii
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List of tables Table 1. Professions of the respondents (Rossouw & van Wyk, 2009) 31
Table 2. Demographic information of the respondents (Van Wyk & Rossouw, 2009: 103) 31 Table 3. Respondents opinions on whether IFRS for SMEs would reduce the burden of preparing financial statements for SMEs (Van Wyk & Rossouw, 2009) Table 4. List of banks in SA (SA Reserve Bank, 2010) Table 5. Individual bank assets (June 2010) (SA Reserve Bank, 2010) 32 48 50
Table 6. Average percentage of clients of respondents for various business forms (Van Wyk & Rossouw, 2009:109) 52
Table 7. Average percentage of clients of respondents in various business forms (Van Wyk & Rossouw, 2009) Table 8. Milestone targets for financial instruments (IASB, 2010) Table 9. Countries and the European Union that form part of the G-20 (G-20, s.a.) 53 64 66
Table 10. Adapted table showing criteria used by developing economies around the world for loan applications 87
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List of figures Figure 1. Representation of the three user groups relevant to the study and the roles that they play Figure 2. Objectives of separate financial statements (Eierle & Haller 2007:10) Figure 3. Relationship between stakeholders with linkages and influences demonstrated 15 54 79
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List of acronyms
AcSB APB ACCA CC ED EU EVA GAAP GASC G-20 Canadian Accounting Standards Board Accounting Practice Board Association of Chartered Certified Accountants Close Corporation Exposure Draft European Union Economic Value Added Generally Accepted Accounting Principles German Accounting Standards Committee Consists of 19 premier industrial and emerging market countries across the world and the EU. Established in 1999 to bring together and stabilise the global financial market IASB IASC IFAC IFRS IOSCO International Accounting Standards Board. International Accounting Standards Committee International Federation of Accountants International Financial Reporting Standards International Organisation of Securities Commissions
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IRBA ISAR (Pty) Ltd MoU SAICA SAIPA SARS SEC SMEs SMEGA
Independent Regulatory Board for Auditors International Standards of Accounting and Reporting Proprietary Limited Memorandum of understanding South African Institute of Chartered Accountants South African Institute of Professional Accountants South African Revenue Services Securities and Exchange Commission Small and Medium Sized Enterprises Small and Medium-sized Entity Accounting Guideline
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CHAPTER 1: Introduction Accounting standards have in the past been limited to national standard setters within economies. As a result of this approach, national authorities have approached such accounting standards within their respective frameworks and have legislated those standards accordingly. In addition, countries have also taken certain approaches towards the accounting standards to be used for publicly traded entities and other approaches for small and medium sized enterprises. Such approaches were seen as appropriate based on the sizes of revenues as well as the forms of the entities. However, this made it difficult for the users of the accounting information across different accounting standards. This paper aims to identify whether there is indeed a need for the harmonisation of accounting standards within economies such as South Africa as well as what the implications of those findings may be for such economies. 1.1 Background Since 1993, there have been on-going discussions between various accounting bodies with the aim of the standardisation of accounting standards. Discussions, conventions and drafts of agreements have been formulated. Substantial progress has been made toward the goal of achieving harmonised accounting standards. Further, there have been meetings and a regular stream of resolutions, which have led to the adoption of certain accounting principles. Some of the more significant milestones have included the proposal and adoption of the International Financial Reporting Standards (IFRS). The adoption of these standards has facilitated in some instances the standardisation of financial reporting for companies that operate across several borders and that include listings in their local markets, as well as in other countries. Some of the more relevant points in this initiative have been to move forward from the Generally Accepted Accounting Practices (GAAP) which is not a legislated set of guidelines, to a more formally structured system which is more prescriptive and more rigidly defined. The time elapsed since the initial proposals and conventions have been 17 years. However, in the interest of financial reporting accuracy and homogeneous standardisation, the Accounting
Industry has persevered with their efforts to bring harmonised financial reporting standards to business communities. Apart from the various associations of accounting bodies, the major accounting houses have been regular contributors to the complex process. They have added valuable input in various areas due to their expertise and have proved to be a valuable contributor in the progress toward completion of this task. The focus has been on the financial reporting of public or listed companies with the rationalisation to provide investors and legislators with a set of reporting standards which would satisfy both legislative and investment criteria. What has been largely absent from this circle of reporting bodies and contributors is the contribution toward a holistic approach toward entire economies which consists of listed and privately owned small and medium entities alike. An additional question to be raised is the impact that such standards may have on small and medium sized privately owned organisations as well as what impact such standards may have on their borrowing capacity from lending institutions. These small and medium privately owned organisations have a need to borrow operating funds or function on an overdraft from lenders. This leads to the statement of the research problem, which has many facets. 1.2 Statement of the Problem The universal adoption of accounting standards came closer to reality when the International Organisation of Securities Commissions (lOSCO), of which the Securities and Exchange Commission (SEC) is a member, agreed to formally endorse a core set of international accounting standards for cross-border listings on the exchanges of all member nations by June 1999. The implementation of these standards would follow after the International Accounting Standards Board (IASB) had successfully completed fifteen new standards. Once the standards were endorsed, IOSCO members would be expected to replace the use of local generally accepted accounting principles with IASB-based financial statements. Thus, the research problem that arises has a number of constructs including:
The acceptance of IFRS for publically traded entities has economic benefits attached
whereas SMEs, even though they form the bulk of economic trade, have had no legislated requirements established to provide them with better access to capital and other economic benefits.
A conflict exists between the standards being used by SMEs and publically traded entities.
Accounting problems arise between accounting professionals in preparing financial statements as well as in expressing opinions based on accounting information prepared based on the varying standards used. It is difficult for creditors, investors and lenders to interpret and have confidence in the financial standards used by SMEs. The problem being that these institutions have to rely on their own means of assessing SMEs and often extend finance based on personal sureties provided by SME owners instead of assessing the financial health of the organisation based on sound accounting standard principles. This may cause finance to be extended based on incorrect criteria out of necessity. From the above, the first research question to be identified pertains to the acceptance of the IASB-based financial statements by the SEC and other IOSCO members that provide issuers with access to New York, London, Tokyo, Hong Kong and other world capital markets. The standard is referred to as the International Financial Reporting Standards (IFRS). This approach of requiring publically traded entities to comply with the International Financial Reporting Standards has since also been implemented in South Africa. As SMEs then continue to report using GAAP, the question is whether a conflict between the accounting standards used by publicly traded entities and SMEs arises and whether this may cause a variety of accounting difficulties within economies such as South Africa? The second research question relates to whether the financial positions of SMEs, established using GAAP, are comparable within the economy as well as internationally and the difficulties attached to this? The third research question, following from the above, is whether the non-uniformity of the reporting of these two main groups of entities leads to difficulties for creditors, investment 3
companies and lenders such as banking institutions and is this causes the stifling of trade for those entities? Another component of the third research question is then to assess whether the current manner of reporting, using GAAP, may also cause investors or capital evaluators to be reluctant to trade with SMEs, as they do not have confidence in the reporting framework used by those entities? 1.3 Purpose and Importance of the Problem
The purpose of the study is primarily to describe the current situation, problem and events. The data was gathered through the use of variables measured on nominal and ordinal scales
(qualitative measurement scales) and analysis was done to establish the variation in the situation, phenomenon or problem without quantifying it (Kumar, 2005). As Strauss and
Corbin (1990) wrote (in Gerhardt, 2004) qualitative research is any kind of research that produces findings not arrived at by means of statistical procedures or other means of quantification.
Economies such as South Africa do not consist only of publicly traded entities but largely consist of small and medium sized enterprises and this has been the subject of attention for the last few years. As Makowla (2002) states, small and medium enterprises form the backbone of many economies. These small and medium sized enterprises have in the past accounted for their financial performance and financial position using either individual accounting standards used by their independent accountants or the generally accepted accounting guidelines as legislated. The main purpose of the financial statements produced have been to obtain finance from lending institutions and the small and medium sized entities have largely viewed this function as primarily the accounting professionals responsibilities. This mutually exclusive view has resulted in many SMEs failure to obtain their desired capital, because the users of the financial information have traditionally not trusted the information produced by these entities. Lawson (2010) reinforces this view by saying that banks have traditionally mistrusted the financial statements of SMEs, which have often been prepared in conformance with complex GAAP reporting requirements. The increased credibility of SMEs with lenders when preparing statements in accordance with the new reporting framework should thus be 4
established. In developing countries such as South Africa, it is often lenders and investors such as banks that play a key role in the ability of SMEs to sustain their operations or to grow their footprint within the economy. It then becomes evident that the requirements of lending institutions become a primary determinant in the reporting framework used by SMEs. The question then arises whether a harmonised set of accounting standards is required for small and medium sized entities and whether such standards are applied or should be applied within the economy. A related question is whether and how those standards may impact on the trade and interaction of SMEs with other entities and economies. This implies that the newly formed and agreed accounting standards should not only apply to listed publically traded organisations, but rather to companies ranging from privately owned entities to publically traded organisations. Such questions underpin the problem, which are whether the International Accounting Standards Board (IASB) should implement a harmonised set of accounting standards for SMEs and whether there is indeed a need for this. Arguments of resource availability to SMEs to meet these accounting standards have been made against the establishment and implementation of a harmonised set of accounting standards. Weber (1992) believes that an argument against the harmonisation of accounting standards is that the costs of creation and adoption of the accounting standards would not be worth the benefits. Goeltz (1991) believes capital markets have already adjusted to the existence of a global market (without standardisation) and investors and issuers have been able to make investment decisions. The argument follows that full harmonisation is probably not practical or valuable (Goeltz, 1991:86). The problem whether harmonised accounting standards should apply to small and medium sized enterprises for the purposes of lending, statistical analysis, economic analysis, improved management and the development of those entities within developing economies such as South Africa should be addressed. The answers to this problem form an integral part to the future economic development of SMEs, companies and economies such as South Africa. Importantly, arguments for and against the harmonisation of accounting standards within
South Africa must be investigated and the need for harmonisation established. This leads to the establishment of the necessary research objectives. 1.4 Research Objectives The research objectives that arise from the problem statement constructs and the research questions include the following: To determine whether a set of harmonised accounting standards has been developed for SMEs and whether the standard has been legislated for SMEs to provide them with better access to capital. To determine whether accounting professionals experience difficulties in preparing financial statements based on accounting information derived varying standards used. To determine whether creditors, investors and lenders have difficulty in interpreting such financial statements and also whether they have confidence in the financial statements provided by SMEs currently. Further, it needs to be established whether lenders such as banks rather rely on personal sureties provided by applicants instead of assessing the financial health of the entity. To establish whether there exists a need for harmonised accounting standards for SMEs in South Africa. Further research objectives have been identified, but will be the subject of future studies to be performed based on the outcome of this study. These objectives are: The relationship between the accounting standards and the impact that those standards may have on SMEs. To determine how the research findings are understood and interpreted regarding the impact of harmonised accounting standards on SMEs. The advantages and disadvantages for companies in accepting harmonisation of accounting standards and what the compliance implications for companies that are driven by legislation might be.
Researching and answering the above research objectives will establish an understanding so that conclusions may be formed about the need for harmonised accounting standards within the South African economy. 1.5 Hypothesis The current differences in accounting standards and systems are creating significant distortion in accounting information used to construct financial statements due to the different standards and interpretation of those charged to process the accounting information. One possible solution for the distortion in accounting information is the harmonisation of accounting standards. Weber (1992) suggests that this harmonisation of accounting standards will help the economy by facilitating transactions and minimising exchange rate costs by providing increasingly perfect information, by standardising information to economic policy-makers, by improving financial markets information and by improving government accountability. Thus, through these efforts, Weber (1992) states that the risk in investment decisions and financial-based management decisions can then be made with less risk. Although there appears to be a widely held belief that harmonisation of accounting standards is necessary, the question remains about the application of such standards for SMEs. This leads to a particular goal in sight in the onset of the document, which is to establish whether privately owned companies should be subject to legislation that will require them to use a universal set of accounting standards. IASB is the independent standard-setting body of the IFRS foundation, and they are responsible for the development and publication of IFRS, including the IFRS for SMEs and for approving interpretations of IFRS as developed by the IFRS Interpretations Committee. The IASB engages closely with stakeholders around the world, including investors, analysts, regulators, business leaders, accounting standard-setters and the accountancy profession (IFRS, s.a.). It is for this reason that the IASB is seen as the leading standards setting board globally, and standards from countries including South Africa are reviewed and adapted to conform to statements as set out by the IASB. The implications of implementing IASB standards for SMEs and publically traded companies must be established and the research will attempt to answer the questions posed here. Conflicts of 7
accounting standards used by SMEs and listed companies have been identified. An example of this is the use of IFRS by publically traded companies that results in high comparability against other entities globally as opposed to SMEs that do not apply such standards. As the acceptance of IASB-based financial statements, by publically traded entities, provide issuers of the financial statements with access to world capital markets it must be established whether the harmonisation of accounting standards for SMEs will improve their access to capital. Also, SMEs use different reporting standards to publically traded entities. What should be determined, in terms of the varying reporting standards, is whether the different accounting standards do indeed cause a variety of accounting difficulties within economies such as South Africa. In the hypothesis that follows, the differences in accounting standards lead to difficulties for creditors, investment companies and lenders such as banking institutions, which may stifle trade for those entities. It must be ascertained whether the relationship between SMEs and lenders such as banks are indeed impacted by whether a harmonised set of accounting standards is legislated and how this impacts on lenders abilities to finance SMEs. Therefore, the hypothesis that will be tested is the alternative hypothesis (H1), which holds that sample observations are influenced by some non-random cause (Stat Trek, s.a.). The hypothesis explained in terms of this document is as follows: whether or not small and medium sized enterprises, within the sample, will benefit from the harmonisation of accounting standards. The results of the test will then prove or disprove that there is a need for the harmonisation of accounting standards for SMEs and will be denoted with the equation (H1:P = 1) or (H1:P = 0) with: H1:P denoting the hypothesis One (1) denoting harmonisation, and zero (0) denoting differential reporting needs. 8
1.6 Research Methodology This section provides the reader with information about the methods used during the research. Each sub section provides an explanation of the method utilised to gather the data necessary to address the problem. In addition to describing these methods, a justification for selecting these methods of research has also been provided. 1.6.1 Analytical Research (Secondary) Part of the research that was employed took the form of analytical research. With this form of research, the question was posed as to whether there is a need for accounting harmonisation in South Africa and secondary research was performed to evaluate the question. The purpose of the analytical research approach was to analyse and explain certain aspects of the issue of accounting harmonisation in South Africa. An important feature of this type of research is in locating and identifying the different factors or variables involved (Scribd, s.a.). Scribd (s.a.) argues that it is these variables that may prove to have a significant impact on the findings of the study, the deductions of other researchers and may add a different view on the subject. 1.6.2 Quantitative Research (Primary) In conjunction with the analytical and secondary research, primary quantitative research was utilised to establish data about the research questions. This research took the form of questionnaires presented to respondents in South Africa in order to assess the opinions of these respondents. The information has been analysed and correlated to establish the need for accounting harmonisation in South Africa. 1.6.3 Qualitative Research (Secondary) The secondary qualitative research focused on data and information that has already been gathered and this has been critically analysed to determine the outcome of the question. The secondary data and information was obtained from six sources: archival records, direct
observation, documents, interviews, participant observation, and physical artefacts (Yin, 1989).
The study further included research conducted by various researchers who used quantitative methodologies in order to assess the views and perceptions of the various groups involved in 9
their studies. Maykat and Morehouse (1994:56) say that qualitative research gains a deep understanding of some phenomenon experienced. Donalek and Soldwisch (2004:345) describe qualitative research as the organized, systematic exploration of some portion of human experience. It is not concerned with the interpretation of data but rather with the discovery of common emergent themes. This form of research has been imperative to this study, as it was anticipated that this approach would provide more information from a variety of sources consequently providing valuable inputs and perspectives into this study. Thus, through systematic research, the research attempted to gain a deep understanding of the views and perceptions of the harmonisation of accounting standards and also of the interpretation and implementation of those standards by the three main groups affected by the standards including:
The input group, which include the SMEs that are affected by the standards and are the
applicants for finance to lenders such as banks

The intermediary group, which are the accounting professionals that are responsible for
preparing the financial statements using the accounting standards and that form a critical link between the SMEs and the lenders, and
The user group, which are the lending institutions that use the financial information to
make lending and other financing decisions that directly affect the SMEs in South Africa. 1.6.4 Theoretical Research The theoretical research took the form of information obtained from media articles, bank articles, research studies, books, and other forms of information. Further, two lending institutions within the Greater Johannesburg area were interviewed as well as two audit companies to establish perceptions regarding the need for harmonisation of accounting standards. In addition, practical application issues were extrapolated in order to assess whether the need for accounting standard harmonisation is valid.
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1.7 Scope of the Research The study is intended to understand the need for the harmonisation of accounting standards for SMEs. The gathering of data will be obtained from sources where relevant studies, conferences, papers and surveys were conducted. Moreover, the study will further endeavour to identify whether the harmonisation of accounting standards in South Africa is required by SMEs and what the possible impact may be. The study will focus on the need for accounting harmonisation in South Africa. More specifically, the study will be conducted in the greater Johannesburg area located in the Gauteng Province. Further, the study will focus on research that has been performed in terms of SMEs regardless of their individual industries, as industry specific information is not regarded as pertinent to the study. The contribution of SMEs to create sustainable employment from their interaction with the banking sector forms a secondary topic of the paper and the impact of harmonised accounting standards on the relationship between the SMEs and the banking sector will also be investigated. 1.8 Limitations of the Research Study The research is subject to certain limitations and a finite scope. Firstly, limitations that have been imposed on this study include time and budget constraints. The extents to which these limitations degrade the quality of the study are discussed here. The reasons for including secondary research included: A part of the data collection and analysis was based on secondary information due to the international nature of research problem, thus increasing the scope of the document.
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The information that needed to be obtained from various sources and the time allocated for the completion of the document placed a constraint on the author (the author was unable to travel to the locations where the data was located) therefore Internet based searches were utilised. It was cost effective for the author to rely on secondary research in terms of both time and budget. 1.9 Structure of the Dissertation This Chapter is followed by a literature review, which includes a reflective and critical review of the literature relating to the research problem. It presents a wide range of academic literature and empirical studies performed between 1993 and 2010. Chapter 3 looks at the research hypothesis and includes an explanation of the research design, methodology, population, and sample size selected. Chapter 4 focuses on the research findings. In this chapter the research data and facts are presented as well as the collation of the results. Chapter 5 presents an analysis of the results. In this chapter, the proof and challenges regarding the research objectives are presented as well as a discussion on whether and how the hypothesis and research objectives have been met. Finally, Chapter 6 presents a brief summary of the research study findings together with conclusions drawn and recommendations made. Further research opportunities will also be explored in the final chapter of the dissertation.
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1.10 Chapter Summary The first chapter of the paper has dealt with introducing the reader to the background of the need for the development of international accounting standards. The statement of the problem was introduced including the current difficulties surrounding the various accounting standards followed by SMEs. The purpose and importance of the problem was explained to the reader to highlight the need for the research paper. Following the importance of the problem, the research questions and objectives were stated as well as the hypothesis to be tested. Also, the research methodology was briefly outlined within the scope and limitations of the research study. The following chapter embarks on a review of literature to form an understanding of the topic under discussion.
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CHAPTER 2: Literature Review A review of the literature is required in order to build a comprehensive understanding of the subject under study. This review evaluated previous and current research in order to establish how relevant and/or useful it was and how it related to the research in this paper (Saint Marys University, s.a.). Part of the literature review focused on international literature, which was necessary to further develop insights and understanding of the topic under discussion. The literature review investigated the opinions that have been formed around whether the harmonisation of accounting standards is needed. However, the issue of accounting standard harmonisation could not be investigated in isolation. In addition to accounting standard harmonisation, the application of the standards in practice also warranted investigation. Thus, part of the literature review focused on the opinions of the intermediary group (accounting practitioners), as they utilise the accounting standards as their primary source of information and guidance when processing accounting information. Further, the literature review explored information pertaining to the IFRS for SMEs to assess its applicability to SMEs within South Africa. The review also looked at the two main groups, to which the standard applies, being SMEs as established entities as well as micro-entities. The aim of the literature review was thus understanding the accounting standard for harmonisation as well as looking at the three major groups of the model being tested; being the input groups (SMEs), the intermediaries (accounting professionals) and the user group (finance institutions that provide capital, overdrafts, etc. to the input group). Figure 1 provides a model of the three groups pertinent to this study. Notably, the three groups are interlinked and interdependent. Figure 1 offers a simplified view of how SMEs go about obtaining finance; usually from lending institutions such as banks. In practice, however, this neat representation 14
of the lending process is one where many SMEs follow this route with many lending institutions whilst utilising several accounting intermediaries. It is here where the need for accounting harmonisation already becomes apparent.
Group 2 Accounting Professionals

Prepare financials
Group 1
SMEs
Applicant for finance
Group 3 Lending institutions

