Accounting for SMEs: Analyzing the Ineffectiveness of IFRS Standards

This essay delves into the challenges faced by Small and Medium Enterprises (SMEs) in managing their accounting and financial operations, particularly in the context of IFRS implementation. It argues that traditional financial accounting methods, often used by larger firms, are not always relevant or cost-effective for SMEs. The essay examines the debate surrounding the adoption of IFRS by SMEs, highlighting the concerns of business owners regarding the costs and complexities involved. It explores alternative accounting measures, such as margin analysis and variance analysis, that can be more practical and useful for assessing profitability in SMEs. The essay concludes that while IFRS might not be the most effective approach for all SMEs, the use of appropriate accounting measures can help these businesses make informed decisions and achieve financial success. The essay uses academic sources to support its arguments.

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ACCOUNTING FOR SMALL AND MEDIUM-SIZED ENTERPRISES

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Introduction
The small business organizations face several challenges in the context of managing and
controlling their accounting and finance operations. This is largely because the conventional
method of management and financial accounting used by larger firms such as cost accounting
and development of financial statements seems to be irrelevant for such firms. This is because
due to their small scale operations and thus they can incur larger costs in implementation of such
accounting practices as compared to the benefits realized. In this context, IFRS has also
developed and established distinct set of accounting standards to be used by small and medium
sized businesses for their financial reporting. The standards have provided relaxation to some
measurement and recognition criteria for SME’s to reduce the costs they incur to development of
financial reports. However, IFRS is facing debate for promoting the development and
maintenance of financial reports by the small businesses as their owners regards that financial
statements do contain important information essential for promoting success and growth of these
firms (Collings, 2010). In this context, the present essay discusses the relevance of some
accounting measures to be used for small and medium sized business in comparison to others for
highlighting the ineffectiveness of IFRS for SME’s.
Accounting measure that is useful for small and medium business (A debate on choosing
the right accounting measure for SMEs)
Role of financial accounting in SMEs and why it is not given importance by business owners
at Small and Medium Enterprises
There has been strong debate ongoing on the adoption of IFRS by SMEs for financial
reporting purpose. As per information gathered from various articles, news and other sources, it
has been mentioned that adoption of IFRS by SMEs has proved to be painful and costly project
to the respective organization. Business owners at SMEs have argued that there is no absolute
benefit of using IFRS for the purpose of financial accounting and in addition to this financial
accounting itself incurs cost with no benefit to the organization (Krantz, 2016). Owners at small
and medium size firms argued that implementation of IFRS that lead to cost due to stretch in
staff and resources with no return to the economy of the company. In addition to this,
management at SMEs reflected that they do not have direct competitor and stakeholders that
have potential interest in the performance of company. Financial issues such as liquidity,
profitability and other financial matters can be solved without giving through consideration to
IFRS. It is can understood through taking profitability as the accounting issue for SMEs and how
various accounting measures can be used to solve this accounting without referring to IFRS
(Segarra, 2011).
Accounting issue that is very important for the point of SMEs with special emphasis to
profitability

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SMEs face many issues related to accounting issue such as profitability and it is very
important because survival of SMEs is critically dependent upon the profitability position of the
company. Assessment of profitability helps business owners to gain insight view of results of
operations and also helps to take important decisions regarding the future growth of the business.
In SMEs, there is no direct interest of people other than its owner and other member that have
direct investment in the company. So, in SMEs profitability position can be determined through
use of other methods such variance analysis, ratio calculations and other accounting measures.
There is no need to follow for depicting the profitability position of SMEs as IFRS requires huge
investment with least or no return. So the use of other accounting measures can easily solve the
accounting issue such as profitability (Brigham and Michael, 2013). Below are the accounting
measures that can be used to assess the profitability performance of SMEs:
Margin Analysis: As the prime motive of SMEs is to earn the maximum profit and in this
context calculating the margin will help the owners of SMEs to assess the profitability position
in very easy manner. The analysis of margins can be split into the granular detail which goes
beyond just the bottom line and not anything more than that. Some of important common metric
used for depicting the margins are:
 Gross profit: It is calculated as sales less cost of sales and it is represented as percentage
of sales. Here, cost of goods sold includes all the cost that is directly related to cost
occurred for bring the gold to saleable condition such as direct labour, raw material,
inward shipping and overhead directly related to factory production. Formula: Gross
Profit/Sales (Damodaran, 2011)
 EBITDA Margin: EBITDA refers to the earnings before interest, tax, depreciation and
amortisation and EBITDA margin helps to estimate the cash margin that can be left with
the company after paying all the expenses. Formula: EBITDA/Net Sales (Davies and
Crawford, 2011)
 Net Profit Margin: It is most important aspect as it calculates profit which is left over
after meeting all the expenses. Formula: Net profit/Sales (Nanavati, 2017)
Variance Analysis
The variance analysis can help a small business to gain an insight into its current
profitability position by the use of key financial items such as sales volumes. The most effective
method used by small entities is sales variance analysis that helps in developing an
understanding of the change in the sales volume realized by a company during a specific
financial period as compared with the standard measures. It provides a quantitative investigation
of the difference between actual and planned behavior and thus can be used effectively for
maintaining a control over the business. For example, if a small business firm estimates the sales
of $10,000 and actual sales realized are $8,000 then a variance analysis yields a difference of
$2,000. The small businesses owner can effectively measure the profitability position and
conduct its comparison over previous years by the use of such accounting measures method.

