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SMEs and Public Accountability

  By: Emerson P. Redor, CPA
October 2009

The International Financial Reporting Standards (IFRS) define Small and Medium-sized Entities (SMEs) as entities that:

a. do not have public accountability, and
b. publish general purpose financial statements for external users. Examples of external users include owners who are not involved in managing the business, existing and potential creditors and credit rating agencies.

The IFRS also describe entities as having public accountability when:

a. its debt or equity instruments are traded in a public market or its is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or
b. it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.

The IFRS further went on to clarify that some entities may also hold assets in a fiduciary capacity for a broad group of outsiders because they hold and manage financial resources entrusted to them by clients, customers or members not involved in the management of the entity. However, if they do so for reasons incidental to a primary business (as in the case of travel or real estate agents, schools, charitable organizations, cooperative enterprises requiring a nominal membership deposit, and sellers that receive payment in advance of delivery of the goods or services such as utility companies), that does not make them publicly accountable.

The Philippine Securities and Exchange Commision, in its Circular no. 13, series of 2006, also included non-public companies with total assets of Php50 million or more and having 200 or more holders each holding at least 100 shares of a class of its equity securities in its description of entities with public accountability.

The Philippine Professional Regulation Commission's Board of Accountancy in its Resolution no. 88, series of 2009, categorizes companies into public-interest (read publicly accountable as defined by IFRS) entities and SMEs.