IFRS for SMEs Blog

Incompatibilities with the EU Directives: Mountain or molehill?

Friday, July 09, 2010 | Posted by: Grant Thornton
Categories: IFRS for SMEs | Tags: IFRS, IFRS for SMEs, UK GAAP, SMEs, financial reporting, Companies Act, FRSs, SSAPs, EFRAG

By Katherine Martin, our secondee to the ASB as a Project Director on the Future of UK GAAP project

Most of us know that the requirements for UK financial statements are set out in FRSs, SSAPs and parts of the Companies Act which together make up UK GAAP. But many people may not be aware that there is an underlying legal requirement to comply with the EU Accounting Directives (often known at the Fourth and Seventh Directives).

This means that, if the IFRS for SMEs is to be included as part of the new UK GAAP, it needs to comply with the Directives.

So, back in November, the European Commission asked EFRAG (the European Financial Reporting Advisory Group) to undertake a line by line review of the IFRS for SMEs to identify any conflicts. EFRAG recently released its findings, and in their letter they set out six such incompatibilities.

Some see these findings as a major stumbling block to adoption of the IFRS for SMEs in the UK. But do they actually represent a serious problem?

Well, looking at the list, some of the areas have been addressed before in UK GAAP, such as the treatment of ‘extraordinary items’. Others only arise rarely and would simply require minor tweaks to the standard, such as the reversal of impairments made to goodwill.

The most problematic area is likely to be fair value: the IFRS for SMEs requires its use for certain financial instruments which cannot be fair valued under the Directives. Again this can be resolved by making a change to ‘UK and Ireland IFRS for SMEs’, although this might be a more significant amendment.

The cost of these changes would be the loss of some international comparability in these six areas, but if the ASB can demonstrate that the IFRS for SMEs can be modified to comply with the Directives it may pave the way for other EU countries to permit its use.

And let’s not forget the ongoing review of the Directives - if the revision to the Directives removes these incompatibilities, then problem solved!

Overall it seems to me that these are relatively straightforward issues to fix, and certainly a hurdle to be crossed rather than a reason to go back to the starting blocks. But what’s your opinion?