Major changes to the SME accounting standard to accelerate the recognition of impairment losses

The revisions to the SME Standard are expected to improve the quality of financial information that SMEs provide in their financial statements to those who use them.

This is an opportune time to contribute to the revisions that are being proposed to the IFRS for SMEs Standard.

The Small and Medium-sized Entity (SME) accounting standard is undergoing a review and the revisions will affect SMEs in South Africa. The changes to the SME Standard range from the rewrite of the accounting requirements for revenue transactions to introducing the expected credit loss impairment model for certain financial assets and updating the definitions of assets and liabilities.

Some of the changes being proposed may require SMEs to start reviewing legal agreements in place relating to revenue transactions or may trigger a need to consider the impact on debt covenants. While it may have financial statement and business implications, the revisions are expected to improve the quality of financial information that SMEs provide in their financial statements to the users of those financial statements such as creditors, investors or financial institutions.

A new revenue recognition model is being introduced which is a simplified version of the revenue model which was adopted under the International Financial Reporting Standards (IFRS) in 2018. Entities with simple revenue transactions such as those that enter into cash transactions are unlikely to feel the impact. However, those in industries like the construction sector may need to consider whether the new requirements will not affect the timing of revenue recognition and thereby impact profits on a year-to-year basis.

SMEs will welcome the relief provided relating to the impairment of debtors, as the incurred loss model can still be applied to these financial assets. The incurred loss model, which is currently being applied, allows impairment losses to be recognised when a credit event has occurred. The new expected credit loss impairment (ECL) model will be applicable to all other financial assets measured at amortised cost, except for debtors and contract assets. The ECL model requires impairment losses to be recognised much earlier as these may have to be recognised over the life of the instrument and not only when an impairment indicator exists.

SMEs in the agricultural sector will see a change in the accounting for bearer plants in that they will have an option to depreciate these plants over their useful lives, whereas under the current Standard, these are measured at fair value less cost to sell, with fair value changes recognised in profit or loss.

The updates to the definitions of assets and liabilities have not been spared as these are based on the conceptual framework that was published more than three decades ago. The inclusion of guidance on measurement, presentation and disclosure is intended to assist SMEs when applying judgement in developing accounting policies when the IFRS for SMEs Standard does not specify requirements for a particular transaction. SMEs may have to assess whether the changes to the definitions as well as the additional guidance provided will have an impact on their financial statements.

Those SMEs entering lease transactions will continue to apply the current lease accounting model, which requires entities to classify leases as either operating or finance leases. The alignment process with this IFRS Standard equivalent (IFRS 16 – Leases) will be deferred to a later date. The proposal to defer the effective date is a result of a call from constituencies to postpone the alignment with IFRS 16 until the post-implementation review of this IFRS standard has been completed.

These proposed changes will lead to additional financial commitments due to systems adjustments to accommodate the new requirements, the training of staff on the new requirements, or the appointments of consultants to support the SMEs during the implementation. The significance of the funding requirements may vary from entity to entity.

Those charged with governance within SMEs will need to be made aware of the upcoming changes before the amendments come into effect to ensure that they understand the business and financial statement implications of such amendments.

This is an opportune time to contribute to the revisions that are being proposed to the IFRS for SMEs Standard to ensure that the final amendments being made are simple and easy to implement in an SME environment. Similarly, the new requirements should help SMEs provide useful information to their users of financial statements.

In the South African context, SMEs that will be affected by the proposed changes to the IFRS for SMEs Standard are companies and close corporations with a public interest score below 350, as determined in terms of the Companies Act 71 of 2008, that have opted to apply IFRS for SMEs. Other entities that are not compelled to comply with a prescribed financial reporting framework but have elected to apply IFRS for SMEs will also be impacted.

Comments on the draft amendments to the IFRS for SMEs Standard should be submitted to the International Accounting Standards Board by March 2023.

For more information visit www.saica.org.za

About SAICA

The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 50 000 members and associates who are chartered accountants (CAs[SA]), as well as associate general accountants (AGAs[SA]) and accounting technicians (ATs[SA]), who hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in every sphere of commerce and industry, and who play a significant role in the nation’s highly dynamic business sector and economic development.

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Bongeka Nodada is Corporate Reporting Executive at SAICA