Evaluate for finance
Feedback to applicant
Figure 1. Representation of the three user groups relevant to the study and the roles that they play 2.1 International Financial Reporting Standards (IFRS) and Related Standards From a variety of sources that include the leading accounting bodies internationally, the development of IFRS has been developed by the IASB to form the basis of accounting standards. Marshall (2009) states that converting to IFRS will benefit global companies, affording them the opportunity to improve processes, eliminate parallel accounting across international jurisdictions, and streamline accounting and financial systems. In addition to IFRS, which has been developed for entities with public accountability, the IFRS for SMEs has also been developed with the view of having a reporting framework for small and medium sized entities. This standard, however, is not seen by many to cater for micro entities, and South Africa developed GAAP for Micro entities to meet their perceived needs for financial information.
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2.2 Accounting Standards Rzvan and Dumitru (2009) state that the main determining factors for reducing differences between national accounting standards have been undertaken by the IASB as well as by professional and governmental bodies at national, regional and global levels. Indeed, their statement is accurate, as a large amount of research has been performed in resolving differences between national accounting systems; that is, finding harmony between accounting systems. 2.3 IFRS Application The issue of fair presentation has arisen with reference to financial statements for listed entities as opposed to SMEs. Coppin (1996:12) says regarding fair presentation: If different standards apply to smaller entities, it could result in the situation that disclosures provided by larger enterprises may not be regarded as fair presentation, but exactly the same presentation will be considered fair presentation in smaller enterprises. This results in a common standard not being applied to all entities but that arbitrary criteria may be used to represent SMEs. Consequently, users of financial information will also have harmonisation difficulties as a result of these differing standards (Van Wyk & Rossouw, 2009:105). 2.4 Companies for which IFRS for SMEs are Assigned According to the IASB, IFRS for SMEs are designed for SMEs providing general-purpose statements for external users. However, the term SME is not specified except that it is for entities with an approximate number of 50 employees. IFRS for SMEs standard also applies to companies without public accountability. Consequently, entities that are publicly traded and financial institutions are excluded and in general, IFRS do not consider not-for-profitentities. It is also noteworthy that, although every national jurisdiction is asked to decide on further directives to refine their application, there is no requirement on size (Whittington, 2008).
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In South Africa, the South African Corporate Laws Amendment Act of 2006 states that IFRS for SMEs may be applied by limited interest companies (i.e. they are not widely held). If they do not have public accountability (not a listed or financial institution), such companies may also choose to apply full South African Statements of GAAP or IFRS (South African Statements of GAAP are entirely consistent with IFRS, although there may be a delay between the issuance of an IFRS and the equivalent SA Statement of GAAP, UN, 2007). Part of the scope of the IFRS for SMEs require that an entity that wants to apply IFRS for SMEs must demonstrate that it does not have public accountability as described in Section 1 of IFRS for SMEs. Section 1 describes public accountability as: An entitys debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or An entity holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This applies typically to banks, investment banks, insurance companies, mutual funds, credit unions and securities brokers/dealers. Some entities may also hold assets in a fiduciary capacity for a broad group of outsiders because they hold and manage financial resources entrusted to them by clients, customers or members not involved in the management of the entity. It is noted however, if they do so for reasons incidental to a primary business (as, for example, may be the case for travel or real estate agents, schools, charitable organisations, cooperative enterprises requiring a nominal membership deposit, and sellers that receive payment in advance of delivery of the goods or services such as utility companies), they are not considered to be publicly accountable. The Accounting Practice Board (APB) has decided that IFRS for SMEs may be applied as per Circular 2.2009, Paragraph 13 based on the requirements of the Corporate Laws Amendment Act, 2006 and the Companies Act, 2008. Some of these requirements are still subject to the Ministers pronouncement of the effective date of the Companies Act, 2008: 17
i.
For companies with year-ends prior to the effective date of the Companies Act 2008: The IFRS for SMEs may be applied by: a public company or a private company, as defined in the Companies Act, 1973, and a limited interest company or a widely held company as defined in the Corporate Laws Amendment Act, 2006 if it does not have public accountability as defined in Section 1 of the IFRS for SMEs.
ii. For companies with financial year ends on or after the effective date of the Companies Act 2008: The IFRS for SMEs may be applied by: a non-profit company; a private company; a personal liability company; and a public company as defined in the Companies Act, 2008, if it does not have public accountability as defined in section 1 of the IFRS for SMEs. iii. For entities other than companies where the founding document or other regulation requires compliance with a fair presentation framework as contemplated by the International Federation of Accountants (IFAC): The IFRS for SMEs may be applied, if the entity does not have public accountability as defined in section 1 of the IFRS for SMEs, except for entities where legal provisions or other regulations require compliance with a specific financial reporting framework (other than the IFRS for SMEs). Such an entity may not apply the IFRS for SMEs even if it does not have public accountability as defined in Section 1 of the Statement of IFRS for SMEs. iv. For entities where legal provisions or other regulations require compliance with a specific financial reporting framework (other than the IFRS for SMEs). Such an entity may not apply the IFRS for SMEs even if it does not have public accountability as defined in Section 1 of the Statement of IFRS for SMEs. v. For entities whose financial reporting framework is not set out by legal provisions, the founding statement or other regulations: If such an entity does not have public accountability, as defined in Section 1 of the Statement of IFRS for SMEs, it should assess whether it is appropriate to apply the IFRS for SMEs (SAICA, 2009b).
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2.5 IFRS in South Africa Companies in South Africa that are listed on the Johannesburg Stock Exchange (JSE) have since 1 January 2005 been required to comply with IFRS. Rossouw and van Wyk (2009) conducted research and states that in February 2007 South Africa immediately issued an exposure draft from the IASB on IFRS for SMEs. South Africa saw the exposure draft as a positive development and an effort to harmonise the approaches in different countries. South Africa also became the first country in the world to approve the proposed standard as a Statement of GAAP for SMEs (Rossouw & van Wyk, 2009). The IASB of the South African Institute of Chartered Accountants voted to issue the IFRS for SMEs as a South African Statement of GAAP: IFRS for SMEs for use immediately on 13 August 2009. As the original text of the IFRS for SMEs was adopted without any change, this meant that audit reports issued would identify the accounting framework used as the IFRS for SMEs. Thus, companies that fall within the scope of IFRS for SMEs could use the new standard. Listed companies are still required to use full IFRS (Deloitte, 2009). However, the use of IFRS for SMEs remains a choice within South Africa and has not been legislated. Van Wyk and Rossouw (2009) wrote in their research paper IFRS for SMEs in South Africa that the South African Accounting Practice Board issued guidelines on which South African entities could apply the South African Statement of GAAP for SMEs (the IFRS for SMEs, Circular 09/07 of SAICA 2007b:par. 10). They further stated that although companies may apply the IFRS for SMEs, other entities (such as close corporations) might also apply the standard if they deem it appropriate. In South Africa, the APB adopts accounting standards. The APB adopted IFRS for SMEs, but entities that fall within the scope of SMEs may, but are not required, to prepare their financial statements in accordance with the standard (SAIPA, s.a.).
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2.6 Small and Medium Enterprise (SME) Reporting One of the most important factors that require specialised IFRS for SMEs is that the majority of all businesses represent smaller, unlisted companies that currently report under national, highly varying standards (Pacter, 2008:118). Accounting experts see these varying standards as detrimental to the future worldwide economy. This is one of the driving factors that are encouraging economies to adopt IFRS for SMEs. Benefits such as higher-quality statements, more efficient auditing, simplified education as well as training (IASB 2007:3) and eventually advanced decision-making for best resource allocation is believed to lead to an optimised worldwide economy (Wiese, 2008:4). Wiese (2008) further states that IFRS is needed for smaller, non-listed companies, as they are the entities that are prevailing. She goes on to say in her report that IFRS for SMEs are based on initial, full IFRS but that they were reduced, simplified and adjusted to reduce the reporting burden that many small companies would suffer. In addition, her report says that SMEs can easily benefit from international comparability. According to Wiese (2008: 5), the company KPMG (2007) state that not all smaller companies should opt for IFRS for SMEs standards and that only companies who act internationally and who plan to go public will benefit. They continue to say that such entities could make best use of international comparability as well as the easy transition to full IFRS. According to Bostan and Grosu (2010), Ian Ball the IFAC Chief Executive, said that, this global accounting standard is a crucial step towards the global convergence of financial reporting practices of SMEs. It will help to increase the quality and comparability of financial statements of SMEs worldwide and will assist SMEs in obtaining access to financing. Beneficiaries will not be only SMEs, but also their customers and all other users of financial statements of SMEs. SAIPA (s.a.) also noted certain comments in light of IFRS for SMEs application. In South Africa, the majority of smaller enterprises are registered as Close Corporations (CC). In terms of the Close Corporations Act 1984, CCs are only required to prepare financial statements in accordance with GAAP as appropriate to the entity. This then means that each CC should 20
decide on the appropriate accounting standards to be followed. This could thus be a recognised standard such as IFRS or IFRS for SMEs or an industry appropriate framework. Additionally, for the Proprietary Limited form of companies in South Africa, the Companies Act 1973 requires private companies to follow either IFRS or IFRS for SMEs. The new Companies Act 2008 may, under certain circumstances, require that Close Corporations and Private Companies should follow either IFRS or IFRS for SMEs. Further, if no standard is required or specified, then the entity must then determine itself the industry specific framework that will then be voluntary adopted (SAIPA, s.a.). APB approved the IFRS for SMEs as a Statement of Generally Accepted Accounting Practice: IFRS for SMEs in August 2009. It was decided that the standard would be applicable to entities whose financial statements were authorised for issue after 13 August 2009. Entities that were already applying the exposure draft on IFRS for SMEs for use in South Africa in 2007 were permitted to apply the Statement of GAAP for SMEs for year-ends up to and including 31 August 2010. The Statement of GAAP for SMEs would then be withdrawn for financial periods ending after 31 August 2010 (ASA, s.a.). 2.7 Micro-Entity Financial Reporting The smallest of the entities that fall within the South African economy are commonly referred to as micro-entities. For better definition of micro-entities, the EU recommended the definition
of less than 10 employees and/or turnover of less than 2m and/or a balance sheet total of less
than 2m (SAIPA, s.a.). SAIPA (s.a.) reported that the IASB issued Exposure Drafts (ED) of the
IFRS for SMEs. The standard was said to provide guidance at a much simpler level than full IFRS, in particular for SMEs that produce general-purpose financial statements. Concern was raised that the IFRS for SMEs standard may not be appropriate for micro-entities. According to Walton (2009), South Africa has produced an exposure draft of an accounting standard for microentities. The proposal is related to IFRS but the draft is geared toward simplified accounting for micro-entities and is aimed at satisfying the needs of the owners, lenders and tax authorities.
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This followed studies commissioned by the United Nations Group of Experts on International Standards of Accounting and Reporting (ISAR) into the needs of small businesses in developing countries. The studies showed that such micro-entities frequently did not produce accounts and that there was an absence of accounting rules, which made it impossible to establish liability to tax, the profitability of the entities, or to raise institutional finance. Further, such entities utilised relatively unsophisticated and unlicensed service providers for their accounting needs. Consequently, when they needed to borrow, different banks would have different accounting information demands, which then added to the cost of the service. This led to a recommendation by ISAR in 2002 for a three-tier structure for accounting where listed entities would use IFRS, SMEs would use IFRS for SMEs, and micro-entities would use Small and Medium-sized Entity Accounting guideline (SMEGA). SMEGA is seen as a guideline that uses straightforward accounting that addresses only the simplest transactions on a level three set of simple accrualsbased rules for micro entities. South Africa took the development of the third-tier concept one step further. A working group that included the South African Institute of Chartered Accountants (SAICA), the Association of Chartered Certified Accountants (ACCA), the Independent Regulatory Board for Auditors (IRBA), the South African Revenue Service (SARS) as well as representatives of financial institutions and also those that provide accounting and auditing services to micro-entities. They issued an exposure draft of an accounting standard for third-tier businesses. The standard is geared to micro-entities that are not required to produce general-purpose financial statements, with particular reference to owner-managed entities. These standards are, in line with the UN recommendations, addressed to the owners, tax authorities and financial institutions. The objectives that the standard aimed to achieve include:
The institution of a cost-effective process to create reliable and meaningful financial reports for third-tier entities The creation of an appropriate standard that will report with consistency in terms of accounting interpretation and application Facilitating the objectives of government with employment creation and an entrepreneurial spirit without overburdening new entrepreneurs 22
The increased reliance of reported information for use by tax authorities, and The support to financial institutions and other lending institutions in their process of assessing the risk profile of the reporting entity (Walton, 2009). In addition, the working group set criteria against which they evaluated the third-tier exposure draft. The criteria included: The frameworks costs should not exceed the benefits to be derived Primary users of the accounting information (owners, tax authorities and lenders) must be
enabled to evaluate the reporting entitys profitability, liquidity and solvency
The document must be easy to understand, to use, a stand-alone document and succinct, and
The majority of transactions and events that a reporting entity may encounter should be
addressed and uncommon transactions omitted.

