Short communication: 2020 Vol: 21 Issue: 6
Valentyna Kostyuchenko, Kyiv National University of Trade and Economics
Anastasiia Kovalova, Kyiv National University of Trade and Economics
Implementation of the Association Agreement between Ukraine and the EU creates additional opportunities for small and medium-sized businesses. In order to understand the information on the financial condition and results of small and medium-sized enterprises, Ukrainian accounting legislation has been brought into line with European Directives. An article on self-determination of the expediency of applying International Standards for the preparation of financial statements was introduced into the Law on Accounting and Financial Reporting in Ukraine. This enables small and medium-sized enterprises to move from National Accounting Standards to International Financial Reporting Standards for small and medium-sized enterprises.
Small and Medium-Sized Business Enterprises, International Financial Reporting Standards, Adoption, Transformation, Conversion, Financial Statements.
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IFRS for small and medium enterprises is increasingly used worldwide. According to the IASB, 86 of the 166 countries surveyed require or permit the application of this standard (Ifrs, 2020). The transition of small and medium-sized enterprises of Ukraine to IFRS is a time requirement, which is associated with the formation of a market economy and due to the need to fulfill Ukraine’s contractual obligations under the Association Agreement with the European Union.
In the current conditions of the national economy, small and medium-sized businesses in the world are increasingly playing a decisive role in the growth of national economies, promotes the development of internal competition and business activity. Ukraine has chosen the path of integration into the European Union. In 2017, in accordance with the Association Agreement between Ukraine and the European Union, the Law on Accounting and Financial Reporting was amended regarding the indicators of assigning enterprises to a certain type (Zakon, 2020). Table 1 shows the classification of enterprises depending on the established indicators.
| Table 1 Classification Indicators for Small, Medium and Large Enterprises in Ukraine | |||
| Type of business entity | Book value of assets, Euro |
Net income from sales of products, thousand euros |
The average number of employees, persons |
| Micro-enterprises | up to 350,000 | up to 700 | to 10 |
| Small enterprises | book value of assets - up to 4,000,000 |
up to 8,000,000 | up to 50 |
| Medium enterprises | book value of assets - up to 20,000,000 |
up to 40,000,000 | up to 250 |
| Large enterprises | book value of assets - more 20,000,000 |
over 40,000,000 | over 250 |
Small and medium-sized enterprises are traditionally the engine of the economy and the most numerous representatives of the business environment. The data in Table 2 show a stable share of small business presence in Ukraine (Ukrstat, 2020).
| Table 2 The Number of Business Entities in Ukraine Depends on the Size | ||||||
| Type of Enterprises | 2017 | % | 2018 | % | 2019 | % |
| Large | 399 | 0.02% | 446 | 0.02% | 518 | 0.03% |
| Medium | 15254 | 0.85% | 16476 | 0.90% | 18129 | 0.93% |
| Small | 1789406 | 99.13% | 1822671 | 99.08% | 1922978 | 99.04% |
This trend can be explained by the presence of significant advantages of small business: the ability to make operational management decisions, support employment and job creation, a small amount of initial investment in starting a business.
The Association Agreement between Ukraine and the European Union in 2004 strengthens ties between the countries, clearly outlines the further vector of economic and social development of Ukraine. The signing of the agreement has led to additional commitments by Ukraine to harmonize domestic legislation with EU law, including the gradual approximation of accounting and reporting to international standards.
Analysis of the information on the website of the Ukraine Finance Ministry shows that Ukrainian enterprises can prepare financial statements in accordance with IFRS for SMEs, without clear quantitative criteria for enterprises. In this case, only two conditions are sufficient: the company is not accountable to society; for external users, general purpose financial statements are subject to disclosure (Visnuk, 2020).
We analyzed the approaches to the application of IFRS for SMEs in Ukraine (Holov, et al. 2013). The results are presented in Table 3.
| Table 3 Approaches to IFRS Reporting for SMES | ||
| Approaches to reporting | Varieties | The essence of the approach |
| Transformation | Full transformation | Transfer of accounting data at the end of the period by reclassifying reporting items or business transactions and making adjustments in accordance with IFRS. |
| Full transformation taking into account the requirements for conversion into foreign currency | Bringing accounting data for UAS at the end of the period to the requirements of IFRS with additional conversion into foreign currency. | |
| Conversion | Full conversion (parallel accounting) | Maintenance by the accounting specialist of two databases of financial reporting: Ukrainian and international. |
| Transmission | Automated process of data transfer to a separate accounting register with automatic adjustment and reporting in accordance with IFRS. | |
| Outsourcing | Accounting and / or reporting under IFRS by a third-party specialized organization (transformation, conversion). | |
The choice of the method of preparation of the reporting under IFRS depends on the purposes of its further use, periodicity of drawing up, financial expenses. We analyzed the strengths and weaknesses of approaches to the application of IFRS for SMEs (Table 4).
| Table 4 Strengths and Weaknesses of Approaches to the Application of IFRS For SMES | ||||||
| Indication | Conversion | Transformation | Outsourcing | |||
| Strengths | Weaknesses | Strengths | Weaknesses | Strengths | Weaknesses | |
| Financial cost | — | Requires significant costs from the company | Does not require significant costs from the company | — | — | Requires significant costs from the company |
| Reliability of reporting | Potentially high degree of information reliability | — | — | Potentially high information risk, inevitable presence of subjective assessments | Depending on the approach (conversion or transformation) | |
| Reporting period | Almost simultaneously with the preparation of national reports | Long, because it means "debugging" | Neutral | — | Depending on the approach (conversion or transformation) | |
| Efficiency of reporting | Almost simultaneously with the preparation of national reports | — | — | Only after the preparation of national reports | Depending on the approach (conversion or transformation) | |
The process of adopting IFRS for SMEs in Ukraine is characterized by the following problems: delays in the translation of the updated version of IFRS for SMEs (January 2020), the need to take into account national specifics, the need for common methodological principles. We see the solution of these problems in the cooperation of enterprises and the state.
At the state level, overcoming problems is possible through: convergence of national standards in accordance with IFRS for SMEs, the creation of common methods and principles for the adoption of small businesses to IFRS.
The opening of new opportunities for small and medium-sized enterprises in Ukraine took place with the signing of an Agreement with the European Union and the creation of a free trade area, which puts on the agenda the application of IFRS for SMEs. Compliance with EU accounting requirements in Ukraine may take into account the envisaged options.
The study identified ways to move small and medium-sized businesses to IFRS for SMEs. To facilitate the adoption of Ukrainian small and medium-sized enterprises to IFRS, in the first place, the state, represented by regulatory authorities, should converge National Accounting Standards in accordance with IFRS for SMEs.