Users of SME Financial Statements Advised to Be Alert to Differences
12 October 2020 – There are significant variations between jurisdictions in Europe when it comes to the accounting treatment of intangibles by small and medium-sized enterprises (SMEs) and consequently users of SME financial statements need to be alert to the lack of comparability of information on intangibles. This is the key finding of a survey conducted by EFAA of its member organisation spanning 11 countries, ‘The Financial Reporting of Intangibles by SMEs in Europe’.
Intangible assets are often, and increasingly, the primary drivers of the value of a company. This is true for all size of entity including SMEs. However, intangibles are often excluded from the balance sheet. The European Central Bank (ECB) in its ECB Economic Bulletin, Issue 7/2018 observes that, although the percentage of intangible assets that are reported in company’s financial statements is gradually increasing, particularly in the service sector, the underreporting of intangible assets could mean that real output is also being understated. There is a growing debate as to whether and, if so, how the value of intangibles should be disclosed in the financial reports of these companies.
While there is significant European Union (EU) regulation governing how publicly accountable companies report intangible assets in their financial statements, the accounting directive has no explicit regulations for SME companies except for the accounting for goodwill. Therefore, the way in which SMEs report on intangibles is primarily governed by local regulation (Local GAAP). Not surprisingly there appears to be more variation in the accounting treatment of intangibles by SMEs in Europe.
All jurisdictions surveyed agreed on the capitalisation and amortisation of purchased intangibles. There were, however, significant variations across jurisdictions for the development costs of new products and services and some variation in the treatment of other internally generated intangibles.
One of the primary authors Robin Jarvis, EFAA Special Advisor and Professor of Accounting and Finance at Brunel University, said: “Against a background of the growing importance of intangibles, for regulators and legislators there is clearly scope for improving comparability between European company accounts by increasing the harmonisation of the treatment of intangibles by SMEs. There is also room for improving the narrative reporting of these matters and the revision of the non-financial reporting directive offers an opportunity to do so.”