THE government is looking to revise the financial reporting standards (FRS) for small firms here, under a new framework that will be up for public consultation.

This came after the Accounting Standards Council (ASC) formed a taskforce earlier this year to look into differential reporting for small and medium-sized enterprises (SMEs) and how it could be applied here.

This allows SMEs to depart from particular requirements of accounting standards or entire accounting standards in preparing their financial statements.

To qualify for the new standards, it is proposed that a firm must satisfy two of the three criteria: (a) net assets do not exceed $15 million; (b) annual turnover does not exceed $15 million; and (c) average number of employees does not exceed 200.

The SME also has a choice of either following the full FRS or the differential reporting framework (SME-FRS).

The taskforce believes 'a choice should be given as some SMEs may wish to be listed on the Singapore Exchange and for these firms, it would actually be less costly for them to adopt the FRS right from the start, instead of incurring the transitional cost of migrating from SME-FRS to the full FRS.'

On the rationale behind the move, the Ministry of Finance said the users of SMEs' financial statements often have different 'informational needs', and providing shareholders with the means to assess corporate performance is less relevant since most SMEs are owner-managed.

Plus, comprehensive financial standards come with a cost, even though their benefits cannot be over-emphasised.

'Businesses need to employ more qualified personnel, implement new processes and controls, and train personnel from accounts receivable clerks to the CEO and audit committee members.'

Furthermore, as the International Financial Reporting Standards (IFRS) moved towards the fair value model, the government says, more judgment is needed in valuing assets and financial instruments.

'This increased complexity may be too onerous for small companies and is likely to outweigh the benefits arising from the use of IFRS.'

Other countries such as Australia, Hong Kong and Malaysia have already adopted differential reporting frameworks for their SMEs, and some private sector players here have also voiced their support for the idea.

To gather feedback on the changes, the government would like all interested parties to offer their comments on its preliminary views on the framework.

This article was first published in The Business Times on May 13, 2008