In terms of the cost/benefit constraint, the IASB believes that the cost-benefit trade off should be assessed in relation to the nature, number and information needs of the users of an entitys financial statements (IASB, 2007:15). Studies that have been performed in South Africa
confirm that the cost of compliance with accounting standards such as IFRS and SA GAAP exceed the benefits for SMEs (Hattingh, 1999; Cleminson and Rabin, 2002; Wells, 2005; Van Wyk, 2005; & SAICA, 2006b in Stainbank, 2008). Internationally, it has also been recognised in the United States of America (USA) and the United Kingdom (UK) that the cost of compliance with IFRS exceeds the benefits for SMEs. The complexity of IFRS and the time of compliance achievement for SMEs have also been highlighted as challenges for SMEs in more recent studies. SAICA are conducting a survey in order to establish the need for a South African Micro GAAP framework, as it believes that IFRS for SMEs does not satisfy the needs of small and micro-entities (Stainbank, 2008). This supports the contention of Stainbank (2008) and Wells (2007) that a single threshold for differential corporate reporting may not adequately address the South African differential corporate reporting needs. Stainbank (2008) goes further to 23
state that Roberts and Sian (2006) are concerned about the low level of literacy, absence of computerised accounting systems and lack of accounting education which may further impair the ability of such entities to produce financial information in accordance with IFRS in developing economies (Stainbank, 2008). The IASB indicated that a 50-employee guideline was used when deciding on the content of the exposure draft (ED) of the proposed IFRS for SMEs and that they considered the IFRS for SMEs suitable for entities with less than 50 employees. The IASB further indicated that many jurisdictions require full IFRS for most companies, including micro-entities (IASB, 2007b:19 in Wiese, 2008). Hence, the IASB believe that more simplified financial statements would not meet the objective of decision-usefulness and would impede the SMEs abilities to attract capital (IASB, 2007b:20). The IFRS for SMEs indicates that an SME would have a broad range of users and that the financial statements of an SME should also show the results of managements stewardship of the resources entrusted to it (IASB, 2007a in Wiese, 2008). However, Roberts and Sian, 2006 (quoted in Stainbank, 2008) state that in reality the users of micro-entity financial reports are probably only the owner, financial institutions and tax authorities. Mller (2008), who is a Senior Executive in SAICA Standards Board states in his article SA Accounting Standards posed for Micro-GAAP revolution that IFRS are anathema to small firms that just cannot justify a full-time accountant or the attendant fees to ensure compliance, especially in a country such as South Africa, where entrepreneurship is highly encouraged. This, in his opinion, was a main driving force for South Africa generating IFRS for SMEs, which is a watered down version of full-blown IFRS. He goes on to say that SAICA is currently researching solutions whereby IFRS can be summarised, adapted and simplified for non-public interest entities. Moreover, one of several answers is to then move IFRS for SMEs into the public interest sphere and to create a much simpler third level of reporting like Micro-GAAP.
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2.8 Needs of Users of Financial Information Importantly, the needs of the users of the financial information generated using the various standards must be established. The needs of the users of financials produced forms a primary motivator behind entities producing such reports. Entities that have public accountability are already required to use full IFRS and the needs of the users of the financial statements produced have been researched extensively. A grey area exists when the needs of users of financial information for SMEs and micro-entities are considered. The IASB created IFRS for SMEs with the view of simplifying the requirements in complying with the said standards and a major driving force behind this standard is the cost element associated with compliance and issue of the financial information. SAICA (2010) states that IFRS for SMEs is suitable for all entities that prepare general purpose financial statements and that the standard is not tailored to the needs of any one group with the exception of those entities whose securities are publicly traded and who hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses (SAICA, 2010). Pacter (2010) said in the IASC Foundation IFRS Conference held in June 2010 that the users of SME financial statements include primarily: lenders, vendors, credit rating agencies, customers and family investors for purposes of short-term cash flows, liquidity and solvency assessments. He then continues to say that users of listed company financial statements include investors in equity shares or long-term debt and that such investments are made over a much longer time horizon and that main applications include forecast earnings, share prices, and assessing the value of the entity as a whole (Pacter, 2010). Schiebel (as quoted in Stainbank, 2008) argues that there is no evidence concerning the common information needs of external users of SMEs financial statements. He examines literature on common information needs of external users of SMEs financial statements and concluded that the research to date has only focused on one group of external users and one region or country at a time and that [n]o information is available about the common information needs of various external groups on a national or international level. Moreover, he argued that the IASB did not determine the information needs of external users of SMEs 25
financial statements and the type of information those external users require from SMEs and that they instead relied on responses by accounting regulators, professionals and academics when instead, they should have placed their focus on the users and preparers of such SMEs financial statements (Stainbank, 2008). One of the primary and underpinning variables that supports SMEs in their ongoing trade are lending institutions such as banks. Schiebel (2008) highlighted an important factor that has not been considered entirely by the IASB the information needs of lending institutions. It is thus important, in this study, to find information about the needs of lenders in terms of financial statements used and evaluated by them to provide finance to SMEs. 2.9 Lending Institutions, SMEs and IFRS SME financial statements have the objective to provide information on the economicfinancial position, financial performance and cash flows of the entity. This information is useful to a wide range of users who cannot request specific reports that are tailored to their specific needs for information in order for them to make a range of economic decisions (Bostan and Grosu, 2010). The IASB released IFRS designed for use by SMEs in July 2009 (Fitzpatrick & Frank, 2009). Once lenders accept the IFRS for SMEs, they may as a rule then require from applicants of finance to submit financial statements in IFRS format anyway. This is one unintended consequence of the countrys intention of using IFRS for listed as well as for unlisted companies within their economy. Importantly, it must be noted that the worlds national accounting standard-setters almost unanimously support the IASBs initiative of developing IFRS for SMEs. The IASB hosted a meeting of the worlds national accounting standardsetters in September 2003. (Greeff, 2008: 57). In preparation for that meeting the Board surveyed them about standards for SMEs. With near-unanimity, the standard-setters that responded said that the IASB should develop global standards for SMEs (IASB, 2007). With this overwhelming support from the standard-setters and bearing in mind that economies ultimately conduct business with other economies through independent transactions
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performed by their respective SMEs, it may be considered unwise not to legislate IFRS for SMEs within South Africa. Ridley (as quoted by Bruce, 2011) reports that on the African continent, there is currently a positive move towards the adoption of IFRS even though there is quite a lot of challenge in implementing IFRS in Africa. Also, that there is a lot of hard work, but lots of payback in inward investment linked to disclosure and reporting. He said that a common presentation format and standardisation of approach that IFRS present are really important. He used the example that several banks had to be rescued and their boards sanctioned by the Central Bank in Nigeria in 2009 and one of the contributing factors was that the local accounting standards were not rigorous enough to pick up the problems. He believes that being on a global standard simply improves general financial hygiene and he is sure that this had a bearing on Nigerias announcement in September 2010 that listed companies will be required to adopt IFRS by 2012 (Bruce, 2011). Greeff (2008) states that lenders generally constitute banks and other financial institutions and that they typically require financial statements as a part of the terms and conditions of their financing agreements. However, lending decisions are not purely based on financial statements from applicants but in addition they also require collateral that primarily takes the form of personal guarantees, cessions and pledges. Further, Greeff (2008) supports his statement by referring to a survey performed by Hattingh (2003) in Greeff (2008) of small and medium sized audit practitioners, SARS, two commercial banks (Nedcor and ABSA) and shareholders of SMEs in order to establish the use of financial statements. Significant results that were highlighted following the survey include: 98% of financial statements are prepared solely for tax purposes by small sized audit practitioners 95% of financial statements are prepared solely for tax purposes by medium sized audit practitioners 27
SARS want financial statements for tax assessment and the assessors do not understand GAAP SMEs are granted overdraft facilities by banks when assets or personal guarantees are secured, and Financial statements are not perceived as relevant by shareholders as these are often produced months or sometimes years after year-end. A survey was performed by Hattingh (2007) on the East Rand among a number of practitioners with 500 clients. The survey was performed in order to establish the users of general financial statements produced by SMEs. The results of the survey highlighted, in affirmation to the survey performed by Hattingh (2003): (Greeff, 2008: 11) Of 161 companies that had borrowed from a lender, each entity provided security for the loan Financial statements were not used for the purposes of obtained loans, for venture capital purposes or for comparison purposes, and Financial statements were used by each one of the respondents for tax purposes. Other studies that were performed in order to establish the needs of the users of private enterprises have also lent support to Hattinghs survey. One such study was performed by the Canadian Accounting Standards Board (AcSB). The AcSB performed a survey of owners and/or Chief Financial Officers of private entities in order to determine who they considered to be the users of their financial statements. The main users of financial statements (90%) were identified as the owner-managers. Lenders were also identified as a major user of financial statements (81%), with tax authorities being identified as another major user of financial statements (81%) (AcSB, 2007:41 in Greeff, 2008). There were two main groups of private entity financial statements identified, which are the owners and management and then banks and other lending institutions (AcSB, 2007:42). As internally generated financial statements or management accounts are deemed adequate for the filing of tax returns, GAAP financial statements are not required by the Canadian 28
Revenue Agency. Thus tax authorities did not feature as a main user of financial statements (AcSB, 2007: 49 in Greeff, 2008). 2.10 Empirical Research on IFRS for SMEs Standard A number of questions are posed along with the literature obtained to develop an understanding of the possible need for accounting standards harmonisation and its application: i. What's been done in this topic area to date? ii. What are the significant discoveries, key concepts, arguments, and/or theories that scholars have put forward? iii. Which are the important works? Significant research has been performed in the area of the accounting standard, IFRS for SMEs, in South Africa by Rossouw and Van Wyk (2009). An empirical research study was performed by Van Wyk and Rossouw (2009) where they asked accounting practitioners, involved in preparing the financial statements of SMEs in general, to give their perceptions and views of IFRS for SMEs. They conducted a survey among accounting practitioners to elicit their opinions on whether they considered the IFRS for SMEs to be applicable and suitable for SMEs. The accounting professionals responded to the questionnaires provided to them and Rossouw and Van Wyk were able to form a general understanding of the opinions and views of the respondents. From the onset of their research, their opinion appeared to be that differential reporting may still be preferable to IFRS for SMEs and it was this hypothesis inter alia, that was tested among the accounting practitioners. They attempted to identify whether the accounting practitioners (intermediary group) believe that the proposed IFRS for SMEs (Statement of GAAP for SMEs) will ease the burden of financial reporting by SMEs. They did have several goals in terms of their study, but only some of the goals of their study are consistent with the goals of this paper and only those are focused on in the literature review. 29
Rossouw and Van Wyk (2009) performed their research in terms of the intermediary group in this paper, the accounting practitioners, who to a large extent are responsible for preparing and expressing an opinion on the financial performance and position of SMEs in South Africa. They systematically explored the human experience involved in the preparation of financial statements and state in their report that it [the report] is not concerned with the interpretation of data but rather with the discovery of common emergent themes. Their research was qualitative as they acquired the views and perceptions of accounting practitioners with regard to IFRS for SMEs. They selected accounting practitioners as the population for their empirical research on the assumption that the accounting practitioners are knowledgeable in accounting and understand their clients (SMEs) information needs with regard to financial reporting. In this study, Van Wyk and Rossouw targeted a purposeful sample to gain a deep understanding of the perceptions and views of the relevant accounting practitioners. Their sample was targeted at practitioners (preparers of financial statements/auditors) who, on a daily basis, are involved in accounting transactions of smaller entities. The practitioners were also regarded as a suitable source that would provide information-rich data (Maykut and Morehouse 1994:56) and as they were involved in the preparation of financial reports of SMEs, irrespective of their legal form (Van Wyk & Rossouw, 2009:102). This strategy was followed as previous related research performed by Kruger (2004) yielded extremely low response rates. In addition, the sample consisted of all delegates involved in the accounting practice for SMEs. As the respondents of the survey consisted of accounting professionals, the main deductions from Rossouw and Van Wyk relate to the intermediary group. Respondents chosen by Van Wyk and Rossouw (2009) for their study (see Table 1 below) fairly represent the accounting practitioners dealing with SMEs across South Africa, where most respondents were SAIPA members. These members further deal with smaller (non-listed) entities and perform more than traditional accounting services for their clients.
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Table 1. Professions of the respondents (Rossouw & van Wyk, 2009) Profession SAICA (CA (SA)) SAIPA Both CA(SA) and SAIPA Other professional membership Non-member Total Total Number of respondents 52 163 13 8 6 242 Percentage 22% 67% 5% 3% 3% 100%
The study consisted of 242 completed questionnaires of which 95% of respondents were in public practice. In addition, responses were obtained from areas that represent the larger accounting practitioner representation of South Africa. Table 2 below presents the details of the responses and the cities from which the completed questionnaires were obtained. Table 2. Demographic information of the respondents (Van Wyk & Rossouw, 2009: 103) Cities/towns Bloemfontein Cape Town Durban George Johannesburg Kimberley Klerksdorp Mafikeng Nelspruit Polokwane Port Elizabeth Potchefstroom Tshwane Rustenburg Total Number of respondents 50 31 23 14 19 9 7 11 6 13 14 15 17 13 242 Percentage 21% 13% 10% 6% 8% 4% 3% 5% 2% 5% 6% 6% 7% 5% 100%
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During the study, respondents were asked their opinions on whether they believed that IFRS for SMEs would reduce the burden of preparing financial statements for SMEs as this has been one of the goals of the IASB in issuing IFRS for SMEs (Pacter 2007:76; Stainbank & Wells 2007:32). Van Wyk and Rossouw (2009) asked respondents whether IFRS for SMEs would save time and effort for the preparers of financial statements. Table 3 indicates the responses that were received from respondents. Table 3. Respondents opinions on whether IFRS for SMEs would reduce the burden of preparing financial statements for SMEs (Van Wyk & Rossouw, 2009)
Question: Are you of the opinion that IFRS for SMEs will reduce the burden of preparing financial statements for SMEs? Answer Yes Moderate No Uncertain Total Percentage of Respondents 45% 29% 13% 13% 100%
The results of the questionnaire indicated that 45% of respondents believed that IFRS for SMEs would reduce the burden of preparing financial statements for SMEs. According to Rossouw and Van Wyk (2009), previous empirical results in Ireland conducted by McAleese (2001:18, in Stainbank and Wells 2007:34) yielded similar results where the research concluded that the Financial Reporting Standards for Small Enterprises had not relieved the financial reporting burden of small entities. However, the research had made a conclusion based on early information gathered from respondents who had possibly not had extensive exposure to the standard at the time, as this question was not posed to respondents.
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The critique delivered on their deduction is that their survey should perhaps have included the question about how long the respondents have worked with IFRS for SMEs standard in order to obtain a perspective on experience with the standard. Based on this view, the responses received can be interpreted that there appears to be a positive outlook of respondents about whether IFRS for SMEs would reduce the burden of preparing financial statements. Further, it is also interesting to note that a large percentage of respondents were moderately sure of this, and it can be assumed this answer was given, as respondents had not yet had extensive experience with IFRS for SMEs. It can also be assumed that those respondents who were uncertain also responded from a frame of reference where they either had little or no indepth experience with IFRS for SMEs at the time of the survey. The study performed by Van Wyk and Rossouw (2009) had fairly established the view considered in this study by the intermediaries, or the preparers of the financial information. 2.11 Value-based Management and Creating Economic Value According to Miller (1998:11), the concept of creating economic value has become so central to the practice of strategic management that it has given rise to a new descriptive label value-based management. He further describes that this is an approach to strategic management that highlights and emphasises a companys fiscal responsibilities to its stockholders. SMEs compete in an international arena, even when they sell to local customers; they have to do so among the presence of global competitors. This brings the subject of strategic management into such SMEs competitive environment. Even though small and medium sized companies may be owner managed, this does not exclude them from the value which they will have to create in order to satisfy lenders of capital or other financial facilities such as forward exchange contracts, loans or account overdrafts. Essentially, such lenders may be classified as a stockholder in the business, which gives them more interest and right to the business apart from the ordinary trade creditors. For this reason, banks require sets of financial statements in order to evaluate risks when considering lending to such organisations.
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It is then, when the SME owners will employ the services of a professional accountant and auditing firm to compile a set of financial statements for the business. However, auditors have reported that compiling financial statements in line with IFRS for such businesses who do not generally comply with any of the requirements or standards set out for SMEs is tedious and difficult as such businesses often do not manage their accounting administration correctly. This pushes up auditing compilation fees and auditors are reluctant to perform compilations for such entities. The result is often obscured financial results, which lenders have to evaluate. In addition, based on the lack of controls within these enterprises, finance is often rejected leaving such companies to close or stagnate. The economic impact resulting from this has been described and does not have to be repeated. What is important to state are the four Ms stated by Miller (1998) as a measure of total economic value added (EVA). These include measurement, motivation, management system and mindset. The majority of lenders use these factors as criteria against which to rate applicants utilising factors such as measurement (annual financial statements); motivation (understanding what the company is planning to do with the funds); management system (understanding how debt will be serviced) and mindset (managerial decision-making behind the value created to service the debt). It has thus become essential not only for larger organisations to carefully consider strategic moves to create economic value and sustainability; it has become the concern of the SME markets in all the economies. The implementation of international accounting standards in SMEs should at the very least force business owners to think increasingly strategically. Although not all will take on the challenge personally in order to comply with regulation, it is likely that such owners will seek to procure the services of entities to ensure that controls are put in place, or seek to comply by some other means. The point here is that SMEs will be more likely to become sustainable when they are placed in positions where they have to comply with regulation instead of procuring financial statements on a need basis. This will foster awareness in SMEs across the board that has not been the case so far.
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It should be seen as the responsibility of the respective governmental bodies such as the South African Receiver Services (SARS) to ensure that compliance is regulated within the various industries a task that will fall outside of the IASBs function. However, the IASB, in conjunction with the various countries should be seen as the standard setting authority that will work with the various countries receivers of revenue to make a universal set of accounting standards possible. 2.12 Chapter Summary Chapter 2 of the study involved a review of literature on the topic. Literature was reviewed from South Africa and abroad to develop insights and understanding into accounting harmonisation. The topic of the accounting standard was investigated and it was identified that it cannot be viewed in isolation. To demonstrate this view, Figure 1 was presented as a simplified model of the three main groups that are involved in the trading of SMEs in South Africa from access to capital and finance perspectives. The accounting standard IFRS was reviewed along with the views on what benefits the accounting standard offer. This standard was reviewed in prelude to the review of the same standard, but only for SMEs being IFRS for SMEs. The benefits which IFRS offers to entities around the world was supported by authors such as Marshall (2009) that presented benefits including the opportunity to improve processes, eliminate parallel accounting across international jurisdictions, and the streamlining of accounting and financial systems. Musta and Dumitru (2009) added to the benefits by stating that the IASB and other governmental bodies at national, regional and global levels have undertaken to reduce accounting differences which gives additional support to the harmonisation of accounting standards argument. In terms of the harmonisation of standards that are necessary in order for lenders to effectively and efficiently evaluate applicants for finance, Coppin (1996:12) stated that fair presentation is needed because if different standards apply to smaller entities, it could result in the situation that disclosures provided by larger enterprises may not be regarded as fair presentation, but exactly the same presentation will be considered fair presentation in smaller 35
enterprises. Rossouw and Van Wyk (2009:105) added to Coppins view by saying that users of financial information will also have harmonisation difficulties as a result of these differing standards. In terms of the harmonisation of accounting standards in South Africa, it was determined that IFRS for SMEs was approved by South Africa as a Statement of GAAP for SMEs. However, it was later determined that the standard is still voluntary for use and has not been legislated for SMEs to use in South Africa. In terms of SME reporting, Pacter (2004:118) identified that the majority of all businesses represents smaller, unlisted companies that report under national, highly varying standards. Accounting experts see the varying standards as detrimental to the future worldwide economy and as such, the IASB (2007:3) are encouraging economies to adopt IFRS for SMEs to benefit from higher-quality statements, more efficient auditing, simplified education as well as training, and also see the adoption of the standard to eventually lead SMEs to advanced decision-making for best resource allocation which in turn would lead to an optimised worldwide economy (Wiese, 2008:4). Ian Ball (Bostan and Grosu, 2010) also supported the need for accounting harmonisation by stating that it is a crucial step towards the global convergence of financial reporting practices of SMEs. In addition, it will help to increase the quality and comparability of financial statements of SMEs and will assist SMEs in obtaining access to financing. He goes on to say that beneficiaries will not only SMEs, but also their customers and all other users of financial statements of SMEs. The cost to benefit argument has often been used to divert decision-makers away from accounting harmonisation, but studies performed in South Africa confirm that the cost of compliance with accounting standards such as SA GAAP exceeds the benefits for SMEs (Hattingh, 1999; Cleminson and Rabin, 2002; Wells, 2005; Van Wyk, 2005; & SAICA, 2006b in Stainbank, 2008).
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That being said, the IASB believe that the cost-benefit trade off should be assessed in relation to the nature, number and information needs of the users of an entitys financial statements. What also became apparent was that the cost to benefit argument appeared to centralise around the initial implementation of the standard but time granted for implementation of the standard was not highlighted as negating factor for SMEs to become compliant. It was with overwhelming support that the national accounting setters said that the IASB should develop global standards for SMEs (ASB, 2007). It was then concluded that with this overwhelming support from the standard-setters and bearing in mind that economies ultimately conduct business with other economies through independent transactions performed by their respective SMEs, it may be considered unwise not to legislate IFRS for SMEs within South Africa. From the lenders perspective, research performed by Greeff (2008) and Hattingh (2003) showed that SMEs are still granted credit facilities by banks when collateral is provided and personal guarantees are provided. An additional study by Hattingh (2007) revealed that each SME surveyed had borrowed from a lender. This then highlights the importance of the relationship between lenders and SMEs and becomes an even more important issue because SMEs drive economies internationally. Rossouw and Van Wyk (2009) performed an important study into the intermediary group being the accounting professionals where they attempted to identify whether the accounting practitioners (intermediary group) believe that the proposed IFRS for SMEs (Statement of GAAP for SMEs) will ease the burden of financial reporting by SMEs. They found that even though the standard is new in South Africa, that 45% of respondents already believed that IFRS for SMEs would reduce the burden of preparing financial statements for SMEs. Critique was delivered on their deduction that IFRS for SMEs would not reduce the reporting burden of SMEs because of the short time which respondents had been exposed to the standard.
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The literature review then also looked at the aspect of SMEs creating economic value. Miller (1998:11) stated that the concept of creating economic value has become central to the practice of strategic management. Lenders are classified as stakeholders in entities, which give them more interest and right into the entities than ordinary creditors. Thus, banks require information about the financial position and performance of the entities as these lenders carry significant risk in lending to these entities and government should be tasked with the legislation of the accounting standard to ensure that entities can be evaluated against a benchmark standard which in turn will reduce risk to lenders, costs of capital and ensure economic local and international comparability of SMEs in the future.
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CHAPTER 3: Research Hypothesis The research hypothesis focuses on whether accounting standards should be harmonised in South Africa. The harmonisation covers publically as well as privately accountable entities. 3.1 Research Design Both quantitative and qualitative methods of research were utilised in the study. In terms of quantitative research, the method that appeared to be most suitable was survey research in terms of the primary research performed. Further, qualitative research is also suitable for this study as in contrast to quantitative research, this form of research allows for the further interpretation of results already obtained by other researchers. Also, the research becomes descriptive and is valuable because it allows for the human element of research. The research can also be described as descriptive research as this form of research can involve collecting quantitative information and it can also describe categories of qualitative information but descriptive research does not fit neatly into either category. Tools that can be used to perform descriptive research include methods such as surveys, interviews, observations and portfolios. These may be used singly or in various combinations to facilitate this type of research depending on the research question that will be addressed. In order to perform the research for this topic, a combination of these tools was employed. One such tool was the use of written questionnaires and personal interviews. These were considered to be more time efficient and allowed for the establishment of rapport with the respondents. In addition, they allowed for the acquisition of more in-depth information and allow for the observation of the respondents by the interviewer so as to obtain visual cues for additional interpretation. Although some of these questionnaires took the form of personal interviews, which by nature require more time, it was considered important to obtain an, in-conversation response from the respondents.
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3.2 Review of the Problem The problem needing to be answered consists of four basic parts. The first research question is that the adoption of IFRS, by listed entities, provides issuers with greater access to world capital markets and that this has also been the case for listed entities in South Africa. However, the SMEs continue to report using GAAP and the question then arose whether a conflict between the accounting standards used by publically traded entities and SMEs arises and whether this causes a variety of accounting difficulties within the country? As SMEs depend largely on finance from lenders, the second research question is whether SMEs using GAAP or their industry standards increases difficulties for them in accessing capital from lenders as well as making comparability of the entities locally and abroad difficult and whether a harmonised set of accounting standards would make access to capital, credit and other facilities easier? The third research question that followed was whether the non-uniformity of the reporting of SMEs leads to difficulties for creditors, investment companies and lenders such as banking institutions and may stifle trade for those entities? Another component of the third research question was then to assess whether the current manner of reporting using GAAP may also cause investors or capital evaluators to be reluctant to trade with SMEs, as they do not have confidence in the reporting framework used by those entities? 3.3 Methodology Qualitative data are collected across a range of social science disciplines, with varying techniques or emphasis, but typically aiming to capture lived experiences of the social world and the meanings people give these experiences from their own perspectives. Bishop and Corti (2005). In addition to the qualitative data used, data was also assembled using quantitative research using a survey.
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3.3.1 Research Approach The use of primary analysis was not solely utilised throughout this dissertation. The use of secondary analysis was also utilised. The secondary analysis used was mainly concerned with analysing data, which was collected by other researchers whereas primary research consisted of questionnaires posed to interviewees. This allowed for the exploration of areas of interest without having to go through the process of only collecting primary data in the field. Thus, the analysis of existing data available from around the world was used as a basis of research. Sources of information included white papers, working papers, Internet sources, journal articles, books, newspapers, other dissertations, government reports, official statistics, and databases. 3.3.2 Data Collection The research that was performed covered the area of current accounting standards as well as that of research performed in the area of the harmonisation of accounting standards. Numerous sources of information were used to establish what the current scenarios are with respect to SMEs. The data collected was done through online searches, utilising literature published on the subject from academic institutions and through contacting the relevant institutions such as SAICA and other reputable institutions considered appropriate for the relevant information. The use of both qualitative and quantitative research was utilised during this research. The main reasons for this decision include: The use of qualitative research is a type of scientific research that seeks to answer a question, systematically uses a predefined set of procedures to answer the question, collects evidence, produces findings that were not determined in advance and produces findings that are applicable beyond the immediate boundaries of the study (Family Health International, s.a.). The qualitative research aspect will explore the attitudes, behaviour and experiences through methods such as focus group information in an attempt to get an indepth opinion from companies affected by the international accounting standards. Methods that will be used include research into participant observation to understand company behaviours in their usual contests. Further, research will be done through in-depth 41
interviews that have been performed on companies histories, perspectives and experiences into the topic explored. The use of quantitative research will be used as this information is presented in the form of statistics that have been generated through the use of large-scale survey research by using methods such as structured interviews or questionnaires. This type of research typically includes many more participants although the contact time is usually quicker than with qualitative research. The importance of the use of quantitative research is that larger samples have been accounted for statistically and this may present a clearer picture about the overall trends presented during the analysis of the data collected. Further, this type of information presents predetermined ideas about what is being measured and studies have been set up with controls in mind and minimises bias. This quantitative analysis may then be subject to statistical analysis to come to results and individual interpretation. Quantitative is said to be ideal for testing hypotheses as well as for hard sciences trying to answer a specific question as this helps to remove any emotions from the questions being asked and answered. 3.3.2.1 Advantages and Disadvantages of Secondary Data Collection It is necessary to briefly explore some advantages and disadvantages of the secondary data collection method used to understand the limitations that will be placed on this document. Some of the advantages of secondary research from the sources mentioned previously include: The use of secondary information allows for much larger datasets than what the author could have collected individually (particularly in performing a quantitative study) Secondary information allows for the identification of trends and social changes Data are often collected through a random sample, which allows for the generalisation to the population under consideration, and Longitudinal studies allow comparisons to be made over time, but smaller and more targeted data datasets may also be available.
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There are, however, certain disadvantages of the preferred method of secondary collection which include: The secondary analysis may produce data that were collected for a different purpose than for the current study, and Methods of collection have to be established in order to justify the use secondary datasets and information sources. 3.4 Hypothesis Links A link between the research and the literature examined needs to be made to the hypothesis. The hypothesis was formed earlier in the document to indicate the specific areas or points that will be concentrated on and that will be discussed in the document. In addition, the hypothesis provided a short preface of the argument that is being tested through the dissertation, and that will either prove or disprove the need for accounting harmonisation within the economy. With reference to the hypothesis, the initial view was that current differences in accounting standards are creating significant distortion in accounting information used to construct financial statements due to the different standards and interpretation of those charged to process the accounting information. It was further posed that a possible solution for the distortion in accounting information is the harmonisation of accounting standards. In formulating the hypothesis, initial literature by Weber (1992) suggested that the harmonisation of accounting standards would help the economy by facilitating transactions and minimising exchange rate costs by providing increasingly perfect information; by standardising information to economic policy-makers; by improving financial markets information; and by improving government accountability. Further research suggests that in February 2007, the standard-setters with near-unanimity, said that the IASB should develop global standards for SMEs (IASB, 2007). However, in spite of this overwhelming support from standard-setters for accounting harmonisation, a large extent of support exists for differential reporting. Research reports by authors such as Greeff (2008) indicate that accounting harmonisation is excessive and not particularly useful for general use of 43
