SMEs Scrutinizing Benefits of IFRS

September 19, 2005 by SAP News

Current research by the Association of German Chambers of Industry and Commerce (DIHK) and PricewaterhouseCoopers (PwC) indicates that almost 60 percent of the 600 SMEs surveyed have already considered the pros and cons of preparing their accounts in line with IRFS. 80 percent do not see any need to change their method of financial reporting at present.

Size often the deciding factor

So far, it is primarily larger companies with sales of EUR 60 million for whom a change to IFRS is relevant. This group accounts for a higher than average share of the eight percent of SMEs surveyed that already prepare their accounts in line with IFRS. “IFRS accounting appeals above all to companies with a substantial export sales share than to those without. Nevertheless, according to the results of the survey, five percent of those companies that trade solely on the German domestic market prepare their accounts in line with IFRS,” reveals Dr. Axel Nitschke, Chief Economist at the DIHK. Of the 11 percent who plan to change to IFRS, over half post sales of more than EUR 60 million. On the other hand, a good third of those surveyed indicated that they had not yet considered using IFRS. This group primarily includes those companies that are not affiliated to a corporate group, that have fewer than 250 employees, little or no export revenue, and sales of EUR 32 million or less.
A company’s decision for or against voluntary reporting based on IFRS is not exclusively dependent on its size. “The pros and cons of implementing IFRS in SMEs differ from company to company. There’s no universally applicable answer, no unreserved yes or no,” claims Prof. Norbert Winkeljohann, Middle Market Leader at PricewaterhouseCoopers. In particular, SMEs with substantial export operations should carry out intensive analysis of the reporting standards before reaching a decision. “Companies should not simply assume that changing to IFRS is a sound business investment. Firstly, they must carefully consider the advantages and disadvantages,” advises Winkeljohann.

Advantages above all in corporate group

23 percent of the companies surveyed cite the reduced workload in internal and external reporting as a key advantage of IFRS accounting. The survey indicates that non-listed groups also reap benefits of financial reporting by IFRS as a result of the improved comparability between subsidiaries. The 8 percent of participating companies that already use IFRS testify to advantages such as a clearer depiction of the company situation and improved group reporting, which they claim more than compensate for the increased accounting workload.
Preparing accounts based on IFRS even brings benefits to those companies that do not wish to change their method of reporting. Approximately half of all the companies surveyed cited fundamental improvements to the presentation of their capital, financial, and revenue situation. Other advantages for companies included positive effects in their rating by their bank (19 percent), and easier access to the capital market (12 percent) or alternative methods of financing (5 percent).
According to the companies surveyed, reporting by IFRS can also provide impetus for internationalization. 14 percent expect to become more competitive on international markets. Six percent believe that IFRS accounting will help them to find partners abroad. 13 percent foresee better opportunities for a potential company sale than with the traditional method of reporting based on the German Commercial Code.

Increase in workload a major stumbling block

According to the companies surveyed, the greatest disadvantage of using IFRS is the effort involved in changing over to the new procedure and the consequent increase in workload which 79 percent of the surveyed SMEs associate with the introduction of IFRS. 50 percent foresee higher internal staffing costs, while 57 percent cite the increased costs of external consulting as a disadvantage. Just under half of the companies (48 percent) regard the IFRS accounting principles as overly complex. The need to prepare duplicate accounts is also seen as a huge drawback. After all, a company may well be able to prepare its group accounts voluntarily based on IFRS, but the individual company accounts must still comply with the German Commercial Code.
Request a free copy of “IFRS in SMEs” (“IFRS in mittelständischen Unternehmen”) by mailing daniela.mongiat@de.pwc.com .

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