SMEs and SMPs: Addressing their Needs and Optimising SMP's Contributions Paul CHAN Council Member and Chairman of the Small & Medium Practitioners Committee, Hong Kong Society of Accountants Managing Partner, Paul Chan & Partners Hong Kong

SMEs and SMPs: Addressing Their Needs and Optimizing SMPs’ Contributions Paul M. P. Chan Chairman, SMPs Committee, HKSA Member, SMP Task Force, IFAC 21 November 2002

© 2002 Paul Chan & Partners. All rights reserved. 3 Definition of SMEs & SMPs  Size, but no universal definition  SMEs ≠ SMPs Size Needs

© 2002 Paul Chan & Partners. All rights reserved. 4 Financial Reporting Needs of SMEs  IASs driven by the desire for a global set of standards for cross-border listings Greater length and complexity Greater disclosure

© 2002 Paul Chan & Partners. All rights reserved. 5 Financial Reporting Needs of SMEs (Cont’d)  Relevance of IASs to smaller companies and the associated costs of preparation and auditing  Who are the stakeholders in financial statements

© 2002 Paul Chan & Partners. All rights reserved. 6 Why Financial Reporting Needs of SMEs Ought To Be Addressed  Huge number of businesses Impact on the labour market Contribution to the economy  Listing requirements ≠ Accounting requirements

© 2002 Paul Chan & Partners. All rights reserved. 7 Issues to Consider  Accountability: Public accountability Separation of owners and management  Cost vs Benefit

© 2002 Paul Chan & Partners. All rights reserved. 8 Issues to Consider (Cont’d)  Accounts to show true and fair view Recognition and measurement requirements Disclosure requirements

© 2002 Paul Chan & Partners. All rights reserved. 9 International Developments in the Area of Differential Reporting  Canada, New Zealand & Hong Kong Exemptions on a standard by standard basis Differential reporting within GAAP Full exemptions Partial exemptions  Exemptions mainly on disclosure  Measurement simplification quite limited

© 2002 Paul Chan & Partners. All rights reserved. 10 International Developments in the Area of Differential Reporting  Canada, New Zealand & Hong Kong (Cont’d) Measurement simplifications: Currently: quite limited What if: owner-managed situation where all investors are “insiders”  Is cost basis rather than fair value basis of measurement acceptable ?

© 2002 Paul Chan & Partners. All rights reserved. 11 International Developments in the Area of Differential Reporting (Cont’d)  UK A separate set of standards for smaller entities (‘FRSSE’) Concerns Double standards? Inconsistency? Still ‘True and Fair’ Accounts?

© 2002 Paul Chan & Partners. All rights reserved. 12 International Developments in the Area of Differential Reporting (Cont’d)  UK (Cont’d) Counsel advice in the UK No conflict or likely weakening of the FRSSE provided that:  The treatment is the same or a simplified version of the treatment in Big GAAP  Different treatments are justified on rational grounds  Rational ground might include  Different nature of entities  Different disclosures are for different users of financial statements  Established practice

© 2002 Paul Chan & Partners. All rights reserved. 13 International Developments in the Area of Differential Reporting (Cont’d)  USA Cash accounting and modified cash accounting Tax basis of accounting  Australia Accounts need not comply with some or all of the accounting standards

© 2002 Paul Chan & Partners. All rights reserved. 14 International Developments in the Area of Differential Reporting (Cont’d)  United Nations – Intergovernmental working group on international standards of accounting and reporting Three-tier approach Level 1 Business – Listed entities Level 2 Business – Significant commercial, industrial and business entities Level 3 Business – Owner-managed with few employees

© 2002 Paul Chan & Partners. All rights reserved. 15 SMPs’ Contribution in Satisfying the Needs of SMEs & SMPs  Understand the perspectives of SME owners  Know the needs of users  SMPs are often those who: prepare accounts for SMEs choose which reporting framework to be adopted by a SME

© 2002 Paul Chan & Partners. All rights reserved. 16 Difficulties Faced By SMPs in Trying To Contribute  Workload  Expertise and exposure  Resources constraints

© 2002 Paul Chan & Partners. All rights reserved. 17 Optimizing SMPs’ Contribution  In the Standard setting process: Comments on EDs Serving on standard setting committees, with alternate membership

© 2002 Paul Chan & Partners. All rights reserved. 18 Optimizing SMPs’ Contribution (Cont’d)  Panel of resources persons to give input prior to the publication of EDs Diversity of expertise and experience Sharing of workload SMP/SME perspectives duly considered before ED is formulated Getting their buy in  Consultation paper on controversial issues

© 2002 Paul Chan & Partners. All rights reserved. 19 Optimizing SMPs’ Contribution (Cont’d)  Others Formation of SMP Committee to oversee matters of interests to SMPs and co-ordinate efforts Periodic discussion forums to share ideas and collect feedback