accounting information, but rather that there are a limited amount of users of accounting information for SMEs which generally include owners, managers and lending institutions. Other research suggests that financial statements are only prepared for a limited amount of applications, and hence that differential accounting standards are appropriate and that accounting harmonisation is not needed, or necessary in South Africa (Hattingh, 2003 and 2007). The hypothesis link, which arises from the information obtained and the initial hypothesis statement, is that there is a definite demand for accounting harmonisation as well as for differential reporting standards. It is then, because the focus of this document is aimed at the accounting harmonisation needs of SMEs within the South African economy, that the literature research and other sources of information should be disseminated in order to establish whether in deed there is a need for the harmonisation of accounting standards in South Africa or not. 3.5 Population 3.5.1 Primary Research The population focused on for the purposes of this research was South Africa. Within South Africa, a more specific population was required for the study. As the topic revolves around accounting standards harmonisation, the population thus decreased to the users of accounting information such as banks and auditing firms. This provided a perspective from the input side which includes the preparation of financial statements through to the perspective from the output side which includes banks in South Africa (primary lenders in the country). 3.5.2 Secondary Research Individuals, other than the author, made the collection of secondary data. The common source of secondary data used was data collected through qualitative research methodologies. This approach was followed, as time constraints did not allow for primary data to be collected regarding the input group and the intermediary group. Also, research has been performed pertaining to these two groups and thus, studies regarding those groups were consulted. This 44
also meant that larger and higher-quality databases were available for research than individual research would have made possible by the author. Secondary research is also considered essential, since it is impossible to conduct a new survey that can adequately capture past change and/or developments (McCaston, 1998). The secondary data analysis has an advantage over primary data analysis since much of the background work needed has been already carried out. For example, literature reviews have been conducted, case studies have been carried out, published texts and statistics may have already been used elsewhere and surveys have been conducted. This means that secondary data generally have a preestablished degree of validity and reliability that need not be re-examined by the author. In addition, the secondary data is also helpful in the research design of subsequent primary research and may provide a baseline with which the collected primary data results can be compared to. The secondary research performed for the purposes of this research included the gathering of information from an array of sources from around the globe to provide a balanced perspective. Additional resources included articles, books written on the topic and information obtained from electronic resources such as websites of the relevant parties such as institutes and auditing firms. 3.6 Sample Sridhar (s.a.) states that sampling is the selection of some part of an aggregate or totality on the basis of which a judgement or inference about the aggregate or totality is made. The population constitutes the total of aggregate items about which information is desired and constitutes an aggregate of elementary units which are either finite or infinite (N), and that possess at least one common characteristic that can be real or hypothetical. 3.6.1 Sampling Method The method of stratified sampling was used for this research. The topic of this research embraces a number of distinct categories, which meant that a frame could be organized for these categories and broken down into separate stratum. Each stratum could then be sampled 45
as an independent sub-population, out of which individual elements could then be randomly selected. The independent strata thus enabled inferences to be drawn about the specific subgroups that may have been lost in a more generalised sample. The use of this sampling method can lead to more efficient statistical estimates, provided that strata are selected based upon relevance to the criterion in question, instead of availability of the samples. This tactic is said to be more efficient than simple random sampling (Pedhazur & Schmelkin, 1991). This approach is seen as most effective as the variable upon which the population is stratified are strongly correlated with the desired dependent variable. One significant advantage of this sampling method is that it focuses on important subpopulations and ignores irrelevant ones. 3.6.2 Detail of the Sample Size The main determinants within the South African economy that relate to accounting standards include the input group, i.e. the SMEs; the intermediary group, i.e. accounting and auditing professionals and the user group, i.e. the users of financial information such as lending institutions. As has been outlined above, the method of stratified sampling was used and as such, an initial identification of independent strata, which enabled inferences to be drawn about the specific subgroups within the topic. The subgroups, which have been determined for the purposes of the study, include SMEs, accounting and auditing professionals and the users of the financial information. 3.6.2.1 SMEs Opinions of SMEs within South Africa were obtained through secondary research and primary research was not performed in this area. In terms of the input group, Eierle and Haller (2007:3) conducted their survey targeted at specific legal forms such as partnerships, limited partnerships and stock corporations to get significant and relevant insights into the attitudes and evaluations of those entities. Their view was that limited liability companies are fairly over-represented which led them to state that their analytical advantage outweighed the disadvantage of the lack of proportional representation of the German landscape of SMEs. They thus selected four size-clusters being 8-32 m EUR, 33-50 m EUR, 51-100 m EUR and >100 m EUR of annual sales; the legal form clusters were AG (stock corporation), GmbH 46
(limited liability company), GmbH & Co KG (limited partnership with a limited liability company as a general partner), KG (limited partnership), OHG (partnership) and sole proprietorship. From each cluster a minimum of 250 entities were randomly selected. If the MARKUS database included fewer than 250 entities in particular cluster, all the companies of this cluster were selected (resulting in a comprehensive selection). 3.6.2.2 Accounting and Auditing Professionals The sample of accounting and auditing professionals that were selected for the study included those selected by Rossouw and van Wyk (2009) in their study, IFRS for SMEs in South Africa: a giant leap for accounting, but too big for smaller entities in general and are referred to as the intermediary group in this study. The accounting and auditing professionals are responsible for the processing and auditing of financial information for the end users (lending institutions) of the financial information. This group of professionals are mainly responsible for the recording of commercial transactions for SMEs, the preparation of financial statements, the examination of these accounts and the certification of their accuracy, and the preparation of personal and business income tax returns. Included are related advisory activities and representation (other than legal representation) on behalf of clients before tax authorities (StatsSA, nd). The opinions of accounting professionals will be obtained through the use of secondary research and the use of secondary research will be employed to establish an understanding of their views on accounting standard harmonisation in South Africa. Primary research will not be utilised for the intermediary group, as this is beyond the scope of the study. 3.6.2.3 Lending Institutions The sample size relating to the users of financial information was limited to two of the countrys largest banks namely Standard Bank and Nedbank Limited. These two banks represent 39.4% of banks represented in South Africa and are also seen as a reasonable representation of the big four banks in South Africa, which also qualifies as locally controlled banks. See Table 4 for a list of locally controlled banks and then see Table 5 for a list of banks by market share as at June 2010. 47
Research into the opinions of the user group took the form of primary and secondary information. The primary information took the form of a survey that was designed to form a better understanding of the criteria used and the processes involved in providing finance to SMEs in South Africa. What emerged from the list of banks in South Africa, aside from the various categories into which the banks fall, is the number of banks that are actively trading within South Africa. As an emerging economy, the number of banks that trade within South Africa can be viewed as relatively small in comparison to the number of banks that trade in the other more significant economies such as USA, Europe and China for example. However, as Table 5 indicates, it is within the category of the locally registered and locally controlled banks where the focus of the information gathered took place. These banks hold significant market share and are seen to be in a stronger position to provide their experiences and opinions about the harmonisation of accounting standards in terms of lending to SMEs within South Africa. Table 4. List of banks in SA (The Banking Association South Africa, 2010)
Category Registered controlled Bank ABSA Bank Limited; African Bank Limited; Bidvest Bank Limited; Capitec Bank Limited; Investec Bank Limited; Nedbank Limited; Regal Treasury Private Bank Limited (in liquidation); Sasfin Bank Limited; Teba Bank Limited; The Standard Bank of South Africa Limited. Registered controlled Mutual banks Albaraka Bank Limited; Habib Overseas Bank Limited; HBZ Bank Limited; African Bank of Athens Limited. GBS Mutual Bank; VBS Mutual Bank. banks foreign Islamic Bank Limited (in final liquidation); Mercantile Bank Limited; The South
banks locally Limited; First Rand Bank Limited; Grindrod Bank Limited; Imperial Bank
Local branches Bank of Baroda; Bank Of China Limited Johannesburg Branch (trading as Bank Of of foreign banks China Johannesburg Branch); Bank of Taiwan South Africa Branch; Calyon (trading as Calyon Corporate and Investment Bank), China Construction Bank Corporation Johannesburg Branch; Citibank N.A.; Deutsche Bank AG; JPMorgan Chase Bank N.A. (Johannesburg Branch); Royal Bank of Scotland
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(formerly ABN Amro); Socit Gnrale; Standard Chartered Bank, Johannesburg Branch; State Bank of India; The Hong Kong and Shanghai Banking Corporation. Foreign with local representative offices banks AfrAsia Bank Limited; Banco BPI, SA; Banco Espirito Santo e Comercial de Le-Israel BM; Bank of Cyprus Group; Bank of India; Barclays Bank Plc; Barclays Private; Clients International Limited; BNP Paribas Johannesburg; Commerzbank AG Johannesburg; Credit Suisse AG; Credit Suisse Securities (Europe) Limited; Ecobank; Export-Import Bank of India; Fairbairn Private Bank (Isle of Man) Limited; Fairbairn Private Bank (Jersey) Limited; First Bank of Nigeria; Fortis Bank (Nederland) N.V.; Hellenic Bank Public Company Limited; HSBC Bank International Limited; Icici Bank Limited; KfW Ipex-Bank GmbH; Lloyds TSB Offshore Limited; Millenium BCP; National Bank of Egypt; NATIXIS Southern Africa Representative Office; Royal Bank of Scotland International Limited; Socit Gnrale Representative Office for Southern Africa; Sumitomo Mitsui Banking Corporation; The Bank of New York Mellon; The Bank of TokyoMitsubishi UFJ, Ltd; The Mauritius Commercial Bank Limited; The Rep. Off. for Southern and Eastern Africa of The Export-Import Bank of China; UBS AG; Unicredit Bank AG; Union Bank of Nigeria Plc; Vnesheconombank; Wachovia Bank, N.A.; Wells Fargo Bank, National Association; Zenith Bank Plc approved Lisboa; Banco Privado Portugus, S.A.; Banco Santander Totta S.A.; Bank Leumi
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Table 5. Individual bank assets (June 2010) (The Banking Association South Africa, 2010) Bank The Standard Bank of SA ABSA First Rand Bank Nedbank Investec Bank Imperial Bank Citibank N.A. Deutsche Bank African Bank JP Morgan Chase Caylon Corporate and Investment Bank Standard Chartered Bank The Hong Kong and Shanghai Assets(Rbn)
781,947,804 663,076,327 578,078,265 546,961,735 201,501,528 57,446,288 51,068,333 34,910,860 28,103,931 25,758,392 15,918,044 13,274,633
Market share
25.5% 21.6% 18.8% 17.8% 6.6% 1.9% 1.7% 1.1% 0.9% 0.8% 0.5% 0.4% 0.4% 0.4% 0.3% 0.2% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Banking 12,871,226
10,793,359 8,584,122 6,524,014 5,959,348 4,760,807 1,879,659 3,520,766 2,638,585 2,065,276 2,105,980 2,099,982 2,340,742
Capitec Bank Societe Generale China Construction Bank Mercantile Bank Bank of China The Royal Bank of Scotland Teba Bank Albaraka HBZ Bank Grinrod Bank State Bank of India Bidvest Bank 50
Sasfin The SA Bank of Athens Habib Overseas Bank GBS Mutual Bank Bank of Taiwan Bank of Baroda VBS Mutual Bank Total assets
1,550,210 1,221,759 734,270 788,009 738,066 455,251 259,292 3,069,936,863
0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0%
3.7 Case Study The study went further to focus on the views of the users of the financial information, which included mainly the lending institutions who are responsible for evaluating the financial statements of clients (often takes place for the purpose of financing, overdrafts of letters of credit, etc.). Although the case study focused on the intermediary group (accounting professionals), the input group (SMEs) form about 90% of the economic entities within South Africa, which makes their needs a significant driver of research of how the SMEs are financed. As Makowla (2010) states, SMEs form the backbone of many economies. The focus should thus be on whether IFRS for SMEs will add value to the two distinct groups (users) of the financial information and whether the harmonisation of accounting standards will result in improved financing practices between the relevant parties. The argument of micro-enterprises being too small for IFRS for SMEs is debatable as these entities engage with lending institutions on an equal basis when financing is applied for. Such entities may only, on a need-to basis, employ the services of an accounting professional to prepare their financial statements but what is important to distil from this process is that when microentities need capital for whatever reason from lenders, that there is a basis on which such entities can be evaluated.
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From the input group view, that is, the entities that are applying to the respective lending institutions, Van Wyk and Rossouw (2009) covered this group to a large extent where they, during their study, asked respondents to comment on the reasons for producing financial statements. Table 6 describes the response from respondents for the purposes for which SMEs use financial statements. The table indicates that a large percentage (65%) of respondents produce financial statements to acquire new finance from banks, as well as for tax purposes (76.6%). Table 6. Average percentage of clients of respondents for various business forms (Van Wyk & Rossouw, 2009:109)
Purposes for which SMEs use financial statements To acquire new finance (i.e. banks) For tax purposes (i.e. tax authorities) For management purposes (i.e. owners/managers) Other uses Ranking 2 1 3 4 % of respondents 65.4% 76.6% 60.3% 38.0%
In Van Wyk and Rossouws (2009:109) interpretation of the feedback from this table, the primary users of financial statements are tax authorities, banks and the mangers/owners and the financial statements of SMEs are indeed for a limited purpose. Although the focus of their questionnaire was to establish the main users of the financial statements, this information does not show whether IFRS for SMEs will positively impact on these users of the financial information or whether such standards should be harmonised across the various forms of business entities. Thus, the questions that were posed to the lending institutions attempted to establish the views of whether accounting standard harmonisation will indeed add value to the various forms of entities. Opinions that were gathered by Van Wyk and Rossouw (2009) fairly represent the majority of business forms within South Africa. Table 7 indicates the average percentage of business forms that the respondents prepare financial information for and include public accountable entities, closely held companies, close corporations, partnerships, sole proprietors, trusts, etc.
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Table 7. Average percentage of clients of respondents in various business forms (Van Wyk & Rossouw, 2009)
Business form Public accountable entities (including widely held companies) Closely held companies (private companies) Close corporations (CCs) Other (e.g. partnerships, sole proprietors, trusts) Total Average percentage of clients 3% 15% 50% 32% 100%
It is apparent from the data that on average about 82% of the clients of the respondents operate as close corporations and other forms, which are the less formal type of entity. Van Wyk & Rossouw also state that these results relate to data presented by the Department of Trade and Industry (DTI) as part of its information sessions on the Companies Bill (DTI 2007:4) (Van Wyk & Rossouw, 2009:108). An interesting observation is further that 50% of the clients of the respondents of this study are Close Corporations (CCs). It is here where the main focus should be in order to understand what value is added by IFRS for SMEs for CCs and their lending institutions. In addition to the study performed by Rossouw and Van Wyk (2009), Eierle and Haller, (2007) published a survey in response to the IASBs world-wide invitation to carry out surveys and field tests with regard to the exposure draft (ED) IFRS for SMEs. It was thus in view of its legal tasks, the German Accounting Standards Committee (GASC) initiated a survey with the aim of obtaining empirical evidence as to whether the ED IFRS for SMEs is able to meet the expectations and needs concerning financial reporting of SMEs in Germany. The GASC also wanted to use the survey to contribute to the initiative to investigate the specific needs of SMEs and their stakeholders with regard to financial reporting. It was their intention to deliver the results of the survey to the IASB and other interested institutions around the world that participate in the development process of IFRS for SMEs. This was also seen as the gathering of empirical data for the German regulator to allow him to revise the national financial reporting rules in the German Commercial Code (HGB). The survey 53
was based on a questionnaire which was sent by mail to 4,000 SMEs, asking the director in charge of the annual accounts to fill it in with return envelopes and the guarantee of confidentiality of respondents (Eierle & Haller, 2007). Where the IASB regards banks, vendors, credit rating agencies and customers as the main groups of external users of financial statements for SMEs, the survey confirmed banks and owners only to be the main groups of users (Eierle & Haller, 2007:9). Management was not considered a main external user group as they can obtain any information needed to run the business and thus do not rely on financial statement information. Further, Eierle and Haller (2007:10) established from the participating SMEs that the provision of information for those user groups as one of the most important functions of their separate or consolidated financial statements. The results of their questions pertaining to the external users of financial information are shown in Figure 2 below. What is evident from the responses obtained is that 63% of respondents use financial information for banks, owners (78%) and taxation (86%) purposes.
Question: preparing
Howrelevanttoyourentityarethefollowingobjectivesof separatefinancialstatements?
81% 77% 77% 74% 23% 18% 12% 9% 5% 8% 14% 86% 14% 19% 26% 78% 63% 63% 63% 8% 16% 17% 19% 11% 6% 6% 7%
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Figure 2. Objectives of separate financial statements (Eierle & Haller 2007:10)
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Although this information was gathered in Germany, it confirms findings by Van Wyk and Rossouw (2009) that the main external groups of users of financial statements are the lenders and owners of SMEs. This empirical research that was performed adds to the input group or rather the owners of the entities who require financial statements to a large extent for lending purposes. Thus, the need for lending is highlighted in terms of SMEs and it is the relationship between the SMEs and the lenders such as banks that then required investigation in terms of how IFRS for SMEs contribute to the financing relationship. Therefore, the questionnaires were designed to gather data in order to form an understanding about how IFRS for SMEs contributes to the lending process between lenders and SMEs. 3.8 Management of Reliability and Validity In terms of the data obtained from SMEs, the questionnaires were conceived in such a way so that respondents did not require extensive knowledge of IFRS for SMEs and appropriate explanations were provided with the questionnaires. Thus, a fairly equal level of knowledge was aimed at which safeguarded reliable and comparable answers. Also, each question where appropriate, contained the answer category, impossible to evaluate which contributed to the quality and reliability of the answer and therefore of the results (Eierle & Haller, 2007:3). In terms of questionnaires designed for the lending institutions, interviews were conducted with the respondents in order to obtain an understanding of respondents views and understanding of the possible need for the harmonisation of accounting standards in South Africa. The questions asked were geared toward discovering whether accounting standard harmonisation in practice will benefit the financing process.
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3.9 Methodological Weaknesses 3.9.1 Secondary Research A weakness of the research methodology employed is that the secondary research relied upon was conducted in Germany in terms of the input group (companies) perspective. 3.9.2 Survey Survey research was used in order to assess the prevalence of the attitudes regarding the area of study. As surveys generally measure attitudes of a population of interest, they are generally weak in assessing causation. Donsbach and Traugott (2008) state that finding that a difference between respondents is associated with a difference in their opinions, does not determine the real cause of the opinion difference. Therefore, surveys have a limitation because they measure individual opinions, whereas opinions are often generated as part of a group process such as a focus group. It should thus be recognised that surveys may be susceptible to error. 3.9.3 Respondent Selection One of the weaknesses in terms of respondent selection is that only a subset of the population is included in the surveys. As the sampled units will inevitably differ from the full population, the generalisation that is sought from their responses may lead to error of feedback interpretation. Importantly, should the study be furthered in the future, larger samples must be utilised in order to have smaller sampling errors. Although some studies suggest that sample size does not affect poll accuracy there would be credibility problems if the sample sizes were too small. 3.10 Chapter Summary In Chapter 3, the problem was reviewed and stated in three parts. The first research question centred around the acquisition of capital for SMEs, whereas the second research question asked whether SMEs that use GAAP were prone to increased difficulties in achieving lending from banks or other creditors. The question continued to ask whether the lack of accounting harmonisation standards, i.e. IFRS for SMEs, has an impact on the confidence of lenders on applications for credit using GAAP or industry standards, rather than IFRS for SMEs. 56
The research approach that was used included primary and secondary methods to assess opinions from the three main stakeholder groups in the study. The studies of other researchers were consulted to develop a broader view of the research and primary research was used to assess opinions regarding the important group the lenders. Sources of information included white papers, working papers, Internet sources, journal articles, books, newspapers, other dissertations, government reports, official statistics, and databases as well as a survey to obtain primary research. The research was performed in terms of qualitative and quantitative approaches and reasons for these approaches included the view that qualitative research could systematically, using a predefined set of procedures to answer the research questions, collect evidence and produce findings whereas quantitative research would use information from studies that have already been performed by other researchers. Use of qualitative research was utilised as this form of research was seen to include many more participants than could be performed using only quantitative research. Certain advantages and disadvantages of secondary data collection were also presented to understand the limitations placed on the research process. Then the link between the hypothesis and the literature was examined. The initial view suggested that current differences in accounting standards were creating distortion in accounting information used and was consequently impairing the ability of SMEs to access capital. The literature was examined where information from Weber (1992) suggested that harmonisation of accounting standards will help the economy by facilitating transactions and minimising exchange rate costs by providing increasingly perfect information; by standardising information to economic policy-makers; by improving financial markets information; and by improving government accountability. Research also found that the standard-setters said that the IASB should develop global standards for SMEs but there was also research that suggested that accounting harmonisation was excessive and not particularly useful for the general use of accounting information for SMEs. Further research by Hattingh, (2003 and 2007) suggested that accounting harmonisation is not required as SMEs use financial statements for such a limited amount of applications. 57
The Chapter then presented the population of the primary research being South Africa, where more specifically, the sample size being two major banks in the Gauteng region was described. This research was focused around the input group being the lenders in South Africa. The secondary research was then conducted to obtain larger and higher-quality information that would not have been possible with the limited resources available to the author for the study due to the broad spectrum of information that needed to be consulted. The stratified sampling method was also described as the method of choice as it embraces a number of distinct categories, which meant that a frame could be organised and the subgroups selected could be based upon relevance to the questions posed instead of the availability of samples. The detail of the sample size was described and contains the input group (SMEs), the intermediary group (accounting professionals) and the user group (lending institutions). Methods of obtaining information from these groups were also described. Information on the input group (SMEs) was obtained from a study performed by Eierle and Haller (2007) that performed a survey targeted at SMEs to understand the perceptions these entities have about the use of IFRS for SMEs. The intermediary group (accounting professionals) as a sample group was also described with research performed by Rossouw and Van Wyk (2009) to establish the perceptions of the group about using IFRS for SMEs in South Africa. Although their study is seen as being performed at an early stage of use of the standard in the country, the responses from 45% accounting professionals were optimistic where other percentages were still undecided. However, this is seen as a positive indicator and it was suggested that the view of accounting professionals might improve as the accounting professionals continue to use the standard.
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The user group (lending institutions) sample were described as the largest locally controlled banks in South Africa being Standard Bank and Nedbank Limited as they represent almost 40% of the market share in the country and this was viewed as a reasonable representation of the big four banks in South Africa. Primary and secondary research was performed into this group as banks not only trade locally, but also across borders, which makes research across borders also important. Importantly, as SMEs form about 90% of the economic entities in South Africa, along with their finance needs from banks, it is seen that this relationship plays a critical role in the economy and therefore warrants further investigation. The secondary research into the input group reviews a case study of research conducted by Rossouw and Van Wyk (2009) where respondents were asked the reasons for SMEs producing financial statements. Respondents feedback was that a large percentage (65%) of respondents produce financial statements to acquire new finance from banks, as well as for tax purposes (76.6%). This confirmed the importance of the need for accounting harmonisation in terms of the relationship between lending institutions and SMEs and the importance, which financial statements play in that relationship. When this information was linked to banks mistrust in financial statements produced using varying standards, the need for high quality internationally recognised financial statements becomes evident. The research performed by Rossouw and Van Wyk (2009) also covered the critical forms of entities within their study which included Close Corporations (50%), Partnerships, Sole Proprietors, Trusts (32%) and Private Companies (15%). In addition to their study performed, the study by Eierle and Haller (2007) found that lenders constituted a large percentage of the reason for SMEs to perform financial statements using the IFRS for SME accounting standard. The management of reliability and validity of the information obtained was then discussed. From the primary research view, questionnaires were designed for the user group and interviews were conducted with the respondents in order to understand respondents views in terms of accounting harmonisation and whether harmonisation could benefit the financing relationship between the two groups. Then, in terms of the secondary research performed by 59
Eierle and Haller (2007), the research was designed in such a way that respondents (input group) did not require extensive knowledge of the IFRS for SMEs standard and appropriate explanations were provided with the questionnaires. Thus reliable and comparable answers were obtained from their study. These methods of research all present their own weaknesses and the Chapter described that there were weaknesses to be found in both the primary and secondary research methodologies followed. The primary research that was used for the user group consisted of surveys combined with interviews with respondents, and it was acknowledged that poor knowledge of the standard could compromise feedback from respondents. The secondary research was performed in Germany in terms of the input groups, which presented its own weaknesses. However, it was acknowledged that SMEs responses could be similar in South Africa, as there were correlations between the studies performed in Germany and South Africa respectively.
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CHAPTER 4: Results and Interpretation This Chapter focuses around the results and interpretation of the research performed. It has already been noted that primary and secondary research were used during the study. Without repeating what has already been stated elsewhere, it is noteworthy to reiterate that the primary research was focused toward the user group of the financial statements being the lending institutions using a survey method. It is here where the results and interpretation of the survey are discussed. In terms of the secondary research, questions were posed in such a manner to establish whether the accounting standards under consideration indeed meet South African requirements as well as international countries. The motivation behind the decision to analyse IFRS for SMEs from a global perspective was to increase the pool of information and data availability for the purposes of the study. It is with this perspective in mind that an analysis plan was formulated in order to systematically ask pertinent questions to the study and to analyse each question respectively. The results of the research questions were then posed and analysed accordingly. Research questions were posed with a specific goal in mind: to develop an understanding of the accounting standards in question and to understand the possible impact of such a standard on the stakeholder groups (input, intermediary and user groups) who are subjected to the standards. It is only through performing primary and secondary research that a perspective from the relevant stakeholders may be developed. 4.1 Results and Interpretation Regarding the Accounting Standard The initial finding is that a variety of accounting standards are in use in South Africa. For listed entities, the IFRS standard has been legislated whereas SMEs, which consist of the balance of the entities in the South Africa, have not been required to use the IFRS for SMEs standard (may use the standard or an industry standard to produce their financial statements). This was seen to create a variety of difficulties pertaining to the access of capital, the processing of financial statements and difficulties with comparability of entities within South Africa as well as internationally.
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These findings led to the first research question, which stated that the adoption of IFRS by listed entities provides issuers with greater access to world capital markets and that this has been the case for listed entities in South Africa as well. However, the SMEs continue to report using GAAP and the question then arose whether a conflict between the accounting standards used by publically traded entities and SMEs arises and whether this causes a variety of accounting difficulties within the country? One objective to be achieved from this was to establish whether an accounting standard has been established for SMEs that would allow for the harmonisation of accounting standards in South Africa. In addition to this objective, the establishment of whether there is an actual need for the harmonisation of accounting standards for SMEs in South Africa needed to be determined. Findings then showed that historically there have been four accounting standards models in the industrialised countries: The United Kingdom, Continental Europe, the United States and Latin American models. The IASC has taken the lead in the harmonisation of these models (Lochner, 1991). The IASB and its predecessor, the International Accounting Standards Committee (IASC), issued these accounting standards. The IASC organisation was restructured at the end of the twentieth century. This restructuring resulted in the IASB, which came into effect on 1 April 2001 (ICAEW, s.a.). The IASB, in conjunction with the IFRS Foundation, has the common goal to develop a single set of high-quality, understandable, enforceable and globally accepted financial reporting standards base upon clearly articulated principles (IFRS, s.a:1). The IASB works with stakeholders around the world to develop these global standards. Stakeholders include investors, national standardsetters, regulators, auditors, academics, as well as other stakeholders, who together aim to achieve this overarching goal. The global effort to implement a harmonised set of accounting standards has been voluntarily adopted by the G-20 as well as by other countries and progress toward the harmonised set of accounting standards goal has been steady. The IFRS body state in the article The move towards global standards (IFRS, s.a.) that all of the major economies have moved towards 62
the adoption or convergence with the IFRS. In line with this, the G-20 has called on the international accounting bodies to intensify their efforts in order to achieve international convergence within their independent standard-setting processes. Hence, the IASB and the US Financial Accounting Standards Board (FASB) were asked to complete their convergence project by June 2011 (IFRS, s.a.). The IASB has issued a Work Plan that stipulates a projected timetable for a number of projects that are currently being executed. The IASB published their progress report on 31 March 2010 in their document, IASB and FASB Commitment to Memorandum of Understanding, Progress Report 31 March 2010. In the progress report, the IASB states their achievements to date. These include five Memorandum of Understanding (MoU) projects. The IASB stated in their Quarterly Progress report of 30 March 2010 (IASB, 2010) that they are on track to publish five of the major MoU projects, exposure drafts that will improve and achieve the substantial convergence of US GAAP and IFRS in those areas. The IASB published their timetable for document publication for the period from April 2010 to December 2011 in their Quarterly Progress Report of 31 March 2010. Documents that require updates or where technical issues are the cause for updates can be found in Appendix A. The areas where the IASB and the US FASB need to update documentation for conversion include the following areas: financial instruments; consolidations; de-recognition; fair value measurement; revenue recognition; leasing; financial instruments with characteristics of equity; financial statement presentation; other MoU projects; and other joint projects. It is in these areas where the universal set of accounting standards is being set and convergence being worked on with the US FASB. These and other indicators are signalling that the US is moving toward complete convergence and ultimately the incorporation and adoption of IFRS in the country. In their report, the IASB has achieved substantially all of their milestone targets for the first quarter of 2010. Further, milestone targets for the third quarter of 2010 are targeted to enable the board to publish a set of improved and common comparable final standards for all users of the standards internationally (IASB, s.a.). Table 8 has been extrapolated from the IASB 63
quarterly report and shows the milestone targets for those financial instruments that the IASB has been working toward in conjunction with the US FASB. Notably, these standards are being worked on and improved upon by both boards to reach successful conversion of those standards internationally. Similarly, the board stated in their report that it is their goal to issue comprehensive improvements to this complex and contentious area that will foster international comparability of financial information about financial instruments (IASB, 2010:2). However, on two of the major projects, being worked on by the boards, i.e. financial instruments and insurance contracts, there are some important technical issues on which the boards have reached different conclusions. These differences have to be addressed in ways that will foster convergence and this could affect the project timetables and the final issuance of the standards according to the IASB report. Table 8. Milestone targets for financial instruments (IASB, 2010) IASB and US FASB Commitment to Memorandum of Understanding: Quarterly Progress Report 31 March 2010 Milestone targets for financial instruments Q2 2010 The IASB has been developing improved financial reporting requirements for financial instruments in phases, in response to requests to accelerate particular parts of the project. In the next phase the IASB will publish in April proposals for the classification and measurement of financial liabilities, rather than by March as previously planned (The IASB published proposals for the classification and measurement of financial liabilities in July 2009 but decided not to include financial liabilities within the scope of the first phase of the financial instruments project). The FASB expects to publish its comprehensive proposal covering classification and measurement, impairment and hedging during the first week of May 2010 rather than March as previously planned. As part of that proposal, the FASB will solicit views on the IASBs proposals for recognition and measurement (of both assets and liabilities) and impairment. The IASB also will publish a request for views on the FASBs comprehensive exposure draft. 64
Since November, the IASB has decided to include non-financial hedges in the phase of the project addressing hedge accounting. As a consequence, the IASB will publish its initial proposals on hedge accounting in mid-2010 (rather than by March as previously planned). The IASB will review the application of its requirements for classification and measurement of financial assets by those entities adopting the requirements early. Q3 2010 The boards will begin to consider together the comment letters and other feedback received on each of the boards various proposals. Q4 2010 / The boards will complete their joint consideration of feedback received and Q1 2011 expect to finalise and issue new requirements.
In terms of financial statement presentation, the boards published a discussion paper in 2008 wherein the principles for presenting financial statements in, a manner that portrays a cohesive financial picture of an entitys activities, disaggregates information so that it is useful in predicting an entitys future cash flows and helps users to assess an entitys liquidity and financial flexibility (IASB, 2010:8).
Further, research was performed in terms of a wider perspective than only South Africa, as the country is still an emerging economy that also trades internationally. It therefore became necessary to perform research that would answer the research questions and meet the objectives from a local and broader perspective. The main regions that were considered were the G-20 countries, Europe, the United States and South Africa.
G20
