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ACCOUNTING & AUDIT
Is there a need for a simplified financial reporting framework in Cyprus? By Gabriel Onisiforou, Board Member, ICPAC and Ernst & Young Cyprus Ltd
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nternational Financial Reporting Standards (IFRS) have been adopted for all companies in Cyprus since 1981. However, the fact that small and medium-sized entities (SMEs) need to comply with the requirements of full IFRS is burdensome and costly. Considerations need to be made as to whether we should develop a local accounting framework (GAAP) to reduce the financial reporting burden for the preparers of the financial statements and their auditors but also for the users of these financial statements such as banks, tax authorities and regulators as well as suppliers, customers, employees, etc. The European Commission (EC) has adopted the European Accounting Directive (2013/34/EU) which provides the legal framework for single company and consolidated accounts for undertakings based in the EU, which was transposed into the national legislation of each Member State. The Directive recognizes that 90% of companies are SMEs. It also recognises that current accounting rules impose a disproportionate administrative burden on smaller entities and highlights the need for a simplified financial reporting regime. To this effect, the EC requires only EU listed companies in EU regulated markets to prepare their consolidated financial statements in accordance with full IFRS. However, a Member State has the option to require the preparation of financial statements to be in conformity with full IFRS for all companies. Cyprus has chosen this route and is the only country in the EU with a single-tier financial reporting framework; its only GAAP is full IFRS. All other European Member States have either developed
ACCOUNTANCY CYPRUS
& Eleni Ashioti, Technical and Professional Matters, ICPAC
a local accounting framework based on the options available in the Directive and/or they have used IFRS for SMEs, developed by the IASB, as a basis with modifications to make it compatible to the Directive (e.g. the UK, Ireland and Malta). The following GAAP regime applies in the UK and Ireland: Under Financial Reporting Standard (FRS) FRS 100, the requirement to use full (EU-adopted) IFRS only applies to the consolidated financial statements of EU entities listed on a regulated market in the EU, or if required by other legislation. FRS 102 is the principal accounting standard in the UK financial reporting regime and is based on the IFRS for SMEs standard. It sets out the financial reporting requirements for entities that are not applying full IFRS, FRS 101 (Reduced Disclosure Framework: Disclosure exemptions from EU-adopted IFRS for qualifying entities) or FRS 105 (The Financial Reporting Standard applicable to the Micro-entities Regime).
It is necessary to moVe towards a simplified financial reporting regime IFRS for SMES As mentioned above, full IFRS applies to consolidated/listed and publicly accountable entities and so the IASB issued the IFRS for SMEs standard in 2009 as an alternative to full IFRS. IFRS for SMEs
is a self-contained accounting and reporting standard but it draws from full IFRS. Compared to full IFRS, it is approximately 250 pages vs approximately 3,000 for full IFRS and requires approximately 10% of full IFRS disclosures. It focuses on the information needs of lenders, creditors and other users of SME financial statements who are interested primarily in information about cash flows, liquidity and solvency. In its preface, the IASB notes that it developed and issued this separate Standard with the intention of applying it to entities that are referred to by a variety of terms, including SMEs, private entities and nonpublicly accountable entities. An entity has public accountability if its debt or equity instruments are traded in a public market or is in the process of being listed (in regulated or unregulated/over-the-counter markets), or it holds assets in a fiduciary capacity for a broad group of outsiders (e.g. banks and credit unions, insurance companies, securities brokers/dealers, mutual funds, investment banks). The IASB also notes that IFRS for SMEs is based on full IFRS with modifications to reflect the needs of users of SMEs’ financial statements and cost-benefit considerations. New IFRS (such as IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases) are currently not reflected in the IFRS for SMEs Standard. Amendments to this standard are normally proposed every three years in an Exposure Draft. It is currently unknown what the outcome will be of the next comprehensive review that started in early 2019. The IASB notes that each new