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Reasons of not adopting IFRS to measure the profitability of SMEs
The limited financial and human resources possessed by small and medium sized
business entities is responsible for the use of such accounting measures for analysis of their
profitability position as compared to the conventional method of accounting used by large firms
such as development of financial statements. The IFRS developed for small and business entities
can be regarded as ineffective for over viewing the profitability position of these firms due to the
following reasons:
 Limited Financial resources: The small businesses possess limited financial resources and
therefore there is no need for them to engage in the complexities of development and
presentation of their financial reports. This is because it will result in incurring them
higher costs as compared to the benefits realized and therefore it would find it difficult
for the firms to develop their financial reports that can result in exhaustion of their
limited labor as well as financial resources (IFRS for SMEs, 2009).
 Legal Complications: The compliance with IFRS by SME’s requires them to legally
comply with the changes in the standards that can result for them to cause changes in the
internal processes that can be time-consuming as well as resource-draining.
 Probability of Error Occurrence: The increasing complexities involved in the preparation
of financial reports and lack of sufficient accounting expertise increases the probability of
occurrence of errors within the financial reports developed by such firms. The data entry
inaccuracies can result in causing huge losses to the company (Accounting and Tax,
2009).
Conclusion
Thus, it can be said from the overall discussion carried out in the essay that accounting
measures used by small business owners should be significantly different from the larger
business corporations. The specifically developed IFRS for small business entities is not so
effective for such firms due to incurring higher costs and time on the part of small firms for their
implementation as compared to the benefit realized.

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References
Accounting and Tax. 2009. Why Small Biz Isn’t Ready for IFRS. [Online]. Available at:
http://www.cfo.com/accounting-tax/2009/10/why-small-biz-isnt-ready-for-ifrs/ [Accessed on: 11
April 2019].
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Canada: Cengage
Learning.
Collings, S. 2010. The great IFRS debate. [Online]. Available at:
https://www.accountingweb.co.uk/business/financial-reporting/the-great-ifrs-debate [Accessed
on: 11 April 2019].
Damodaran, A, 2011. Applied corporate finance. USA: John Wiley & sons.
Davies, T. and Crawford, I., 2011. Business accounting and finance. USA: Pearson.
IFRS for SMEs. 2009. CPD technical article. [Online]. Available at:
https://www.accaglobal.com/in/en/member/discover/cpd-articles/corporate-reporting/ifrs-
smes.html [Accessed on: 11 April 2019].
Krantz, M. 2016. Fundamental Analysis for Dummies. USA: John Wiley & Sons.
Nanavati, U. 2017. Profitability analysis for SMEs- Know how well your business is doing.
[Online]. Available at: https://economictimes.indiatimes.com/small-biz/sme-sector/profitability-
analysis-for-smes-know-how-well-your-business-is-doing/articleshow/57937713.cms?from=mdr
[Accessed on: 11 April 2019].
Segarra, M. 2011. Small Companies Criticize Switch to IFRS. [Online]. Available at:
http://www.cfo.com/accounting-tax/2011/07/small-companies-criticize-switch-to-ifrs/ [Accessed
on: 11 April 2019].