According to the G-20 organisation, the G-20 consists of the premier industrial and emergingmarket countries from all regions of the world. Thus, the G-20 forms the forum for international economic development and promotes discussion on issues relating to global economic stability. Currently, nineteen countries are members of the G-20, and The European Union (represented by rotating Council presidency and the European Central Bank) is then 65
the twentieth member of the G-20. Table 9 provides a list of the G-20 countries. Importantly, the member countries represent the majority of the global gross national product (90%), the world trade that includes EU intra-trade (80%) as well as two thirds of the worlds population. Table 9. Countries and the European Union that form part of the G-20 (G-20, s.a.)
Argentina Australia Brazil Canada China France Germany India Indonesia Italy Japan Mexico Russia Saudi Arabia South Africa Republic of Korea Turkey United Kingdom United States of America The European Union
Moreover, the G-20 states that the G-20s broad membership and also its economic weight provide it with a high degree of legitimacy and influence over the management of the global economy and financial system (G-20, s.a.). While the G-20 leaders have called for an increased convergence to IFRS standards, IFRS reports that progress toward convergence has been steady and that time lines to the adoption or convergence with IFRS in the near future have been established. The G-20 asked the IASB and the US FASB to complete their convergence project by June 2011 at their September 2009 meeting in Pittsburgh, US (IFRS, nd). What is significant about the G-20 is that the member countries represent the majority of the world trade and consequently comparability of financial statements will increase significantly as IFRS is legislated. Further, the G-20 countries have asked the IASB to, per required timeframe, increase its efforts in order to move forward the convergence of IFRS standards with its various member countries.
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EuropeanUnion(EU)
As of 1 January 2005 all EU listed companies had to adopt IFRS in order to prepare their consolidated financial statements. This decision was aimed at enhancing the competitiveness of the European capital markets by establishing a single set of homogeneous, investor oriented and internationally recognised accounting standards (Guggiola, 2010). Moreover, The EU forms part of the G-20, which in turn, requires that member countries conform to a uniform set of accounting standards and principles.
UnitedStates(US)
According to Marshall (2009), due to the strength, size and global reach of the US capital markets, the US cannot afford to remain an outlier, as more than 110 countries already require, permit or base their standards on IFRS. The opinion of Marshall is similar to the majority of opinion globally, especially within the United States, that convergence with or adoption of IFRS has become inevitable. Marshall (2009) further states that IFRS has the potential to become the set of accounting standards that best provide a common platform on which companies can report and investors can compare financial information. Also, the increased acceptance and use of IFRS in the major capital markets throughout the world has placed increased pressure on the US to converge with or accept IFRS.
SouthAfrica
South Africa is a member of the G-20 organisation. In addition, South Africa has required since 2005 that listed entities comply with IFRS. Research is indicating that the majority of industrial and developing countries around the globe have complied or have plans to comply with IFRS as set by the IASB by 2014. What has been made clear through research is that international accounting standards for listed and multinational companies around the globe are becoming the requirement for comparability and investment to go forward. The implications of the use of international accounting standards as a platform for communication between entities from different countries are said to have multiple advantages for participants.
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Although the standard being IFRS was investigated in terms of the various regions, striking similarities in terms of the economic composition ratios between listed and SMEs exist within these regions. It is from the information gathered during the course of the study that the accounting standard under scrutiny being IFRS for SMEs has become better understood. The IASB issued an exposure draft on IFRS for SMEs, in February 2007 (Rossouw and Van Wyk, 2009). The exposure draft was immediately issued in South Africa and was seen as a harmonisation step between different countries. This proposed standard was approved by South Africa in October 2007 and is referred to as a Statement of GAAP for SMEs and is widely known as IFRS for SMEs (Rossouw and Van Wyk, 2009). The accounting standard has, without equal, attracted the input and participation of its stakeholders from around the world. IFRS for SMEs has become the new benchmark for accounting standard comparison and confirmation against which all other standards will be compared in the future. 4.2 Results and Interpretation regarding the Input Group (SMEs) In terms of the input group (the SMEs), the problem statement identified was that a conflict exists between the accounting standards used by publically traded entities and those used by SMEs in South Africa. The variance of standards were said to cause difficulties for accounting professionals in preparing financial statements as well as for the user groups to interpret those financial statement based on the varying standards used. More specifically, SMEs are said to form the backbone of the economy and have difficulty accessing capital from lending institutions because of the lack of confidence that lenders have in the financial statements produced by the SMEs using varying standards including GAAP and other relevant industry standards. As SMEs depend largely on finance from lenders, the second research question posed was whether SMEs, using GAAP or their industry standards, experience increased difficulties in accessing capital from lenders, and in making comparability of the entities locally and abroad difficult? Could a harmonised set of accounting standards make access to capital, credit and other facilities easier? The objectives this research had to meet were to establish whether a set of harmonised accounting standards have been developed from SMEs and whether they 68
have been legislated to improve their access to capital from lenders. In addition, the objective was set to understand certain impacts of harmonised accounting standards on SMEs. The input group (the SMEs) utilising the standard for their respective purposes has also become apparent during the course of the study. SMEs, regardless of their turnover or employee count, rely on lending institutions for finance and overdraft facilities. It is these entities that are most affected by whether accounting standard harmonisation becomes a reality in South Africa or not. To date, these entities have to a large extent fallen by the way side as listed and publically accountable entities have enjoyed much of the research and accompanying benefits associated with that research as well as with the standards that have been developed. Such organisations have already begun benefiting from increased access to capital, international and statistical comparison and increased transparency of accounting information for their shareholders. Even though SMEs make up approximately 90% of economic business entities, not enough research, nor enough emphasis, have been placed on their needs from a financial perspective. It is these entities that form a critical part of the South African economy in terms of economic growth and maintenance. SMEs have different financial statement needs to large businesses and also utilise their financial statements for a narrower range of decisions. It can be argued, however, that such entities require finance from lenders such as banks for a number of universal reasons such as survival and stability, rather than growth and profit maximisation (Holt, s.a.). The harmonisation of accounting standards of SMEs has been developed in response to demand for such a common accounting standard. For IFRS for SMEs to become an effective economic and accounting tool, such standards should be legislated within industrial and developing countries in order to facilitate comparability of industrial and sector information. Moreover, the adoption of IFRS is supposed to enhance transparency and quality of financial reporting and consequently strengthen an entitys capability to obtain external capital. Although some research has indicated that a bank may (partially) lose its information advantage, the adoption of IFRS for SMEs results in the reduction of the cost of debt with
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already existing lenders if the information quality of the IFRS statement is sufficiently high (Bigus and Schorn, 2008:74). One argument for IFRS adoption by SMEs is made by Wielenberg (as quoted in Grtler, 2009). He focuses on the argument on whether the adoption of IFRS may lead to a better credit rating due to an improvement of financial indicators. He presents, in his model, that a bank evaluates the creditworthiness of a debtor through the use of an internal rating system, which then also considers whether or not the debtor has adopted IFRS. Wielenberg (as quoted in Grtler, 2009) then also allows for the possibility that firms providing IFRS financial statements receive a better rating due to their improved financial indicators. Hence, the adoption decision may serve as a signal of the true type of debtor (Grtler, 2009:73). Mascra, Neag and Pscan, (2009:38) state that IFRS represents a very significant step on the path to global convergence of financial reporting practices by SMEs. They quote IFAC Chief Executive Ian Ball saying it will contribute to enhancing the quality and comparability of SME financial statements around the world and assist SMEs in gaining access to finance. Moreover, the beneficiaries will be not only SMEs, but also their customers, clients, and all other users of SME financial statements. Bradford (2007) adds to the argument of information comparability by stating that with business turning global, it is important that investors are able to compare companies under similar standards. Likewise, it is important for business operating in multiple countries to be able to create financial statements that are understandable in all of the countries they operate in. 4.2.1 Impact of IFRS on SMEs A further question that needed to be asked is what impact harmonised accounting standards may have on SMEs in South Africa in terms of their finance needs? Companies are required to report on their operations throughout for success and continuity. For SMEs, this takes place on a smaller level. South Africa took the lead in implementing IFRS for SMEs, where the primary users of the financial statements are owners, SARS, and lenders such as banks. The 70
SMEs in South Africa thus issue general purpose financial statements that are directed towards the needs of a wide range of users of the information as these users are generally not in a position to demand tailored reports that will meet their particular information needs (IASB 2007a:7-9). Martin (2005) states that IFRS for SMEs is welcome, as it takes forward the harmonisation of financial information and presents an opportunity to raise accounting reliability and quality throughout. The number of SMEs in South Africa alone is estimated to be approximately 2.5 million entities. In Europe for example, the number of SMEs in 2005 was approximately 6 million. It is thus an important consideration for accounting standards to accommodate the vast majority of these entities. In addition, any system of reporting ought to be relevant to their needs and understandable to their users Martin (2005). One question that arises from this is then how would these standards impact on the SMEs within South Africa? The impacts of the harmonised accounting standards will not only apply to South Africa but may in fact also become an indicator of what impact industrialised and developing countries will experience. The inverse of this statement can of course be equally applied, where the impact of harmonised accounting standards in other countries may become an indicator of the impact that may be experienced in South Africa. The impact on several areas has been investigated and is presented below.
EducationandTraining
Once IFRS for SMEs are implemented in South Africa, entities are faced with the major task of education and training in order to become familiar with IFRS. Not only will the trading entities be affected, but also companies preparing the financial statements/accounts, the auditors report on this as well as the users that are interpreting them (Martin, 2005).
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Comparability
For companies to understand why their respective competitors are becoming more successful or are able to budget with means that those companies cannot, such companies need to look at comparing financial records.
Risk
Investors and lenders need to assess the risks associated with an entity and therefore knowing where the company stands financially becomes a primary requirement for such assessment before investment is considered.
NationalStandards
The implementation of IFRS for SMEs should provide improved comparability for users of accounts while enhancing the overall confidence in the accounts of SMEs, and it should reduce the significant costs involved in maintaining standards on a national basis (Holt, s.a.). Where countries then decide to implement IFRS for SMEs, entities have an obligation to comply with those standards. Where such national standards are applied, professional accounting entities must become enabled to produce financial statements around either the full IFRS or the IFRS for SMEs. Standards must be integrated into education programmes and other training programmes provided. The national standards will provide a common platform upon which: Lending institutions can base their risk assessment Ease of transition for those entities that wish to become publically traded companies can take place Education programmes can be uniformly applied across the national education providers, and Vast improvements in statistical information become available. 72
Internationalpressure
With the increase in international pressure on domestic companies, these smaller entities find themselves in a position where they have to understand the global economy of their industries. What this means to the domestic SMEs is that locally, these entities are impacted by international competitors for domestic market share. As a result, the smaller, less globalised companies have to report in the same manner as those mainstream public competitors to interpret statements from one country to the next.
Growth
Listed and public companies are required to report using IFRS in the majority of the industrial and developing countries. Thus, where SMEs plan to become publicly traded entities, they will be required to report in full IFRS. Therefore, IFRS for SMEs allows such entities to prepare for IFRS ahead of their listing.
Initialadditionalwork
Simon (nd) makes the observation that there continues to be negative effects and burdens, being placed on SMEs, when GAAP had been working well up to this point. More especially the SMEs possess fewer resources to enable them to adapt to IFRS for SMEs. This alone may cause the adoption of IFRS for SMEs to be significantly delayed as business owners have limited resources to allocate to this task. However, the opposite view should be considered. IFRS for SMEs have not been required by governments for adoption and implementation at a moments notice. These entities are given two to five years depending on their geographical position to integrate the standard into their businesses. These are also the very entities that largely, at one point or another, are placed in a position where they have to apply for capital, finance or may consider acquisitions or disposals of their businesses.
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Whatever the case may be, those entities will at some point in time have to demonstrate the ability of the entity to repay such finance using sets of financial statements. The difference in the success of these entities applications will largely depend on the standards used to present the financial position and performance of the entity and they will want the evaluators to have confidence in the information, which they are providing. The additional work required will be absorbed over a period of time and may in the future only benefit entities following their individual strategies such as growth and diversification.
Costs
There are costs associated with any change within a reporting system. For the smaller of the SMEs, these costs have the potential to impede the entitys survival entirely. Such costs may include new software, training from IFRS experts, hiring new employees or training existing ones. Throughout the conversion, certain entities may have to report twice, which will add large sums of hours and labour which could strain entities even further amidst already poor economic conditions. Simon (nd) states that the high costs of both set up and maintenance of the new system could potentially force these smaller companies to either remove themselves from operations or cause them to spiral into bankruptcy or be bought out by larger companies to grow and expand. The cost impact on small entities has, to date, been identified as the single largest threat to the successful implementation of IFRS for SMEs. However, these views vary from entity to entity, and the costs that will be involved may be absorbed by those entities over a period of time. It should further be borne in mind that costs of implementation will, more often than not, be in ratio with the size of the operation of the entity. The smaller of the SMEs, with for example five employees, will be able to utilise products available in the market geared toward smaller companies such as the use of Pastel or QuickBooks in South Africa that are affordable to small entities. Other packages are available around the world. New systems that are required in order to conform to IFRS for SMEs are available, for example, from websites at either no or at low cost. In addition, the IASB could also be approached to present the perfect system in literature form at low or no
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cost to these small entities, and then the onus shifts from there to the small entities to simply adopt and adapt the perfect system to fit their individual needs.
Lendingcapabilities
One of the main driving forces behind SMEs to adopt and implement IFRS for SMEs is that this form of reporting might help them in accessing capital from lending institutions such as banks. It is when lenders such as banks have themselves become familiar with IFRS (where they also report in this standard) that they will prefer financial statements from loan applicants to be presented in the same format. In this manner, resources can be utilised more effectively within banks as well as the training of their employees who will be assessing the risks associated with the loan applicants.
Economicimpact
The lending capabilities of SMEs form a vital pillar of any economy. Although such entities generally employ less than 50 employees, their economic power lies in their sheer numbers. An important economic driver is the relationship between lenders and the SMEs. Whether SMEs borrow capital for expansion, survival or maintenance, their ability to employ and repay loans underpins vital economic issues such as tax revenues, unemployment liability of governments, crime and other economic factors. It is thus critical that banks and SMEs alike communicate in a common platform such as IFRS to stimulate economic activity. This common platform will enable analysis of financial statements to be performed by banks in a much faster timeline, which in itself will add to economic stimulation. SMEs will then also learn what is required from them in terms of their financial performance and be able to focus on value adding activities. Another area that warranted investigation was to establish what the possible implications for entities could be when implementing IFRS for SMEs. IASB issued the IFRS for SMEs to provide an alternative framework in the place of the full IFRS. IFRS for SMEs was designed in response to international demand, from developed and emerging economies, for a set of accounting standards that would be much easier to use than the IFRS alone. IFRS for SMEs 75
has been designed with the view that the respective national regulatory authorities may require their SMEs to implement the reporting standard. A few reasons for SMEs to use IFRS have been provided by Holt (s.a.) in his technical article IFRS for SMEs. Some of the important reasons include: It allows easier transition for SMEs to full IFRS should the SME become a publicly listed company. IFRS for SMEs have been designed taking into account the costs and other burdens imposed on entities wishing to comply with the standards. Entities that wish to survive and grow apply, by and large, to lending institutions in order to gain access to their required finance and such lending institutions may then require financial statements to be presented in terms of IFRS standards. Smaller companies often form part of a group of companies that must incorporate said entities financial performance into their aggregate annual financial statements and IFRS for SMEs allows for easier integration and aggregation of such information and segmental reporting and forecasts of the future. An international set of accounting standards should provide improved comparability for users of accounts while enhancing overall confidence in the accounts of SMEs and reduce the significant costs involved in maintaining standards on a national basis. It has become apparent that IFRS is the platform for the preparation of financial statements for listed publically entities throughout a large portion of industrial and developing countries. The IASB issued IFRS for SMEs in response to international demand and thus, it can be stated that a unified and universal accounting standard has been established for SMEs. However, the IFRS for SMEs has not yet been legislated as the international standard to be used by SMEs. Although IFRS for SMEs has been developed as a self-contained set of accounting principles, such standards do not as yet appear to have been adopted by those countries that require listed entities to use the full set of IFRS. Currently differing approaches are being pursued by SMEs within these countries. Where some countries require SMEs to 76
use national generally accepted accounting principles, others may require SMEs to follow a certain mainstream accounting standard, where again, other countries may require the use of IFRS for SMEs. Several implications exist for countries that have not legislated the use of an international accounting standard such as IFRS for SMEs within their national borders. (Holt, nd: 2) states that the accounting standards that have been developed by countries may lack comparability across boundaries. A relating consequence of lack of comparability is the difficulty of the interpretation by countries that may then lead to incorrect statistical information for those countries. Differences in the interpretation of the fair value of assets, for example, may impact on the performance of countries, with misinformation fuelling incorrect bases for economic analysis and interpretation. There are then also implications for entities that are then using mainstream accounting practices in place of an international standard such as IFRS for SMEs. One such implication is that the use of local or mainstream practices leads to difficulty when such entities wish to later issue their shares on capital markets, where the full set of IFRS standards then becomes a requirement. Such entities will also encounter difficulties in establishing a benchmark against which to compare their performance due to a lack of comparability across national boundaries. 4.2.2 Relationship between banks and SMEs As SMEs have an important position in the world economy, the accounting information provided by them must have the same role. The legislation of the national accounting standard IFRS for SMEs will contribute to enhancing the quality and comparability of SME financial statements and in doing so assist SMEs in gaining access to finance. Figure 3, below, depicts the general relationship that accounting standards are believed to have with SMEs in South Africa. The figure simplifies a very complex reality, but is aimed at providing linkages between these seemingly disparate research questions. The model is not intended to describe the mutual impact between entities, but instead depicts the cycle that shows the impact that harmonised accounting standards, when legislated, may have on SMEs. In turn, lenders such as banks may use a similar framework to evaluate SMEs when applications for finance are considered. In turn, finance may impact on the SMEs ability to grow and provide 77
employment coupled with their growth prospects. Without such finance, numbers of SMEs may not be sustainable and this in turn gives rise to increased unemployment. When these SMEs are considered in aggregate, they have a significant impact on the economy in terms of economic growth, unemployment within the economy, taxes paid to government (personal and company), which in turn may impact on the countrys international trade participation. This does not mean, however, that other factors such as macro and environmental should be excluded from this argument, but this is not the focus of this paper and is thus only mentioned here. 4.2.3 Lending to SMEs and Economic Growth From the model in Figure 3, it can be seen that there exists a fundamental relationship between accounting standards, lenders evaluation of SMEs and the SMEs sustainability and growth potential. In this argument, this is considered to be a current weak link in the current economic environment in South Africa. It is further argued that not only will the legislation of international accounting standards improve trade both domestically and internationally, but that the legislation of accounting standards are an economic necessity if a country aims to implement one tool to improve its economic sustainability.
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Accounting standards
SMEs record keeping and reporting
International trade participation, international investment, access to global markets
Lenders evaluation of SME
Economic growth unemployment, company taxes, etc.
SMEs growth potential & employment provided
Figure 3. Relationship between stakeholders with linkages and influences demonstrated 4.3 Results and Interpretation regarding the Intermediary Group The intermediary group (the accounting professionals) presented its own problem statement. They experience difficulties during preparation and opinion expression based on accounting information that is derived from varying standards. The research question that arose, as a result of this problem, was to establish what the experiences are that accounting professionals have with the varying accounting standards and what their opinions are concerning a harmonised set of accounting standards. The objective to be met was to determine whether accounting professionals experience difficulties in preparing financial statements using accounting information based on varying standards. The intermediary group or accounting and auditing professionals play an important part in the equation between the lenders and the input group. Their interpretation of financial information that they are responsible for producing forms just that critical link between the SMEs and the lenders. Whether it is their 79
function to prepare financial statements or express an opinion to meet lending requirements, these accounting/auditing professionals will continue to play an important role in the future development of accounting standards around the world. Boone and Kurtz (2010) write that the natural progression of a business begins with financing and that subsequent steps including investing, lead to operating the business effectively. They continue to say that all organisations, whether profit-oriented or not-for-profit perform three basic activities (financing, investing, and operating activities) and accounting plays a key role in each one. It is within these basic activities where accounting professionals are responsible for processing and interpreting accounting transactions. The main role of this group within the study may be viewed as the group that adds value to both the input and user groups in terms of finance application. These accounting professionals offer valuable services in particular to the input group (organisations) where they are required to prepare financial statements for those entities, whether it is for tax, loans, overdrafts, budgeting, auditing or other services required from time to time. Professional accountants are thus utilised within SMEs primarily for setting-up manual or computerised bookkeeping systems, the preparation of financial statements, preparing tax returns, budgeting, as well as producing audited accounts. In addition, accountants are also involved in setting up simplified systems that enable entities to run their business smoothly and profitably with activities such as budgeting, performance monitoring, cash flow forecasts, credit control, and stock control. Importantly, the function that the intermediary group performs in terms of this paper includes recommendations on finance through instruments such as overdrafts, loans, leasing, hire purchase, factoring, venture capital and grants. In addition, the intermediary group can be instrumental in advising and introducing SMEs to viable sources of finance and also help with the drafting and presenting of the business case for them. It is within this sphere that accounting professionals will add value when they have a clear understanding of what the requirements are of SMEs from lending institutions. Historically, accounting professionals performed the preparation of financial statements with an inward view toward the SMEs. This means that the accounting professionals understood that financials should be drawn up for the purposes of a loan or other form of finance, without having a full understanding of what the 80
requirements from the lending institutions was. Thus, financial statements have been constructed in line with the industry standard or the accounting standard with which the accounting professional was familiar with. The disparity that this creates is that historically the accounting professionals would prepare financials per inter alia, the criteria mentioned above which consequently creates a variety of financial statements in a variety of formats using a variety of criteria, which then have to be interpreted by the lending institutions (user group). This disparity is addressed in this paper. Save to say that accounting professionals or the intermediary group will continue to be a vital link between lenders and SMEs as well as in the development of accounting standards in the future. 4.4 Results and Interpretation regarding the User Group The problem that has been stated is that it is difficult for creditors, investors and lenders to interpret and to have confidence in the financial statements used by SMEs. The lack of confidence pertains to the fact that these institutions have to rely on their own means of assessing SMEs instead of having an accounting standard which may provide to a large extent the information that such institutions require to extend finance to SMEs. The lenders thus often extend finance based on personal sureties provided by owners of SMEs rather than assessing the financial health of the entity that is based on a harmonised and internationally recognised set of accounting standards. Finance may thus be extended based on incorrect criteria out of necessity. The question that follows from the above is whether the varying accounting standards used by entities lead to difficulties for lenders in assessing those applicants for finance, capital or other credit facilities. In addition, what should be assessed is whether the current varying accounting standards result in lenders being reluctant to trade with SMEs due to their low confidence in the reporting framework used by SMEs. The objectives then to be met are to determine whether lenders have difficulty in interpreting and evaluating financial statements prepared using varying standards and whether they have confidence in those financial statements. It should also be determined whether lenders rather rely on personal sureties provided by applicants instead of assessing entities financial health using financial statements. 81
4.4.1 Understanding the User Group (lending institutions) The user group or lending institutions are the target group to satisfy in terms of financial statement presentation. It is the lending institutions that make decisions regarding which projects to fund, which overdrafts to grant and which financing elements to approve or reject. Banks in particular, play a critical role in the financing of SMEs as a whole. Relevant research has been performed in the area of what the requirements and needs are of lending and financing institutions such as banks across the globe. The research from various countries is relevant to the subject under study as global trade increases and thus the risk that is carried by the lending institutions unify. Some of the primary risks that are shared by banks regardless of their geography include risks such as client liquidity, business continuity and recovery against assets. Some of the research performed is evaluated in answering the following questions. Another question, which arises, is to establish what evidence supports the need for accounting harmonisation, i.e. the need for IFRS for SMEs from the banking sectors viewpoints. The World Bank and other international organisations welcomed the 230-page booklet of accounting rules for SMEs that was produced by the IASB in July 2009. Their primary welcoming of the accounting rules was fuelled by their view that the accounting rules are a means to bring capital into emerging economies. With consistent global accounting rules it is hoped investors will be able to better understand the value of a company, wherever it may exist across the world (Christodoulou, 2010). Banks, as independent institutions, also collaborate and adhere to their code of best practice by learning from worldwide developments and incorporating those developments within their operations. Thus, banks look to the World Bank with its view that accounting rules are a means to bring capital into emerging economies, a view adopted by banks themselves in order to remain competitive in their arena. The landscapes of banks have changed significantly since the financial crisis, which started the recent recession, and from which economies are still busy recovering. Banks are thus seen as the central finance resource for entire economies 82
such as South Africa to recover and grow. However, the banks carry significant risk, and it can be argued that a contributing factor to the financial crisis was that banks may have evaluated applicants for finance using their internal criteria to the exclusion of healthy accounting standards such as IFRS for SMEs, which may have contributed to the misjudgement of applicants when granting finance. Grtler (2007) argues that by giving a ... bank exclusive access to proprietary information, which is mainly soft in nature ... small and medium sized entities (SMEs) can credibly commit to sustain a long-term relationship with a ... bank. In addition, compared to other creditors a ... bank is more willing to provide cheap loans to SMEs in the first place even if it incurs losses since the ... bank is able to extract an economic rent in later stages due to its access to exclusive information. With this information, in addition to the banks own criteria, banks may develop a more secure view of applicants since they now have a benchmark against which applicants can be evaluated. The accounting standard that has been followed by many SMEs in South Africa is GAAP and is required by the Companies Act and the Closed Corporation (CC) Act. There is currently no legislation in South Africa that requires sole proprietors and partnerships to present their financial statements in accordance with GAAP. This has, in the past, created inconsistencies as the micro-entities such as partnerships and sole proprietorships were not used to presenting financials in the legislated format for the acquisition of capital or overdrafts from lenders Lawson (2010). Banks have traditionally mistrusted financial statements presented by SMEs that often conforms to complex GAAP reporting requirements. Lawson (2010) states that SMEs may have increased credibility with their lenders when they prepare their financial statements in accordance with the new IFRS reporting framework. Not only will banks trust financial statements, as they will be familiar with the lenders requirements, but they will also be able to better and more easily assess the financial statements presented in the IFRS framework. In addition, Lawson (2010) states in his article IFRS for SMEs that at the writing of the article 71 countries had adopted IFRS for SMEs. The implication for all SMEs in these countries is that those entities that fall within those regions will be able to provide sustainability reports to potential creditors abroad and those creditors will be able to more easily assess credit applications and make informed decisions whether to grant those 83
applicants credit facilities. Jekel (2010) wrote in his article The Move from GAAP to IFRS that this uniform set of accounting principles allows companies that operate in multiple countries to adhere to only one set of accounting rules and prepare only one set of financial statements. Thus, for entities to prepare just one set of financial statements rather than a whole slew of them in order to adhere to each countrys financial reporting rules has been stated to make companies jobs easier. Also, they make financial statements user-friendlier for stakeholders such as creditors abroad who may want to view financial statements for several different countries and thus have the ability to evaluate their credit applicants more effectively. Creditors such as banks can also better make comparisons between companies if all the financial statements are uniform. With consistent global accounting rules it is hoped investors will be able to better understand the value of a company, where ever it may exist across the world (Christodoulou, 2010). Paul Pacter, director of standards for SMEs at IASB, is reported by Christodoulou (2010) to have stated that the little companies in countries such as Brazil, El Salvador and Swaziland were the most eager to adopt IFRS for SMEs as the little companies in those countries say we need to have access to capital, and For this standard we have a whole new constituency. In a study conducted by Ikheimo, Ojala, Stening & Riistama, 2010) advantages were identified from banks perspectives after the implementation phase of the standard which includes improved decision-making by company management and improved lending processes by banks. Pacter (2008) stated at the Small and Medium-sized Entities World Bank Conference on Promoting Business Development in Honduras that some of the benefits of global standards for lenders and other capital providers such as banks include: High quality global financial reporting standards that can be applied consistently Standards will enhance comparability of financial information, and The efficiency of allocation and the pricing of capital will be improved.
Pacter (2008) added that even SMEs that are seeking capital from lenders and capital providers need financial statements that are understandable and high quality as they affect the lending decisions by banks, loan monitoring, and credit ratings. 84
Ikheimo, et al. (2010) found in their study that financial institutions have the potential to benefit from cross-country process improvements in the use phase of the IFRS for SMEs (Schiebel, 2007). Their study also found, when interviewing respondents, in particular IFRS specialists, that banks would benefit because of more up-to-date information on their customers: their financial position and how they are doing financially. If a bank can use the IFRS information as such, the experts cannot see how it could raise any costs for banks. Other benefits that are foreseen from the implementation of IFRS for SMEs are the consolidation of the banking industry, which provides opportunities for scale advantages Schiebel (2007). The scale advantages suggested in the banking world include cross-country harmonisation of lending criteria, the use of contract covenant criteria, and global service centres for financial statement analysis. Pacter (2007) states that in most jurisdictions, half to three-quarters of all SMEs including the very small ones have bank loans. Thus, banks across borders rely on financial statements in making lending decisions, establishing terms and interest rates and monitoring loans. 4.4.2 Findings from Lending Institutions The survey questions were designed in a manner, which allowed respondents to respond with qualitative information for the researcher to interpret. The survey for the lending institutions was designed to obtain their opinion about, experience with, and input criteria that they use in order to assess loan applications from SMEs, and to also determine whether there are benefits that accounting harmonisation by utilising IFRS for SMEs may provide to the lenders and SMEs. Respondents were asked several questions in order to establish a view from lending institutions perspectives about the harmonisation of accounting standards within the South African business environment. Respondents from the major, locally controlled banks provided valuable data in terms of the need for accounting harmonisation from the banking sectors perspective. The individuals that answered had also been working with applicants for loans and other facilities offered by banks for a number of years, which provided
