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Differential Accounting Requirements for Micro Small and Medium Taxpayers. Henri Fortin, Head , Centre for Financial Reporting Reform International Tax Dialogue Conference on Taxing Micro and Small Businesses Tbilisi, May 5, 2011. Differential Reporting: Background.

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differential accounting requirements for micro small and medium taxpayers

Differential Accounting Requirements for Micro Small and Medium Taxpayers

Henri Fortin, Head, Centre for Financial Reporting Reform

International Tax Dialogue Conference on Taxing Micro and Small Businesses

Tbilisi, May 5, 2011

differential reporting background
Differential Reporting: Background
  • Accounting standards historically developed with a focus on public-interest entities (PIEs) or public companies
  • Increasing complexity of transactions (financial instruments, securitization, structured investment vehicles, business combinations, etc.)…

… leading a the growing body of accounting standards, difficult to understand by most accountants

  • Proposals emerged to develop a separate or parallel set of standards for smaller entities
  • Key principle behind differential reporting: cost-benefit equation in definition the financial reporting requirements
differential reporting a recent trend
Differential Reporting: A Recent Trend
  • Until recently, most countries followed the “one-size-fits-all” approach
  • A consensus now exists in favor of differentiating between types of entities
  • Two proposals developed at international level
    • Accounting and Financial Reporting Guidelines for SMEs: two levels (SMEGA 2 and 3) – UNCTAD, 2003
    • The IFRS for SMEs – IASB, 2009. Countries around the world have started adopting it
  • In the European Union, accounting directives apply to all companies – current discussions regarding a possible adoption of the IFRS for SMEs
  • No universal model or approach to implementing differential reporting
differential reporting different models
Differential Reporting: Different Models
  • Self contained v. One set of standards with exemptions for SMEs
  • How many layers?
    • Three levels: PIEs / SMEs / Microenterprises
    • Two levels: public v. closely held companies
  • Definition of SMEs
    • Based on notion of public accountability
    • Based on quantitative criteria
  • What types of simplification? Disclosure only, or recognition and measurement as well?
  • Options provided by accounting standards (e.g., cost model or revaluation model for property): what to do with those?
differential reporting examples
Differential Reporting: Examples
  • In most EU countries
    • One set of standards compliant with the 4th and 7th directives
    • IFRS for companies listed on regulated markets (Reg. 1606/2002)
  • Spain: Two separate accounting systems (large v. SMEs) plus specific accounting requirements for microenterprises
  • UK: Three levels: IFRS, UK GAAP and “FRSSEs” – each set is self-contained
  • Chile: Simplified accounting for SMEs and Micros, established by law as part of a “Simplified Taxation System”
  • New Zealand: “Framework for Differential Reporting” - partial and full exemptions in terms of disclosure
  • Francophone Africa
    • Three levels: “normal”, “simplified”, “minimal, cash basis”
    • Based on revenues only, with low thresholds
two approaches to financial reporting
Two approaches to financial reporting

Approach 1

  • Focus on financial information provided to external users (investors and lenders) for economic decisions
  • Notion of “general-purpose financial statements”
  • Standards prescribe principlesfor the presentation, recognition and measurement of assets, liabilities, revenues and expenses, and the related disclosures
  • Tax reporting is generally treated as a separate process, or even fully decoupled
  • Model prevailing in countries with deep financial markets
  • Financial reporting information less likely to be influenced by other considerations
two approaches to financial reporting1
Two approaches to financial reporting

Approach 2

  • “Accounting system” including
    • Uniform nomenclature (chart) of accounts
    • Presentation, recognition, measurement and disclosure principles
    • Prescriptions regarding the way books of accounts are kept
  • Designed to satisfy the needs of external users (incl. tax authorities) and owners/managers – strong linkage with tax reporting
  • Model prevailing in Continental Europe
  • Increased comparability / “one-stop-shop”
considerations for developing differential accounting
Considerations for developing differential accounting
  • Country’s traditions (legal, administrative, accounting, business, etc.)
  • Degree of development of financial markets
  • Existing financial/corporate information infrastructure (e.g., credit bureaus)
  • Degree of development of the profession
thank you

Thank you

  • The views expressed in this presentation do not necessarily reflect those of the Executive Directors of The World Bank or the governments they represent.
  • Differential Accounting Requirements for Micro Small and Medium Taxpayers
  • Tbilisi, May 5, 2011