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Is there a need for a simplified financial reporting framework in Cyprus?
By Gabriel Onisiforou, Board Member, ICPAC and Ernst & Young Cyprus Ltd
& Eleni Ashioti, Technical and Professional Matters, ICPAC
International 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 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).
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
and revised full IFRS Standard should be considered individually on a case-by-case basis to decide if and how its requirements should be incorporated into the IFRS for SMEs Standard.
Non-Endorsement of IFRS for SMES at EU level When the EC considered the adoption of IFRS for SMEs, it concluded that in six areas it was not compatible with EU regulation, mainly because it was still considered complex for European SMEs. This is in accordance with a study ‘Compatibility Analysis IFRS for SMEs and the Council Directives’, conducted in 2011 by the European Financial Reporting Advisory Group (EFRAG), being the advisor to the EC on accounting matters. Nevertheless, the EC notes that Member States can permit or require IFRS for SMEs as their accounting standard for all or some of their unlisted companies, provided that the Directive is fully implemented, and the standard is modified to comply with any accounting requirement of the Directive that departs from IFRS for SMEs.
The Way Forward? The Directive requires Member States to consider the specific conditions and needs of their own markets. Noting that micro and small undertakings have limited resources with which to comply with regulatory requirements, we believe it is necessary to move towards a simplified financial reporting regime. As such, it is our belief that we should consider the possibility and the practical way to eliminate the obligation of all companies, irrespective of their ownership structures and size, to prepare their financial statements in full IFRS compliance. Considering also the scope of full IFRS, these are not meant to be used by entities that do not have public accountability. Developing our own accounting standard, based on the direction of the Directive, would be an ideal solution as it is based on a ‘‘think small first’’ principle – it starts with the accounting requirements of small undertakings and then adds additional accounting and reporting requirements as undertakings pass the thresholds for medium and large undertakings. However, there should be capacity and proper resources to prepare such a framework and to continually monitor it in the future. Modifying IFRS for SMEs to comply with the Directive could be a more suitable solution for moving away from this complexity, while maintaining a high-quality level of financial statements. Providing a comprehensive set of financial statements is especially important in the case of Cyprus. The country is an international business and financial centre of credible standing and is sensitive to foreign investments, anti-money laundering procedures and transparency. Having an internationally recognised standard, while avoiding disproportionate administrative burdens on small undertakings, seems to meet such concerns. Also, the banks and the tax authorities use the financial statements of an entity for their own purposes, and moving towards a standard which has the same underlying principles as those currently used could, therefore, be more easily comprehended and followed. Lastly, IFRS for SMEs is drawn from full IFRS, and is therefore more easily adopted and understood in Cyprus, making the learning curve for the preparers, auditors and the accounting profession in general much easier.
Do you agree with the need to move away from full IFRS for certain companies in Cyprus and introduce a “non-full IFRS GAAP”? How do you envisage this change? We welcome members’ views at info@icpac.org.cy.