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perspectives from past experience as well as providing a platform for future improvements that may be made. The feedback obtained from respondents suggests that banks in terms of annual revenues consider SMEs. As the banks main business is money, they appear to disregard the employee number dynamic that is emphasised by the IASB. The respondents feedback varied somewhat in terms of the main criteria used to assess loan applications. The main criteria included the following: The characteristics of the applicant and the business, The capacity of the entity to repay the loan within terms, The availability of capital, Different types of collateral, The trading environment (conditions) of the entity, and Requests by the lender for further information. In other words, the financial assessment of the entity was indicated as the most important criteria for loan applications. It is this, for this financial assessment where IFRS for SMEs will add the most important benefit within the loan process where the transparency and quality of information will present more perfect information rather than with the bank mistrusting the financial statements presented to them for the loan. It is, however, acknowledged that respondents indicated that the applicants credit history as well as owner characteristics also play an important role in the loan assessment process. Of equal importance to respondents, was the collateral that applicants should provide. The author wanted to compare the information provided by the sample of respondents and found that similar criteria are used by lending institutions in both developing and developed countries with small variances in responses from banks around the world. In a study that was conducted by Beck, Demirg-Kunt & Soledad Martnez Pera (2008), criteria used by banks around the world were identified as similar criteria to those used in South Africa. Table 10 86
has been adapted from their work to show the average criteria items that are considered important during the loan process by banks for SMEs. Table 10. Adapted table showing criteria used by developing economies around the world for loan applications (Beck, Demirg-Kunt & Soledad Martnez Pera, 2008) Criteria used by banks around the world Financial assessment of the business Firm's credit history with their bank Firm's credit history from a credit registry Firm's owner characteristics (age, sex, etc.) Collateral Purpose for the loan Size of the loan Banks' average use of collateral in business lending For loans to small- and medium-sized enterprises Types of collateral used for small & medium enterprise lending Real estate Cash and other liquid assets Land Bank/personal guarantee Equipment Average 54% 15% 9% 9% 6% 4% 0% Average 90% Average 39% 23% 13% 12% 8%
In terms of whether lenders were using accounting standards in conjunction with their lending criteria, respondents were inclined to refer back to their historical bases of evaluating applicants and did not refer to accounting standards, but merely to the financial statements policies and the manner in which assets were recognised and depreciated and other notes in the financials with which they worked.
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Respondents were mostly involved with loan applications utilising pre-existing criteria of which collateral and entities credit histories were seen as important factors. The use of IFRS for SME standards is seen as an important development as banks require data they can understand and compare which is seen as improving the confidence which lenders will have in financial statements presented to them. From the information transparency perspective, lenders views of the IFRS for SMEs is also that financial statements that are based on an international standard will provide greater transparency of the financial position and performance of the applicants, but they were not prepared to relinquish the current criteria used to assess loan applications, especially since such a model has not been tested in their industry. Respondents mainly believed that during the later stages of the adoption and legislation of IFRS for SMEs that financial statement items may be incorporated in addition to existing criteria. As the exposure draft from the IASB states: it is common for SMEs to have bank loans and banks operate across borders and rely on financial statements in making lending decisions, in establishing terms and interest rates and in monitoring loans. Importantly, banks require data that they can understand and compare and financial figures are crucial to the rating process of loan applications. The adoption of IFRS for SMEs as a criteria for loan applicants represent a significant departure from current practices with reference to assets and liabilities being uniformly recognised and reported under a universally accepted and econometric measurement framework. 4.5 Chapter Summary Chapter 4 has dealt with the results and interpretation of the research study into whether there is a need for accounting harmonisation in South Africa. The research utilised primary and secondary research and was geared toward the three main stakeholder groups pertinent to the study that include the input group (SMEs), the intermediary group (accounting professionals) 88
and the user group (lending institutions). In addition to the groups, the standard itself for harmonisation being IFRS for SMEs was also investigated. In terms of the accounting standard, the variety of accounting standards was identified as a problem as SMEs use these standards to produce financial statements for finance and other lending purposes. One objective was to establish whether an accounting standard has been established for SMEs that would allow for the harmonisation of accounting standards in South Africa. The IFRS for SMEs standard was identified as the standard for harmonisation for SMEs in South Africa. The standard was developed by the IASB in conjunction with the IFRS foundation as a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles. Not only have more than a hundred countries adopted this standard, but the IASB have also issued a Work Plan that stipulates the timeframes for a number of projects currently being executed in order to improve convergence of the standard with countries such as the US and other countries moving in the direction of IFRS in the future. These standards are importantly been worked on and improved upon by both boards to reach successful conversion of those standards internationally. It was also identified that listed companies that already use the IFRS have greater access to capital, and it was this lending relationship between the SMEs and lenders such as banks that was then highlighted in the study. What was important to understand was whether lending institutions that traditionally mistrusted financial statements, based on the varying standards, would utilise financial statements based on IFRS for SMEs to a greater extent and whether banks considered the standard as pertinent to the lending process. What was discovered was that the user group use a number of criteria on which applications are evaluated and that internally created criteria were developed to mitigate the risks that banks carry in the lending process of SMEs. It was found that banks are very interested in the harmonisation of accounting standards as these provide clearer indicators of the financial position and performance of SMEs. However, respondents also indicate that their lending criteria were not likely to change dramatically but did view the financial standard harmonisation as a radical departure point for applicants in terms of comparability and reliability. 89
It has become clear, through research that international accounting standards around the globe are becoming the requirement for comparability and for investment to go forward. The research that was performed indicated that the harmonisation of accounting standards would contribute to enhancing the quality and comparability of SME financial statements and assist SMEs in gaining access to finance. Other beneficiaries of the harmonisation of the accounting standards were also identified as SMEs customers, clients and all other users of SME financial statements. Other benefits of the harmonisation of accounting standards on a national level were also identified as: lending institutions that can then manage their risk assessment, the ease of transition from non-listed to listed entities, the uniform application of educational programmes, as well as the vast improvements in statistical information that will then become available. It was also highlighted that SMEs in South Africa can ill afford not to harmonise the accounting standards, with the increase in international pressure on domestic companies as SMEs now find themselves in a position where they have to understand and have comparability of their business in terms of a global economy of their industry. As SMEs form a vital part of the economic activity in South Africa as well as globally and their economic activity lies in their sheer numbers, the harmonisation of accounting standards are an important economic driver for them. This is particularly so in terms of their transition needs, the national minimisation of costs and burdens imposed on the entities, the ability of SMEs to access capital and for group reporting duties and segmental reporting, as well as for national and international comparability and the building of confidence with lenders and investors in the future.
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CHAPTER 5: Discussion of Results This chapter focuses on the meaning of the results in terms of the hypothesis, research questions and objectives, and theoretical paradigm. Interpretation of the results is the key here (Milpark, 2009:2) 5.1 Comparison of Literature Reviewed with Findings from the Research Chapter 2 reviewed the work that has been carried out, by reputable authors, in the area of study. The aim of this section is to compare the literature reviewed with findings from the research. This comparison has been divided into three parts from which a generalised comparison has been made. The three parts consist of the main stakeholder groups: a comparison of the input group, followed by a comparison of the intermediary group, and finally the user group. In addition, the accounting standard under discussion will be included in the discussion. 5.1.1 Accounting Standard The relevant accounting standard under review is IFRS for SMEs. The literature review showed that this standard was not compiled overnight, but that the standard is the result of years of input from stakeholders around the world. Research has shown that IFRS for SMEs was issued as an exposure draft within South Africa and that South African accounting bodies have adopted it as a statement of GAAP. In practice the standard was seen as a positive development in South Africa and the country became the first country in the world to approve the exposure draft as a Statement of GAAP for SMEs. Globally, the standard is receiving much needed attention as a strong realisation is taking place that SMEs in fact drive economies, and as such, require primary attention in an effort to increase comparability and capital within economies. However, the standard does not come without its challenges and some major areas of impact were identified during the data analysis. Areas identified include: education and training; comparability; risk; national standards; international pressure; growth; initial additional work; 91
costs; tax consequences; lending capabilities; and economic impact. Literature suggests that these areas pose challenges in most developing as well as established economies. South Africa is currently experimenting with the development of Micro GAAP for micro-entities. However, it should be borne in mind that IFRS for SMEs provide a framework under which the major stakeholders in terms of finance can evaluate the performance of the entity, whether that entity is considered an SME or a micro-entity. The lack of comparability of those countries where IFRS for SMEs has not been legislated causes difficulties in interpreting financial information and by cross border countries where investors and other financiers may be allocated. 5.1.2 Input Group (SMEs) A survey was conducted by Hattingh (2003) on inter alia, commercial banks and shareholders of SMEs to establish the use of financial statements. The results that are highlighted here are that SMEs are granted overdraft facilities by banks when assets or personal guarantees are secured. Another finding that warrants statement is that shareholders of SMEs do not regard financial statements as relevant as they are often produced months or sometimes years after year-end. This brings into question the relevance of financial statements to banks when loan applications are conducted. In addition to the study performed by Greeff (2008), Hattingh (2007) performed a study on the East Rand where the results found show that, of the SMEs surveyed, each entity that had borrowed from a lender provided security for that loan. Additional findings were that financial statements were not used for loan purposes, venture capital purposes or for comparison purposes but that financial statements were rather used for tax purposes. However, these results merely sketch the status quo, as it exists at the moment. It can be argued that because there has been no harmonisation of accounting standards, banks have not been able to look to entities financial statements with confidence to assess the financial position of such entities. In addition to this argument, the IASB hosted a meeting of the worlds national accounting standard-setters, where the board surveyed them about standards 92
for SMEs. It was with near unanimity that the standard-setters responses said that the IASB should develop global standards for SMEs (IASB, 2007). This overwhelming support in favour of IFRS for SMEs, which is being adopted by countries worldwide, is a clear indicator of where accounting standards are headed in the future. In South Africa, SAICA (03/06:1) state that, statements of GAAP were, in most respects, similar to IFRS. Minor differences arose as a result of different effective dates, and in some instances options permitted in IFRS were removed from Statements of GAAP and additional disclosure requirements included. The Financial Standards Foundation (2009) states that the 2007 UNCTAD report observes that entities that apply South African Statements of GAAP cannot claim compliance with IFRS because of the transitional differences that still exist. In addition, the World Bank assessed the accounting and auditing practices in South Africa and commented on the lack of procedures for enforcing accounting standards in South Africa, noting that the lack of legal backing for accounting standards gives rise to problems. They continue to say that the existing mechanisms for enforcing compliance with accounting and auditing standards seem to be weak (eStandardsForum, 2009). It is here where harmonisation begins at ground level. There are as many arguments for or against the harmonisation of accounting standards as far as the input group is concerned. The weaknesses, however, do not appear to lie with the input group but rather with the legislation that requires them to produce a set of financial statements in one format or another. In terms of the argument that banks may or may not require financial statements, the study by Eierle and Haller (2007) produced results that showed that banks are a main user group of financial statements. Their survey sample consisted of 4,000 entities that spread across from the smaller entities to larger SMEs. Where the IASB regards banks, vendors, credit rating agencies and customers as the main groups of external users of financial statements for SMEs, the survey confirmed banks and owners only to be the main groups of users (Eierle and Haller, 2007:9). One possible contributing factor for the differences in responses received from Hattingh (2003), Rossouw and van Wyk (2009), the IASB (2007), and the study by Eierle and Haller 93
(2007) may be the way in which the questionnaires were structured, the sample sizes and the questions that were answered and the criteria used for interpretation. Although there are a variety of findings about the necessity of IFRS for SMEs, the trend has been established that IFRS for SMEs will continue to be adopted within countries and due to international trading and the increased need for transparent information, banks cannot ignore the need for the harmonisation of accounting standards in the future. What makes the survey conducted in Germany all the more relevant is that GASC initiated the survey with the aim of obtaining empirical evidence as to whether IFRS for SMEs is able to meet the expectations and needs concerning financial reporting of SMEs. They also wanted to use the survey to investigate the specific needs of SMEs and their stakeholders regarding financial reporting and their further intention was to deliver these results to the IASB and other institutions around the world that participate in the development process of IFRS for SMEs. Currently in South Africa, SMEs are not required by law to prepare their financial statements in accordance to a specified accounting standard such as IFRS for SMEs. Instead, entities may prepare their financial statements in accordance with their industry standard or use IFRS for SMEs (Statement of GAAP) if they so choose. An example of the difficulties that national standards in place of IFRS create is reported on by Ridley (2011). He reported that the IFRS standard is receiving in-depth attention as several banks had to be rescued in Nigeria in 2009. One contributing factor was that the accounting standards were not rigorous enough to pick up the problems. He further states that being on a global standard simply improves general financial hygiene of entities. Consequently, Nigeria is adopting IFRS and will require entities to produce financials accordingly by 2012. Lawson (2010) reports that such inconsistencies filter through to micro-entities (partnerships and sole proprietorships) who are not used to presenting financials in legislated format for the acquisition of capital or overdrafts from lenders. It appears that insult is added to injury as banks have traditionally mistrusted financial statements presented by SMEs because they conform to industry or GAAP requirements. He continues to say that SMEs may then have 94
increased credibility with lenders when their financials are prepared in accordance with a global reporting framework. As more than 71 countries have already adopted IFRS for SMEs, the implication for entities that fall within those regions are that they will be able to provide sustainability reports to potential creditors locally and abroad. Jekel (2010) goes further where he states that this uniform set of accounting principles allows companies to adhere to only one set of accounting rules and prepare only one set of financial statements. Thus, entities are then only engaged in preparing one set of financial statements rather than different sets, which certainly makes entities jobs easier. Jekel (2010) also notes that IFRS for SMEs make financial statements user-friendlier for stakeholders such as creditors abroad, who want to view financial statements for several different countries and thus have the ability to evaluate their credit applicant more effectively. Christodoulou (2010) looks at accounting standards from investors views and states that with consistent accounting rules, it is hoped that investors will be able to better understand the value of a company, wherever it may exist across the world. Paul Pacter, director of standards for SMEs at IASB, is reported by Christodoulou (2010) to have stated that the little companies in countries such as Brazil, El Salvador and Swaziland were the most eager to adopt IFRS for SMEs as the little companies in those countries say we need to have access to capital, and For this standard we have a whole new constituency (Christodoulou, 2010). Ultimately, SMEs do not exist in a vacuum. There are many stakeholders involved within the sphere of SMEs. Although all of the stakeholders matter to SMEs, they do have to be able to finance their businesses in either the short- or long-term through a number of means. Some of the means include banks and creditors and the traditional assumption that these are domestically based is becoming a more difficult status quo to maintain. Global trade increases daily, and SMEs within South Africa, whether trading domestically or importing or exporting their goods and services, cannot afford to be left by the way side because they cannot be evaluated due to their accounting standards followed.
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5.1.3 Intermediary Group What has become apparent through the literature review is that the work of Rossouw and Van Wyk (2009) was performed during the early stages of the implementation of voluntary use of IFRS for SMEs in South Africa. Their study focused on accounting professionals from around the country and that is where their study ended. Their study, even though conducted during the very early stages of IFRS for SMEs in South Africa, extracted information from accounting professionals about whether they considered IFRS for SMEs to relieve the burden of compliance and it has already been argued in this paper that almost half of the respondents were already positive about the standard. Accounting professionals were also asked their opinions where some of those questions could have rather been directed toward the input group, as it is they who are affected by the burden as opposed to the accounting professionals. 5.1.4 User Group The user group in this study is primarily viewed as the lending institutions such as banks. Banks are seen as the central finance resource for SMEs, to a large degree, in economies such as South Africa. For these lending institutions, the documentation that they receive to evaluate applications, or review finance and facilities, is underpinned by the information that they receive. Financial statements provide information on the economic-financial position, financial performance and cash flows of SMEs. Studies by Greeff (2008) suggests that banks currently typically require financial statements as a part of the terms and conditions of their financing agreements, but that lending decisions are not purely based on those financial statements from applicants. In addition, banks require collateral that primarily takes the form of personal guarantees, cessions and pledges. Banks carry significant risk, and their contribution to the continuance (going concern) of SMEs is significant. The recent financial crisis provides much evidence of this. It can be argued that a contributing factor to the financial crisis was that banks may have evaluated applicants for finance using their internal criteria to the exclusion of healthy accounting 96
standards such as IFRS for SMEs, which may have contributed to the misjudgement of applicants when granting finance. In addition to the banks internal criteria used when evaluating finance, banks are an important economic stakeholder in the development of the economy. Banks cannot ignore international developments in terms of assessment criteria of loan applications, and consequently, banks look to international developments keenly and adopt their criteria from time to time to ensure that they, as entities, remain competitive in their global landscape. In keeping with this, the worlds national accounting standard-setters almost unanimously support the IASBs initiative of developing IFRS for SMEs. The World Bank and other international organisations welcomed the 230-page booklet of accounting rules for SMEs that was produced by the IASB in July 2009. Their primary welcoming of the accounting rules was fuelled by their view that the accounting rules is a means to bring capital into emerging economies. GAAP (2011) addresses the cost of capital in terms of banks and IFRS for SMEs. In their article Cost of capital, they state that the primary purpose of IFRS for SMEs is to reduce the cost and increase the availability of capital. To accomplish this IFRS for SMEs aims to eliminate accounting standards derived risk for creditors and to eliminate the accounts driven risk premium for business. The standard seeks to establish a framework providing an accurate, objective, complete and unbiased picture of a companys true financial position and results of operations. They state that if IFRS for SMEs is applied properly, the picture painted can be vastly different from: The fiscal needs of the state The clouded picture by lobbyists, each trying to convince lawmakers that too much transparency is not in the publics best interest, and Seeking to inform public interest groups, non-governmental organisations and other stakeholders who would, on the one hand, very much like to dictate a company policy but who, on the other, are not willing to put their own capital at risk.
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They continue to state that the advantages of IFRS for SMEs are clear in that the less risk there is for banks the more capital at a lower cost is available for business. By reducing or eliminating a risk, IFRS for SMEs reduces the risk on profits, not just for banks, but also for businesses. They continue to say that since profitable banks and businesses are more likely to pay corporate taxes, and hire workers who pay personal taxes, IFRS for SMEs also lowers unemployment and increases tax receipts. In addition, this information is valuable and used by a wide range of users who generally cannot request specific reports that are tailored just for their needs in order for them to make economic decisions (Bostan & Grosu, 2010). With this information, in addition to the banks own criteria, banks may develop a more secure view of applicants since they now have a benchmark against which applicants can be evaluated. Some of the primary risks that are shared by banks regardless of their geography include risks such as client liquidity, business continuity and recovery against assets. Lenders have been identified by several studies as a major user of financial statements. One such study performed by AcSC shows that lenders were identified as a major user of financial statements (81%) next to owner-managers with (90%) (AcSB, 2007:41). It is not a coincidence that lenders and owner-managers are the main users of financial information, as it is the risk factor that drives their interest in knowing truly what the financial position and performance of the entities are. Further, Ikheimo, Ojala, Stening, and Riistama (2010) identified advantages from banks perspectives after the implementation phase of the standard, which includes improved decision-making by company management and improved lending processes by banks. Pacter (2008) stated at the Small and Medium-sized Entities World Bank Conference on Promoting Business Development in Honduras that some of the benefits of global standards for lenders and other capital providers such as banks include high quality global financial reporting standards that can be applied consistently; standards will enhance comparability of financial information; and the efficiency of allocation and the pricing of capital will be improved.
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Pacter (2008) added that even SMEs that are seeking capital from lenders and capital providers need financial statements that are understandable and high quality, as they affect the lending decisions by banks, loan monitoring, and credit ratings. Ikheimo et al. (2010) found in their study that financial institutions have the potential to benefit from cross-country process improvements in the use phase of IFRS for SMEs (Schiebel, 2007). Their study also found when interviewing respondents, in particular IFRS specialists, that banks would benefit because of more up-to-date information on their customers: their financial position and how they are doing financially. If a bank can use the IFRS information as such, the experts cannot see how it could raise any costs for banks. Other benefits that are foreseen from the implementation of IFRS for SMEs are the consolidation of the banking industry, which provides opportunities for scale advantages (Schiebel, 2007). The scale advantages suggested in the banking world include cross-country harmonisation of lending criteria, the use of contract covenant criteria, and global service centres for financial statement analysis. Pacter (2007) states that in most jurisdictions, half to three-quarters of all SMEs including the very small ones have bank loans. Thus, banks across borders rely on financial statements in making lending decisions, establishing terms and interest rates and monitoring loans. The interviews that were conducted with the lenders in this study lend more support to the findings of more extensive research, by other sources, in this area. 5.2 Proof/rebuttal of any Hypotheses or Support/challenges to the Research Objectives At the onset of this paper, the question was posed whether SMEs will benefit from the harmonisation of accounting standards. The paper then explored the needs of the SMEs as well as what benefits the harmonisation of accounting standards would offer those entities. This was done through examining the capital needs of SMEs and by looking at where SMEs obtain their sources of finance. The two primary sources that were identified include lenders as well as creditors. It was with this in mind that the largest providers of the various forms of finance were explored, being banks.
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The study then looked at the view of banks and what their general take on the harmonisation of accounting standards, i.e. IFRS for SMEs was. It was found that banks more and more use financial statements, as personal sureties can only secure to an extent the risk that the banks carry. More and more value is seen by banks in terms of the value which a harmonised accounting standard will present to them, as the standard is not one produced by lobbyers or influential sources, but rather by an independent accounting standard setters that ensure transparency and validity of information. Within the final chapter of the document, the input-, intermediary- and user groups were looked at and certain conclusions and recommendations were made. What has been highlighted in the study is that there are stakeholder groups that are affected by the harmonisation of accounting standards, being the use of IFRS for SMEs in South Africa. It has been established that much work has been done in terms of the accounting standard, but it has also become apparent that South Africa has weaknesses in implementing and monitoring such standards. The accounting standard IFRS for SMEs is now receiving attention as the focus of economies has shifted towards SMEs and how these standards affect them. In this study, a key underlying driver for SMEs has been identified being their abilities to acquire capital and other finance from lenders. It has also been highlighted that the lending institutions play a critical role in the future trading of SMEs and that the accounting standard must play a key role in the presentation and evaluation of the financial performance and position of the SMEs. It is the comparability and transparency of the information provided to lenders that has become a critical component in assessing applications for credit facilities from lenders. Surveys that have been conducted have established that the majority of SMEs utilise lenders facilities at one point or another and that assets and personal guarantees are still being regarded as key components for assessing applications above financial statements. What has been highlighted in this regard, however, is that banks are considering IFRS for SMEs as becoming a key component in evaluating applications, as this will provide them with a basis
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of comparability, transparency and uniformity in terms of the very assets they regard as important against loan applications. Although it is still being debated whether there is a need for accounting harmonisation in South Africa, the various studies have shown that the: need for comparability and transparency of information; the world wide drive toward harmonisation; the key relationship that exists between SMEs and lenders; and the aggregate impact of SME trade in South Africa and abroad, brings with it the conclusion that the harmonisation of accounting standards in South Africa is indeed required. In parallel with the need for accounting standard harmonisation is the need for government to legislate and implement monitoring strategies to drive compliance and thus economic activity forward. If banks then are the main user group of financial statements, why it is that so little research in terms of their needs to provide finance and facilities have been performed? The need for the accounting standard for the input group (SMEs) has been well researched, and the input of the intermediary group has been used on a continued bases. Yet, the capital foundation to the SMEs, the lenders, appears to have had little input into the need for harmonisation of accounting standards in South Africa. It has also been identified that banks in particular mistrust financial statements as a benchmark has not been available to them when assessing financial statements and IFRS for SMEs offers them that benchmark. Research has also shown that preparing one set of financials cuts costs on a national level, makes financials more user friendly and provides transparent and quality information to the user group and SMEs alike. 5.3 Hypothesis and Research Objectives Attainment Discussion The research objectives that were identified at the onset of the study stated that what should be established during the course of the paper is whether there is a set of harmonised accounting standards available for SMEs. A further objective was to establish what the standardised accounting standard is that is currently being followed in South Africa and finally to establish whether there is a need for harmonised accounting standards by SMEs in 101
South Africa. The hypothesis was also geared toward proving or disproving whether such a set of standards is needed in South Africa and in testing the hypothesis, research was performed into primary and secondary sources to understand SMEs needs from various perspectives such as the SMEs themselves, the accounting professionals, the standard setters, the developments globally and the opinion of banks both locally and abroad. During the study the research did establish that a set of harmonised accounting standards have been developed being IFRS as well as IFRS for SMEs. The latter, IFRS for SMEs was developed because there was such a requirement from countries around the world. The IASB not only developed this simplified accounting standard, but invited stakeholders from around the world to participate in the process. This was their main driver behind releasing the exposure draft in 2007. Although the study did not discover all of the studies performed by countries in terms of IFRS for SMEs, the significant studies that were identified during the course of this paper have identified that SMEs will greatly benefit from the use of such a set of accounting standards. 5.4 Brief Summary of the Research Study Finding During the course of this paper, research was performed into the establishment of whether a harmonised set of accounting standards is needed in South Africa. Research has shown that indeed, the standard that is under discussion, IFRS for SMEs brings with its implementation its own advantages and challenges. What has been established during the study is that the larger part of the input group being the SMEs indicated that they may benefit from the legislation of IFRS for SMEs, whereas a portion of accounting professionals within South Africa appear fairly positive about the standard and others are unsure of the standard. What is certain, however, is that the standard is very new to the accounting professionals in South Africa, and a later study may confirm this in more detail. The research has also show that the user group (lending institutions) have traditionally not trusted the financial statements produced by SMEs and that such a harmonisation of accounting standards will provide a basis for banks to re-evaluate their own criteria. This is 102
not to say, however, that the personal sureties required by lenders will fall away. In fact, due to the risks associated with loans and the repayment thereof, banks will rather embrace the surety of harmonised accounting standards such as IFRS for SMEs and incorporate the standard as a requirement for loan applications, rather than part with personal sureties. Thus, the harmonisation of accounting standards may provide banks with a more transparent view of applicants, provide a better frame of reference to those very entities, and empower accounting professionals to understand and incorporate a harmonised accounting standard that will enable them to perform their duties better as well as to provide better advice to business owners into the future. 5.5 What are the Key Recommendations that will Add Value to the Organisation? Entities, more specifically, SMEs, have not been actively involved with the compliance issues related to their financial statements and have traditionally viewed accounting standards as a function best performed by an external accounting professional. It can be argued that in light of an entrepreneurial spirit, business owners do not need to know the ins and outs of their financial statements, but what drives the larger corporations will to a large extent drive SMEs also. Such drivers include the need for finance, overdrafts, creditors, and so on, and the time is coming to an end where the owners of SMEs can remain oblivious to their financial statements as well as to the components that make up such documentation. Not only will acquiring knowledge about the financial statements in terms of a harmonised accounting standard show the true value and worth of the SME as it stands, it will also provide an enlightened view to business owners about where they stand in terms of their markets, cash flows, and other critical areas such as how to present their businesses to potential investors and venture capital providers. The accounting standard in question within this paper being IFRS for SMEs has the potential to bring SMEs and their owners into the global picture, where they may then better understand their businesses as well as those of their competitors, suppliers, and customers. They may then find themselves in a position where annual reviews of facilities or further
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facilities no longer becomes a matter of differential criteria, but that SMEs will be reviewed from a familiar position by banks were informed decisions can be made. Ultimately, SMEs should understand that once lenders accept IFRS for SMEs, they might, as a rule, then be required to submit financial statements in IFRS format anyway to these lenders of finance. 5.6 Implications and Risks to Management There are always implications and risks to management whenever information that they deem confidential leaves their offices. There are the implications that managers may become subjected to evaluation from business owners in terms of what the financial statements look like, as business owners may then have a broad base for comparison of the financial performance and position of their businesses. There are always the implications where accounting professionals are given less, rather than more, freedom about how to present and interpret financial data in the preparation of financial statements. 5.7 Discussion of the Weakness of the Research As with all research papers, this paper has its own set of weaknesses. The weaknesses start off with this study not being a national study and one that was performed by a number of participants or professional institutions. If a study of this nature be performed by professional institutions that have the resources available to perform the study with a significant amount of time available, the opinion of this study may be enforced or detracted by the results produced. Either way, such a study is warranted, as the mere significance of SMEs along with their relationship with their banks becomes a critical component to their continuance. Another weakness of the research performed here is that the researcher is not an expert in the field of accounting standards. It would be far more beneficial to the subject for experts in the field to conduct a study of this nature, as they would be in an advantageous position to conduct the correct research utilising more correct criteria.
