Title: PROPOSED IMPLEMENTATION OF A FINANCIAL REPORTING FRAMEWORK FOR SMEs
1PROPOSED IMPLEMENTATION OF A FINANCIAL REPORTING
FRAMEWORK FOR SMEs
Simon RileyHong Kong Society of Accountants11
May 2004
2The First Consultation Where we left off last
time
- General support for a differentiation to main
GAAP for SMEs - Concerns that cost benefit not sufficiently
redressed - Response Separate Framework based primarily on
historical cost convention
3Six Consultation Issues
- The need for a separate financial reporting
framework for SMEs? - Justification / principles for SME financial
reporting framework? - True Fair necessary?
- Which entities should qualify?
- How does the Companies Ordinance requirement fit
in? - What reporting requirements should apply?
4Issue 1 Separate financial reporting framework
for SMEs
- General consensus from first consultation that a
differentiated / separate SME reporting framework
- Recap on international experience from first
consultation - - SME reporting frameworks in place in UK,
Australia, Canada, NZ
5Issue 1 Separate financial reporting framework
for SMEs
- Developments at IASB
- - Discussion Paper imminent
- - Accommodating the IASBs approach in Hong Kong
6Issue 2 Justification / principles
- Costbenefit
- - Limited user group for non-listed SMEs in
non-regulated industries - - Financial reporting needs of users
- Resources available to SMEs also limited
- Financial reporting requirements should always
meet the costbenefit criterion (for main GAAP
SME GAAP)
7Issue 3 True Fair necessary?
- In CP-I, proposition was that True Fair
necessary - - integrated approach
- differential reporting
- Problem
- - disclosure relief not consistent with true
fair - - did not sufficiently redress costbenefit issue
- Decision to propose SME financial reporting
framework outside True Fair
8Issue 4 Which entities qualify?
- No public accountability
- - Listed securities
- - Banks, insurance companies, dealers, investment
advisers - Unanimous agreement of owners
- Hong Kong Company per s.141D, currently
- - Private company
- - No subsidiaries / holding company
9Issue 4 Which entities qualify?
- Other entities on the basis of size
- - Not to exceed any two of the following
- - Total revenue of HK50m p.a.
- - Total assets of HK50m
- - 50 employees
10Issue 5 Companies Ordinance
- Current s.141D True Correct requirement to
remain for qualifying companies - Â S.141D companies to prepare financial statements
in accordance with Companies Ordinance
requirements with relevant HKSA requirements
(currently PN 600.2 but proposed new
SME-Financial Reporting Standard)
11Issue 5 Companies Ordinance
- Proposed retention of s.141D separate reporting
framework but lobby for changes - - Repeal Eleventh Schedule
- - Repeal group company restriction
- - Introduce size criteria
12Issue 6 Financial Reporting Framework
- 1st consultation discussion on integrated v
separate framework - Differential reporting proposal was integrated
operating within true and fair - Comments received re-think of approach
- 2nd consultation separate approach
- Financial Reporting Framework (SME-FRF)
Financial Reporting Standard (SME-FRS)
13Issue 6 Financial Reporting Framework
- Cutting ties with true and fair (main GAAP)Â
- Measurement Disclosure requirements greatly
simplified proposed historical cost basis - Will not necessarily move in tandem with main
GAAP (contrasts with UK FRSSE which is linked to
true and fair)
14Issue 6 Financial Reporting Framework
- Designed to redress the balance between cost
benefit - - But a quantification not possible
15Financial Reporting Framework (SME-FRF)
- Summary of main points
- Different user base for SME financial statements
absence of investing public - Accrual accounting still applicable
- substantially same definitions of asset,
liability, revenue expense as per main
GAAP - But historical cost convention considered
appropriate for users needs and for costbenefit
in financial reporting for qualifying entities - Stewardship rather than business valuation
16Financial Reporting Framework (SME-FRF)
- For a qualifying entity
- - free choice to apply either SME-FRS or main
GAAP but not a hybrid of the two - - SME-FRS applies only to a single entitys
financial statements main GAAP required for
consolidated financial statements
17Financial Reporting Framework (SME-FRF)
- On first time adoption of the SME-FRS
- - financial statements and comparatives in full
compliance with the SME-FRS except when
impracticable to do so s.141D exemption on
comparatives - - equity reconciliation to that reported under
previous GAAP
18Financial Reporting Standard (SME-FRS)
- Stand-alone set of financial reporting
requirements - Applicable only to entitys separate financial
statements - - Consolidation requires application of full GAAP
- Â
19Financial Reporting Standard (SME-FRS)
- Significant simplifications to main GAAP
- - Asset accounting Property, Plant Equipment,
Leases, Investments, Investment Properties,
Intangibles All at Cost less depreciation /
amortisation / impairment (as applicable) - - Income Taxes No deferred tax recognition
- - Disclosure relief in many cases (e.g.
impairment no Cash Flow Statement) - Introduction of Related Party Disclosure
requirements - Illustrative financial statements
20The Consultation Process
- Consultation documents issued for public comment
- - Comments welcomed by 31 August 2004
- Available on HKSA websitehttp//www.hksa.org.hk/p
rofessionaltechnical/accounting/exposuredraft/
21The Consultation Process
- We have also specifically written to those who
provided comments on the first consultation - First consultation paper comment letters posted
on the HKSA website http//www.hksa.org.hk/profess
ionaltechnical/accounting/rm/consultation_paper.p
df - http//www.hksa.org.hk/professionaltechnical/acc
ounting/rm/ias_consultation_paper.php