To meet the needs of smaller enterprises, sometimes referred to as microenterprises, ISAR has developed a single set of guidelines - Level 3 - which meet the needs of those enterprises that do not produce general-purpose financial statements.
The Level 3 Guidelines have been developed using a "bottom-up" approach rather than being integrated into the "top-down" approach which characterizes the proposed IFRS for SMEs.
The bottom-up approach starts with a realistic consideration of the needs of users and preparers of the financial statements of smaller enterprises. Therefore, in order to meet the financial reporting needs of all enterprises, ISAR is proposing that a three-tiered structure be adopted, as follows:
- Level 1: This level would apply to listed enterprises whose securities are publicly traded and those in which there is significant public interest. These enterprises should be required to apply the IFRS issued by the IASB.
- Level 2: This level would apply to significant business enterprises that do not issue public securities and in which there is no significant public interest.
- Level 3: This level would apply to smaller enterprises that are often owner-managed and have no or few employees. The approach proposed is simplified accruals-based accounting, closely linked to cash transactions. National regulators may permit a derogation for newly formed businesses or new entrants to the formal economy to use cash accounting for a limited time.
How exactly the boundaries between the three levels should be specified is a matter that cannot be dealt with adequately without knowledge of the specific economy in which the enterprises operate.
The recommendation of ISAR is that there should be a system with at least three levels, but how these levels are defined must be determined by each member State that chooses to apply this approach.
The Accounting and Financial Reporting Guidelines for Small and Medium-sized Enterprises (SMEGA) Level 3 Guidance that ISAR has developed is set out in this document.