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Another potential weakness of the study was that parts of the study relied on information gathered by researchers with different objectives in mind. It was due to the relevance of parts of their studies that they were used as resources within this study. A better approach would be to base a study solely on primary research with the entire research focussed on the question of the harmonisation of accounting standards. Such a study should also then be performed in South Africa for South Africa, albeit not strictly necessary. 5.8 Further Research Opportunities There are a number of further research opportunities that have come to light during the course of this paper. The initial further research opportunities were identified during the establishment of the research objectives of this paper. The first opportunity for further research would be to understand the relationship between the accounting standards and the impact that those standards will have on SMEs. Further, the understanding and interpretation of the research that has been gathered about this impact may bring further clarity to the accounting standard debate. Moreover, further research may be conducted to establish the advantages and disadvantages for entities to accept accounting standard harmonisation as well as research regarding compliance implications for entities. Although some advantages and disadvantages have been identified, a focussed study should make known within a clear reference point what the pros and cons of compliance with IFRS for SMEs really are. 5.9 Chapter Summary Within the final chapter of the document, the input-, intermediary- and user groups were looked at and certain conclusions and recommendations were made. What has been highlighted in the study is that there are stakeholder groups that are affected by the harmonisation of accounting standards, being the use of IFRS for SMEs in South Africa. It has been established that much work has been done in terms of the accounting standard, but it has also become apparent that South Africa has weaknesses in implementing and monitoring such standards.
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The accounting standard IFRS for SMEs is now receiving attention as the focus of economies has shifted towards SMEs and how these standards affect them. In this study, a key underlying driver for SMEs has been identified being their ability to acquire capital and other finance from lenders. It has also been highlighted that the lending institutions play a critical role in the future trading of SMEs and that the accounting standard must play a key role in the presentation and evaluation of the financial performance and position of the SMEs. It is the comparability and transparency of the information provided to lenders that has become a critical component in assessing applications for credit facilities from lenders. Surveys that have been conducted have established that the majority of SMEs utilise lenders facilities at one point or another and that assets and personal guarantees are still being regarded as key components for assessing applications above financial statements. What has been highlighted in this regard, however, is that banks are considering IFRS for SMEs as becoming a key component in evaluating applications, as this will provide them with a basis of comparability, transparency and uniformity in terms of the very assets they regard as important against loan applications. Although it is still being debated whether there is a need for accounting harmonisation in South Africa, the various studies have shown that the need for comparability and transparency of information, the world wide drive toward harmonisation, the key relationship that exists between SMEs and lenders and the aggregate impact of SME trade in South Africa and abroad brings with it the conclusion that the harmonisation of accounting standards in South Africa is indeed required. In parallel with the need for accounting standard harmonisation is the need for government to legislate and implement monitoring strategies to drive compliance and thus economic activity forward. If banks then are the main user group of financial statements, why it is that so little research in terms of their needs to provide finance and facilities have been performed? The need for the accounting standard for the input group (SMEs) has been well researched, and the input of the intermediary group has been used on a continued bases. Yet, the capital foundation to the SMEs, the lenders appears to have had little input into the need for harmonisation of accounting standards in South Africa. It has also been identified that banks in particular 106
mistrust financial statements as a benchmark has not been available to them when assessing financial statements and IFRS for SMEs offers them that benchmark. Research has also shown that preparing one set of financials cuts costs on a national level, makes financials more user friendly and provides transparent and quality information to the user group and SMEs alike. The hypothesis stated that the results would prove or disprove that there is a need for accounting standards for SMEs in South Africa. It is then in terms of the hypothesis that the equation denotes (H1: P = 1) with H1: P denoting the hypothesis and with 1 denoting harmonisation. It is thus the conclusion that the hypothesis has been concluded to being that there is a need for accounting harmonisation in South Africa and is stated as H1: P = 1.
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GOELTZ, R.K. 1991. International Accounting Harmonization: The Impossible (and unnecessary) dream? Accounting Horizons, 85-86. GREEFF, M.E. 2008. The need for and development of differential reporting globally. Short Dissertation. University of Johannesburg. http://152.106.6.200:8080/dspace/bitstream/10210/2554/1/The%20need%20for%20and%20d evelopment%20of%20differential%20reporting%20globa.pdf Date of access: 10 Jan. 2011. GUGGIOLA, G. 2010. IFRS Adoption in the E.U., accounting harmonization and market efficiency: a review, 2010/2. http://www.google.co.za/url?sa=t&source=web&cd=1&ved=0CBUQFjAA&url=http%3A%2 F%2Fideas.repec.org%2Fp%2Fins%2Fquaeco%2Fqf1002.html&rct=j&q=IFRS%20Adoptio n%20in%20the%20E.U.%2C%20accounting%20harmonization%20and%20market%20effici ency%3A%20a%20review&ei=OC3VTLCKDMKLswbXcGQCA&usg=AFQjCNF_HIaRGZLYJULPgqFmE1g33UeHyQ&cad=rja Date of access: 4 Jan. 2011. GURTLER, M. 2009. 50 years after MM: recent developments in corporate finance. http://books.google.co.za/books?id=RnVVbSGgSEC&pg=PA73&lpg=PA73&dq=relationship+banks+smes+ifrs&source=bl&ots=e5 uL9EVr5f&sig=vOXD2z7kpEXcitSN84e2XQm_Ei0&hl=en&ei=9ZUITZuNNJGgOtepgOU E&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBUQ6AEwAA#v=onepage&q=rel ationship%20banks%20smes%20ifrs&f=false Date of access: 9 May 2011. HATTINGH, C.P. 2007. Thought for the Month 3: The IASBs motivation for SME. http://www.mafiabuzz.co.za/downloads/Straight%20Talking%20Documents/Thought%20for %20the%20Month%203.docDate of access: 28 Feb. 2011. HOLT, G. s.a. IFRS for SMEs. http://www.accaglobal.com/members/publications/accounting_business/CPD/ifrs+sme Date of access: 16 Aug. 2010. IASB. 2007. Basis for Conclusions on Exposure Draft. IFRS for Small and Medium-sized Entities. IFRS Foundation. www.iasb.org/NR/rdonlyres/B34721E3.../0/SMEs.pdf Date of access: 17 Nov. 2010. IASB. 2010. IASB and FASB Commitment to Memorandum of Understanding. Quarterly Progress Report. IFRS Foundation, Mar. http://www.google.co.za/url?sa=t&source=web&cd=1&ved=0CBUQFjAA&url=http%3A%2 F%2Fwww.iasb.org%2FNR%2Frdonlyres%2F184E570C-808F-45B9-9710iii
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8249A76A0677%2F0%2FApril2010progressreport3.pdf&rct=j&q=IASB%20and%20FASB %20Commitment%20to%20Memorandum%20of%20Understanding&ei=ABv6TM_gM4vzs gbXg7jYAw&usg=AFQjCNFu0Aex-hw7_PZky_cCRMNdNr3zNQ&cad=rja Date of access: 15 Dec. 2010. ICAEW. s.a. Knowledge guide to International accounting standards. London: ICAEW Library & Information Service http://www.icaew.com/index.cfm/route/156901/icaew_ga/en/Technical_and_Business_Topic s/Guides_and_publications/Knowledge_guides/Knowledge_Guide_to_IAS_IFRS Date of access: 13 Nov. 2010. IFRSa. s.a. About the IFRS Foundation and the IASB. IFRS Foundation. http://www.ifrs.org/The+organisation/IASCF+and+IASB.htm Date of access: 21 Aug. 2010. IFRSb. s.a. The move towards global standards. IFRS Foundation. http://www.ifrs.org/Use+around+the+world/Use+around+the+world.html Date of access: 23 Mar. 2010. IFRS. 2010. International Financial Reporting Standards (IFRS). An AICPA Backgrounder. IFRS Foundation. http://www.google.co.za/#hl=en&biw=1280&bih=644&q=SEC+decide+2011+IFRS+reportin g+mandatory+U.S.+issuers&aq=o&aqi=&aql=&oq=&gs_rfai=&fp=82d887925170decc Date of access: 24 Apr. 2010. IKAHEIMO, S., OJALA, H., STENING, E.M. & RIISTAMA, V. 2010. The IFRS for SMEs: Do we need it? An expert-based study in Finland, Jan. http://www.hse.fi/NR/rdonlyres/E8E50618-C471-434B-97C9A2198C991E24/0/Ik%C3%A4heimoSMEIFRS.pdf Date of access: 18 Oct. 2010. JEKEL, L. 2010. The Move from GAAP to IFRS. http://www.articlesbase.com/international-business-articles/the-move-from-gaap-to-ifrs3635907.html Date of access: 15 May 2010. KRUGER, R. 2004. Harmonising user needs with reporting requirements of close corporations. Bloemfontein: University of the Free State. (Dissertation Masters). KUMAR, R. 2005. Research Methodology. A step-by-step guide for beginners. 2nd Ed. London: Sage Publications Ltd. http://books.google.co.za/books Date of access: 16 Apr. 2010. LAWSON, R. 2010. IFRS for SMEs. http://linkupima.com/posts/3374bca7d0 Date of access: 13 Feb. 2011. iv
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LOCHNER, P.R. 1991. The Role of U.S. Standard Setters in International Harmonization of Accounting Standards. Journal of Accountancy, 108. http://www.allbusiness.com/accounting/methods-standards/339832-1.html Date of access: 16 Jul. 2010. MAKOWLA, A. 2002. Small firms left out of world cup. Fin 24.com. http://www.fin24.com/Economy/Small-firms-left-out-of-World-Cup-20101027 Date of access: 2 Sep. 2010. MARSHALL, K. 2009. IFRS Adoption in the United States: Hurry Up and Wait. Corporate Compliance Insights. http://www.corporatecomplianceinsights.com/2009/ifrs-adoption-inthe-united-states/?pfstyle=wp Date of access: 5 Apr. 2010. MARTIN, R. 2005. The Impact of IFRS on SMEs. ACCA. http://www.accaglobal.com/members/publications/accounting_business/archive_by_topic/fin ancial_reporting/2005/956314 Date of access: 12 Jun. 2010. MASCRA, E., NEAG, R. & PASCAN, I. 2009. Actual aspects regarding the IFRS for SME Opinions, debates and future developments. http://oeconomica.uab.ro/upload/lucrari/1120091/03.pdf Date of access: 18 Jul. 2010. MAYKAT, P. & MOREHOUSE, R. 1994. Beginning qualitative research: a philosophic and practical guide. London & Washington: Falmer Press. McCASTON, M.K. 1998. Tips for Collecting, Reviewing, and Analyzing Secondary Data. Partnership & Household Livelihood Security Unit(PHLS), Feb. 1998. http://www.livelihoods.org/info/pcdl/docs/work/SL%20Nepal/Reference%20Sheets/Tips%20 for%20Using%20Secondary%20Data.doc Date of access: 20 Aug. 2010 McNABB, C. s.a. Descriptive Research Methodologies. http://www.google.co.za/url?sa=t&source=web&cd=5&ved=0CDkQFjAE&url=http%3A%2 F%2Fpangea.tec.selu.edu%2F~cmcnabb%2Fphilosop%2Fpower.ppt&rct=j&q=Descriptive% 20or%20Survey%20Research%20Design%20&ei=UAGGTa_CHZSChQfkuqnRBA&usg=A FQjCNFiUbwif7cCYUMC26u7ulSRMu5_mg&cad=rja Date of access: 7 Nov. 2010. MILLER, A. 1998. Strategic Management, 3rd ed. Boston: Irwin McGraw-Hill Companies, Inc. MILPARK. 2009. Writing the Research Report. Milpark Business School (Pty) Ltd.
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MULLER, E. 2008. SA Accounting Standards poised for Micro-GAAP revolution. South African Institute of Chartered Accountants. https://www.saica.co.za/About/Regions/SouthernRegion/SouthernRegionNewsletterAugust20 08/SAAccountingStandardspoisedforMicroGaap/tabid/1190/language/en-US/Default.aspx Date of access: 18 Jun. 2010. MUSTATA, V., RAZVAN, M.V. & DUMITRU, M. 2009. From The Harmonization Need to the Spontaneous Accounting Harmonization. Journal of the Faculty of Economics, 3(1)1067-1071. http://ideas.repec.org/a/ora/journl/v3y2009i1p1067-1071.html Date of access: 7 Apr. 2010. PACTER, P. 2008. The Proposed IFRS for SMEs: Benefits for Honduras. Small and Medium-sized Entities World Bank Conference on Promoting Business Development in Honduras. 12 February 2008. http://siteresources.worldbank.org/INTHONDURAS/Resources/PPT_Paul_Pacter.pdf Date of access: 12 Apr. 2010. PACTER, P. 2010. Special Interest Workshop. IFRS for small and medium-sized entities. IASC Foundation. IFRS Conference 24 June 2010. http://www.ifrs.org/NR/rdonlyres/2EF78D9E-471A-4A61-8730B917EA246FA9/0/Specialinterestsession_SMEs.pdf Date of access: 24 Jul. 2010. PEDHAZUR, E. & SCHMELKIN, L. 1991. Measurement design and analysis: An integrated approach. New York: Psychology Press. QUINN, L.R. 2008. International Reporting Standards Gain Global Recognition. http://www.investopedia.com/articles/financialcareers/08/international-a Date of access: 23 Oct. 2010. RASVAN, M.V. & DUMITRU, M. s.a. From the harmonization need to the spontaneous accounting Harmonization. http://ideas.repec.org/a/ora/journl/v3y2009i1p1067-1071.html Date of access: 20 Jun. 2010 ROSSOUW, J. & VAN WYK, H.A. 2009. IFRS for SMEs in South Africa: a giant leap for accounting, but too big for smaller entities in general. http://www.meditari.org.za/docs/2009v1/8.%20Van%20Wyk%20&%20Rossouw%20(16.08) %20-%20Meditari%20Vol%2017%20No%201%202009.doc.pdf Date of access: 12 Dec. 2010. SAICA. 2009a. Statement of Generally Accepted Accounting Practice (GAAP): International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). South African Institute of Chartered Accountants Circular 2/2009. vi
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https://www.saica.co.za/TechnicalInformation/Publications/Circulars/tabid/109/language/enZA/Default.aspx Date of access: 17 Apr. 2010 SAICA. 2009b. Who can apply IFRS for SMEs in South Africa? Technical Information. South African Institute of Chartered Accountants. https://www.saica.co.za/TechnicalInformation/OnlineTechnicalQueries/tabid/1248/language/ en-ZA/Default.aspx Date of access: 12 Nov. 2010. SAICA. 2010. Relief for small and medium enterprises IFRS for SMEs. South African South African Institute of Chartered Accountants. https://www.saica.co.za/tabid/1638/itemid/1688/language/en-ZA/Background-Introduction.aspx Date of access: 28 Jun. 2010. SAIPA. s.a. Differential Reporting. South African Institute of Professional Accountants. http://www.saipa.co.za/DisplayContent.asp?ContentPageID=546 Date of access: 27 Jul. 2010. SAINT MARYS UNIVERSITY. s.a. Writing a Literature Review. http://www.smu.ca/administration/library/litrev.html Date of access: 21 Aug. 2010. SCRIBD. s.a. Types of Research for your Dissertation Writing. http://www.scribd.com/doc/30161872/Types-of-Dissertation-Research Date of access: 12 Aug. 2010. SIMON, B. s.a. The Negative Effects of IFRS Upon SMEs of the World. http://ezinearticles.com/?The-Negative-Effects-of-IFRS-Upon-SMEs-of-theWorld&id=5410139 Date of access: 25 Apr. 2010. SRIDHAR, M.S. nd. Sampling & Sampling Strategy or Plan. Part 5. Research Methodology. http://www.scribd.com/doc/2034905/Research-Methodology-Part-5-Sampling-SamplingStrategy-or-Plan Date of access: 6 Jul. 2010. STAINBANK, L. 2008. The Development Of Financial Reporting For SMEs In South Africa: Implications Of Recent And Impending Changes. African Journal of Accounting, Economics, Finance and Banking Research, 3(3). http://www.globip.com/pdf_pages/africanvol3-article1.pdf Date of access: 25 Oct. 2010. STATSSA. s.a. Major divisions, divisions and major groups. Statistics South Africa. Retrieved from http://www.statssa.gov.za/additional_services/sic/mdvdvmg8.htm#8812 Date of access: 15 Dec. 2010.
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STAT TREK. s.a. Statistics Tutorial: Hypothesis Tests. http://stattrek.com/Lesson5/HypothesisTesting.aspx Date of access: 13 Nov. 2010. THE BANKING ASSOCIATION SOUTH AFRICA. 2010. South African Banking Sector Overview. http://www.banking.org.za/getdoc/getdoc.aspx?docid=1130 Date of access: 15 Dec. 2010. THE COMMISSION. 1995. Accounting Harmonisation: A New Strategy Vis--vis International Harmonisation. Communication from the Commission. http://ec.europa.eu/internal_market/smn/smn02/s2mn20.htm Date of access: 12 Jan. 2010. UN (UNITED NATIONS). 2007. United Nations Conference on Trade and Development. TD/B/COM.2/ISAR/39. United Nations. http://www.unctad.org/en/docs/c2isard39_en.pdf Date of access: 12 Jul. 2010. VAN WYK, H.A. & ROSSOUW, J. 2009. IFRS for SMEs in South Africa: a giant leap for accounting, but too big for smaller entities. Meditari Accountancy Research, 17(1) 99-116. http://www.meditari.org.za/docs/2009v1/8.%20Van%20Wyk%20&%20Rossouw%20(16.08) %20-%20Meditari%20Vol%2017%20No%201%202009.doc.pdf Date of access: 12 Nov. 2010. WALTON, P. 2009. South Africa proposes micro entity accounting. Essec-KPMG Financial Reporting Centre. Essec Business School. http://www.essec-kpmg.net/us/ifrsobservatory/ifrs-observatory-frame.html Date of access: 23 Dec. 2010. WEBER, C.M. 1992. Harmonization of international accounting standards. The National Public Accountant. October 1. http://www.allbusiness.com/accounting/methodsstandards/339832-1.html Date of access: 3 May 2010. WIESE, N. 2008. IFRS for SME, Seminar paper. Germany: GmbH http://books.google.co.za/books?id=nG7mwrS1ZesC&pg=N&lpg=N&dq=IFRS+for+SME,+ nadine+wiese&source=bl&ots=r104YghvKm&sig=UftklGY1tr8rUgSnWsebqSsuhJw&hl=en &ei=7KvOTavHC5C8QaXsNTrCQ&sa=X&oi=book_result&ct=result&resnum=2&ved=0CB0Q6AEwAQ#v=onep age&q=kpmg&f=false Date of access: 8 May 2010. WHITTINGTON, G. 2008. Fair value and the IASB/FASB conceptual framework project: An alternative view. Abacus, 44(2), 139-168. YIN, R.K. 1989. Case study research: Design and Methods. Newbury Park: Sage.
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APPENDICES Appendix A: Timetable for Document Publication April 2010 to December 2011 (IASB and FASB Commitment to Memorandum of Understanding. Quarterly Progress Report. 31 March 2010) IASB and FASB Commitment to Memorandum of Understanding Quarterly Progress Report 31 March 2010 Updates on convergence projects Financial instruments Our goal is to issue comprehensive improvements to this complex and contentious area that will foster international comparability of financial information about financial instruments. As we noted in our November statement, each board has faced different imperatives that pushed our development timetables out of alignment. In particular, the IASB has been replacing its financial instrument requirements in a phased approach, whereas the FASB has been developing a comprehensive proposal. Those differing development timetables and other factors have contributed to the boards reaching differing conclusions on a number of important technical issues. Our strategy for addressing those differences calls for each board to publish its proposals and that of the other board, as a way of giving interested parties the opportunity to compare and assess the relative merits of both boards proposals. Additionally, we established an expert advisory panel to help the boards identify and resolve operational aspects of their respective credit impairment models. ix
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Our strategy also calls for us to consider together the comment letters and other feedback we receive in an effort to reconcile our differences in ways that foster convergence. We expect to begin those joint discussions in the third quarter of 2010. Although our recent experiences with joint meetings show that we have been able to resolve differences on several projects, there is no guarantee we will be able to resolve all, or any, of our differences on this project. First quarter 2010 milestone targets achieved The following first quarter milestones were achieved in accordance with the timetable published in November. The IASB issued new requirements for the classification and measurement of financial assets in early November 2009. On 5 November 2009 the IASB published for public comment an exposure draft on the amortised cost measurement and impairment of financial instruments, with comments due by 30 June 2010. Updated milestone targets for financial instruments Q2 2010 The IASB has been developing improved financial reporting requirements for financial instruments in phases, in response to requests to accelerate particular parts of the project. In the next phase the IASB will publish in April proposals for the classification and measurement of financial liabilities, rather than by March as previously planned. (The IASB published proposals for the classification and measurement of financial liabilities in July 2009 but decided not to include financial liabilities within the scope of the first phase of the financial instruments project). The FASB expects to publish its comprehensive proposal covering classification and measurement, impairment and hedging during the first week of May 2010 rather than March as previously planned. As part of that proposal, the FASB will solicit views on the IASBs proposals for recognition and measurement (of both assets and liabilities) and impairment. The IASB also will publish a request for views on the FASBs comprehensive exposure draft. Since November, the IASB has decided to include non-financial hedges in the x
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phase of the project addressing hedge accounting. As a consequence, the IASB will publish its initial proposals on hedge accounting in mid-2010 (rather than by March as previously planned). The IASB will review the application of its requirements for classification and measurement of financial assets by those entities adopting the requirements early. Q3 2010 Q4 2010 / Q1 2011 The boards will begin to consider together the comment letters and other feedback received on each of the boards various proposals. The boards will complete their joint consideration of feedback received and expect to finalise and issue new requirements.
Consolidations The agendas of both boards include projects on consolidation. In 2008 the IASB published an exposure draft of a comprehensive replacement of its consolidation requirements, and in 2009 the FASB finalised one aspect of that project that amended and improved US GAAP relating to consolidation of variable interest entities and related disclosures. The boards concluded last November that, ideally, their standards for consolidation would include objectives and principles for assessing control that would be applied consistently for all types of entities and produce globally comparable results. Consistently with that conclusion: The IASB agreed in November 2009 to amend its timetable to give the boards the opportunity to jointly deliberate the consolidation requirements. The FASB set a goal of publishing an exposure draft in the second quarter of 2010. The IASB agreed to make available a staff draft of its proposed standard and publish a request for views on the FASBs proposal. The two boards agreed to jointly deliberate the issues with the expectation they would produce improved and common final standards by the third quarter of 2010. xi
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The IASB proposal, originally published in 2008, included enhanced disclosures about unconsolidated entities. The IASB decided in February 2010 to accelerate its work plan and issue in the second quarter of 2010 final disclosure requirements for securitisation and investment vehicles (such as special purpose entities and structured investment vehicles) that an entity has sponsored or with which it has a special relationship, but does not control. First quarter 2010 milestone targets achieved There were no first quarter 2010 milestone targets for this project. Updated milestone targets Milestone targets for consolidations Q2 2010 The IASB expects to finalise and publish required disclosures about securitisation and investment vehicles that any entity does not control but has sponsored or with which it has a special relationship (which the IASB had previously planned for publication in Q4 2010). The FASB expects to publish a comprehensive exposure draft on consolidations that is not expected to significantly affect consolidation of variable interest entities (previously expected in Q1 2010). The IASB will make available a staff draft of its proposed standard and will also publish a request for views on the FASBs proposals. Q4 2010 or The IASB and FASB aim to issue common standards on consolidation Q1 2011 covering all entity types.
Fair value measurement The FASB issued Statement 157 Fair Value Measurements in 2006 and those requirements have been in effect since November 2007. In May 2009 the IASB published an exposure draft xii
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of an IFRS on fair value measurement. The exposure draft is largely consistent with the FASB requirements. In November, the boards reached agreement on the following: Their objective is to ensure that fair value has the same meaning in US GAAP and IFRSs, by making US GAAP and IFRS fair value measurement requirements the same other than minor necessary differences in wording or style. The boards agreed to consider together the comments received on the IASBs exposure draft. The FASB agreed to propose amendments to US GAAP fair value measurement requirements, if necessary. The boards also agreed that if they become aware of perceptions that the FASB and IFRS fair value measurement requirements are different they will work together to address those perceptions. First quarter 2010 milestone targets achieved The IASB held public round-table meetings in Asia, Europe, and North America in conjunction with the FASB. Updated milestone targets Milestone targets for fair value measurement Q2 2010 The FASB expects to issue an exposure draft of proposed amendments to its fair value measurement requirements that would improve them and achieve convergence with the proposed IFRS (previously expected to be issued in Q1 2010). Q3 2010 Q4 2010 The FASB expects to hold a public round-table meeting to discuss its proposal. After the close of the public comment period for the FASB exposure draft, the boards will deliberate issues jointly, with a goal of issuing common standards in the fourth quarter. Revenue Recognition The boards are working together to provide a single revenue recognition model that can be applied to a wide range of industries and transaction types. US GAAP currently has many xiii
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industry-specific requirements that are not always consistent with each other. IFRSs are perceived as lacking necessary application guidance. The new model will eliminate weaknesses and inconsistencies in the existing standards. The boards published a joint discussion paper in December 2008 that proposed a single revenue recognition model built on the principle that an entity should recognise revenue when it satisfies its performance obligations in a contract by transferring goods and services to a customer. That principle is similar to many existing requirements. However, the boards think that clarifying that principle and applying it consistently to all contracts with customers will improve the comparability and understandability of revenue for users of financial statements. The boards have been considering the comments received on their discussion paper as well as feedback from their outreach programmes. First quarter 2010 milestone targets achieved The boards conducted a series of workshops to learn how various types of entities would apply the proposed requirements. The feedback received was positive and provided additional comfort that the proposals are operational. Updated milestone targets Milestone targets for revenue recognition Q2 2010 Q2 2011 The IASB and FASB expect to publish an exposure draft that would improve their respective requirements and achieve convergence. The IASB and FASB aim to issue improved and common standards.
Leases The IASB and FASB are developing together a new single approach to lease accounting that would ensure that all assets and liabilities arising under lease contracts are recognised in the xiv
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statement of financial position. The project is addressing the accounting from the perspective of both the lessor and lessee. The boards continued to deliberate technical issues during the first quarter of 2010. First quarter 2010 milestone targets achieved There were no first quarter 2010 milestone targets for this project. Updated milestone targets Although the boards have retained their second quarter 2010 milestone target for publishing exposure drafts, their decision in March to explore an alternative approach to the accounting by a lessor may affect that milestone target. Milestone targets for leasing Q2 2010 Q2 2011 The IASB and FASB will publish exposure drafts proposing the accounting for leases, from the perspective of the lessor and the lessee. The IASB and FASB aim to issue improved and common standards.
Financial instruments with the characteristics of equity The FASB and IASB have been working together to improve and, as a consequence, simplify, the financial reporting requirements for financial instruments with characteristics of equity. The purpose of this project is to develop a better way to distinguish instruments that are equity from those that are assets or liabilities. Some aspects of the current IFRS and US GAAP requirements have been criticised for their complexity or inconsistency. As of November 2009, the boards had agreed to assess the feasibility of an approach that would classify as equity particular share-settled instruments. The boards noted they were unable to establish a timetable until they completed that assessment.
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First quarter 2010 milestone targets achieved The boards completed their assessment and decided to propose for public comment an approach that would classify as equity particular share-settled instruments. The boards agreed on milestone targets for this project. Updated milestone targets Milestone targets for liabilities and equity Q2 2010 The FASB and IASB expect to publish exposure drafts of proposed requirements for identifying financial instruments that should be classified as equity and those that should be classified as an asset or as a liability. The exposure drafts will have a 120-day comment period. Q2 2011 The boards expect to issue improved and common standards.
Financial statement presentation The FASB and IASB are working together to establish a common standard that would improve how information is organised and presented in the financial statements. The IASB has already implemented the decisions reached in the first phase of this project into its existing IFRS for the presentation of information in financial statements. Accordingly, the FASBs proposals will include improvements related to that phase as well as the matters the boards are currently discussing together. In 2008 the boards published a discussion paper in which they set out the principles for presenting financial statements in a manner that portrays a cohesive financial picture of an entitys activities, disaggregates information so that it is useful in predicting an entitys future cash flows and helps users to assess an entitys liquidity and financial flexibility. As of November, the Boards had decided to accelerate aspects of this project relating to the presentation of other comprehensive income and discontinued operations. In particular: xvi
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The boards agreed to publish together a proposal that would make it easier to compare income statements prepared in accordance with IFRSs or US GAAP. The proposals are designed to improve how items of other comprehensive income are presented in the financial statements. The boards agreed to explore a definition of discontinued operations based on existing IFRSs and to work together to improve related note disclosures. First quarter 2010 milestone targets achieved The boards agreed to base the definition of discontinued operations on existing IFRSs and agreed on improvements to related note disclosures. Updated milestone targets Milestone targets for financial statement presentation Q2 2010 The IASB and FASB expect to publish in April exposure drafts proposing improvements to how items of other comprehensive income items are presented in the financial statements (the previous report called for an ED in March). The FASB and IASB expect to publish in April exposure drafts that would bring together their requirements for defining discontinued operations and improve related disclosure requirements (the previous report called for an ED in March). The IASB and FASB both expect to publish an ED on Financial Statement Presentation with a five-month comment period. Q4 2010 Q1 2011 Q2 2011 The IASB and FASB aim to finalise amendments to their requirements for reporting discontinued operations. The IASB and FASB aim to finalise improvements to how items of other comprehensive income are presented in the financial statements. The IASB and FASB aim to issue improved and common standards on Financial Statement Presentation.
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Other MoU projects The IASB has been developing proposals to improve the accounting for joint ventures, and remove differences between IFRSs and US GAAP. The IASB plans to finalise its new requirements in June 2010, which includes removing the ability to use proportionate consolidation for joint ventures, thereby providing a more representative portrayal of the assets the reporting entity controls. In response to calls from preparers and users of financial statements, the IASB is conducting a project that will result in significant improvements to the accounting for post-employment benefits. Having reviewed comments received on a discussion paper published in March 2008, the IASB focused on improvements to the recognition and presentation of changes in defined benefit obligations and plan assets. The resulting proposals, which include eliminating the corridor approach and revised disclosure requirements, will be published in April. Other joint projects The boards are also working together on other projects that are not part of the MoU. They have been developing together a new Conceptual Framework. The first two chapters of the Framework, which address the objectives and qualitative characteristics of financial reporting, will be published in the second quarter of 2010 (rather than towards the end of 2009, as indicated in the previous report). As indicated in the previous report, in the first quarter of 2010 the boards published together an exposure draft for a chapter addressing the reporting entity. Both boards understand the importance of emissions trading schemes as a mechanism to help manage C0 emissions. The financial reporting consequences of the many
2
different allocation and trading systems will become increasingly important. The boards have been working together on this project and expect to publish an exposure draft together in 2010 with the aim of issuing common standards in 2011. The IASB published in 2007 a discussion paper Preliminary Views on Insurance Contracts and has been developing xviii
The need for harmonisation of accounting standards for SMEs in South Africa (Appendices) xix
proposals on the basis of that discussion paper, in the light of comments received. In 2007, the FASB issued an Invitation to Comment containing the IASBs discussion paper to solicit input on whether it should undertake a comparable project jointly with the IASB. In October 2008 the FASB added a project on insurance to its agenda and the boards agreed to undertake it jointly. They began discussing the project together in 2009 and, to date, have reached different conclusions on several important technical issues (a summary of those differences is available on our websites). While the boards have a milestone target of publishing together exposure drafts in Q2 2010 (with a view to finalising a high quality common standard by mid-2011), the nature and timing of the milestone targets may change depending on the outcome of our efforts to reconcile our differences Publications expected in the second quarter of 2010 A clear sign of continued progress towards completing the improvements to IFRSs and US GAAP identified in our November statement is the forthcoming publication of proposals on the topics listed below. IASB Consolidation: Disclosures about unconsolidated SPEs/structured entities (IFRS) Financial Instruments - Classification and Measurement: Financial Liabilities (exposure draft) Financial Instruments Hedge Accounting (exposure draft) Joint Arrangements (IFRS) Post-employment Benefits Defined Benefit Plans (exposure draft) De-recognition (exposure draft) FASB Financial Instruments (exposure draft) Consolidation (exposure draft) xix
The need for harmonisation of accounting standards for SMEs in South Africa (Appendices) xx
Fair Value Measurement (exposure draft) IASB and FASB Financial Statement Presentation organisation and presentation of information in the financial statements (exposure draft) Financial Statement Presentation Presentation of Items of Other Comprehensive Income (exposure draft) Financial Statement Presentation Discontinued Operations (exposure draft) Financial Instruments with Characteristics of Equity (exposure draft) Revenue Recognition (exposure draft) Leases (exposure draft) Insurance Contracts (exposure draft)
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The need for harmonisation of accounting standards for SMEs in South Africa (Appendices) xxi
TIMETABLE FOR DOCUMENT PUBLICATIONAPRIL 2010 to DECEMBER 2011
xxi
The need for harmonisation of accounting standards for SMEs in South Africa (Appendices) xxii
Appendix B: Questionnaire Questionnaire Purpose This questionnaire is designed to gather information provided by you to assist the author of the research to assess the need for the harmonisation of accounting standards in South Africa. As lending institutions form a critical element in the reasons for SMEs to produce financial statements, your input as a lending institution is valuable. The entities in this questionnaire under consideration are small and medium sized companies in South Africa and include entities such as: Privately owned (unlisted) Proprietary Limited (Pty) Ltd, Close Corporation, Trusts, Sole Proprietor, etc. Confidentiality: This questionnaire is completely confidential and its sole purpose is to understand the views of the lending institutions in terms of accounting standards in South Africa. You may choose to display your details, but this is not compulsory. Your assistance in this regard is greatly appreciated.
What Bank do you work for? ___________________________________________________________________________________________________ What is your position within the institution? _______________________________________________________________________________________ How many years experience do you have pertaining to the small and medium sized enterprise loan and overdraft division in the entity? ______________ What do you consider to be a small and medium sized enterprise? _____________________________________________________________________ What criteria do you use in general to evaluate loan applications by small and medium enterprises? __________________________________________ __________________________________________________________________________________________________________________________
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The need for harmonisation of accounting standards for SMEs in South Africa (Appendices) xxiii
What are the most important criteria against which you assess loan applications by SMEs? _________________________________________________ ___________________________________________________________________________________________________________________________ What accounting standards have you been using (if any) to evaluate applicants in terms of loans, overdrafts or other facilities? __________________________________________________________________________________________________________________________ Do you include accounting standards such as IFRS for SMEs to evaluate applicants against for loans, overdrafts and other facilities? Please explain your yes or no response. ________________________________________________________________________________________________________ ___________________________________________________________________________________________________________________________ Do you believe that if SMEs have to make compulsory use of the IFRS for SMEs accounting standard that this will produce improved financial information that will aid you in assessing loan applications by companies, i.e. will the use of this standard increase your confidence in the financial statements provided by loan applicants? __________________________________________________________________________________________ Do you believe that the IFRS for SMEs accounting standard could lead to greater transparency in the financial information provided by the companies that you currently evaluate? ____________________________________________________________________________________________________ Do you believe that the IFRS for SMEs accounting standard may improve the lending institutions ability to assess the loan applicants risk profile? ___________________________________________________________________________________________________________________________
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The need for harmonisation of accounting standards for SMEs in South Africa (Appendices) xxiv
Do you believe that the bank may use the criteria as set by IFRS for SMEs in terms of aspects such as revenue recognition, assets and depreciation to evaluate applicants? Do you further believe the bank may adopt and use these criteria as a requirement for loan applicants to submit their financial statements? _________________________________________________________________________________________________________________ ___________________________________________________________________________________________________________________________ Any additional comments which you would like to add to this questionnaire. ______________________________________________________________________________________________________________________________ ________________________________________________________________________________________________________________________
Thank you very much for your input into the questionnaire. It is greatly appreciated. Sincerely, J. Goncalves (083 755 1325) jahde@ananzi.co.za
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Harmonising SME accounting standards

