Small entities: What challenges and issues do these entities have to prepare GRAP financial statements?

The Board researched the financial reporting environment of small entities to understand if they should have different reporting requirements (see article on “Small entities”: Should there be different reporting requirements for them? [3 November article]).

As part of the research it was necessary for the Board to obtain a clear understanding of the issues small entities have to determine the Board’s possible actions. Challenges relating to (a) accounting, and (b) the broader small entity environment, were identified.

(a) Accounting challenges

These challenges often relate to areas where judgement is required. Small entities do not have the necessary skills to apply judgement, nor do they have the resources to acquire those skills. Areas were also identified where the requirements of the Standards of GRAP may be misunderstood and misapplied. The most prevalent areas are:

• Accounting for non-current assets. The challenges include:
  • Determining fair value, which was raised as an on-going challenge and not only once-off.
  • Applying judgement to separate assets into components.
  • Applying judgement to determine useful lives and residual values of assets and adjusting for fully depreciated assets still in use.
• Applying materiality.

Preparers are unable to apply materiality, including determining appropriate accounting policies. This results in resources being spent to account for and disclose immaterial transactions and information.

• Keeping up-to-date with changes in the reporting framework.

The requirements of the Standards change on an annual basis as new Standards become effective and amendments are made to existing Standards. Respondents indicated an inability to keep up-to-date with changes.

• Standards of GRAP are complex and may be difficult to interpret.

The complexity of the Standards of GRAP can be challenging when readers are not financially literate.

• Accounting for, and disclosure of, financial instruments.

A general inability to account for and disclose financial instruments was raised as the Standard is complex.

(b) Broader small entity environment

A number of issues impact on entities’ ability to prepare GRAP financial statements when they are small. These are not directly related to specific accounting issues. The key issues are set out below:

• Human resource capacity and skills.

One person is often responsible for a wide range of tasks with limited time and support. Preparers are not educated in Standards of GRAP and entities are unable to train staff due to budget and time constraints. Due to the geographical location of some entities, they are unable to attract the right skills.

• Budget constraints.

Small entities have limited budgets and noted high costs to comply with the requirements of the Standards, for example appointing experts and consultants.

• Lack of daily and monthly controls, including record keeping.

Regular controls are not in place and record keeping is lacking, which leads to unreliable financial information. Asset management is also a challenge.

• Overreliance on consultants.

Because of small entities’ capacity constraints, consultants are used extensively. When consultants are used skills are not transferred.

• Difficulty complying with legislation.

The issues go beyond preparing financial statements and include an inability to comply with broader legislative requirements.

The detailed information is included in the Research Paper. Look out for an upcoming post on GRAP for small entities: What did the Board conclude? for the outcomes of the research.

How can the Research Paper be accessed?

The Research Paper has been published on the ASB’s website and can be accessed here.

The views expressed in this article are those of Secretariat and not the ASB Board.