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THE NEED FOR HARMONISATION OF ACCOUNTING STANDARDS FOR SMEs IN SOUTH AFRICA

by JAHDE ELIZABETH GONCALVES

Supervisor: Dr. Jan Meyer JOHANNESBURG April 2011

JOHANNESBURG, SOUTH AFRICA

70 77 78 79 81 82 85 88 91 91 91 92 96 96 99 101 102 103 104 104 105 105 i ix ix xxii

applicants for finance to lenders such as banks

Group 2 Accounting Professionals

Group 3 Lending institutions

addressed and uncommon transactions omitted.

1,550,210 1,221,759 734,270 788,009 738,066 455,251 259,292 3,069,936,863

0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100.0%

Informationforpotentialinvestors Informationforcustomers Informationforemployees Informationforsuppliers Basisforprofitdistribution Informationforbanks Informationforentity'smanagement Informationforowners Basisfortaxation

Figure 2. Objectives of separate financial statements (Eierle & Haller 2007:10)

SMEs record keeping and reporting

International trade participation, international investment, access to global markets

Lenders evaluation of SME

Economic growth unemployment, company taxes, etc.

SMEs growth potential & employment provided

TIMETABLE FOR DOCUMENT PUBLICATIONAPRIL 2010 to DECEMBER 2011

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