Technical accounting regulatory frameworks: The need for change

The criteria for classification as a micro, small, medium or large company are different for commercial and accounting purposes. This means that in certain cases some companies are affected by the cost of implementing the current accounting regulatory frameworks.

Some of us have been advocates of the application of International Financial Reporting Standards because of their transparency in the financial markets, especially in the reporting of general purpose information of publicly traded entities and SMEs, in the sense that the same global standard establishes.

But we have also insisted that in Colombia the issue was regulated by assigning obligations related to the Standards to micro and small companies, leaving it to the market to define the professional criteria with which they are applied, to the economic detriment of the entrepreneur. It could even be said that the application of the International Standard and its classification in some groups has been subject to alleged abuses in its application.

For example, while the IFRS say that valuing property, plant and equipment is optional (paragraph 29 of IAS 16 and paragraph 17.15 of the Standard for SMEs), in Colombia the market sold and continues to sell that it is mandatory.

This generates high implementation costs for small and medium entrepreneurs, because, although it is true that it is advisable to value real estate, the vast majority of micro and SMEs were sold and continue to be sold the supposed obligation to value tables, chairs, old computers and even bathroom wastebaskets. Even the co-ownerships were given written concepts saying that they “had” to value this type of personal property.

One of the main myths is that assets cannot be fully depreciated in the accounting, when IAS 16 in paragraph 79b allows it; there it is indicated that a disclosure of these assets is only required when they are in use.

In this regard, I wrote an article entitled Accounting terrorism with movable assets, which has not been well received in some academic and professional circles, as it shows a market reality that few are concerned about.

A large part of this problem arises from the contradiction between the definitions of microenterprise and SME.

A commercial sector entity is “micro” for commercial purposes if it has less than $1,534,234,000 in revenues in 2019 (Law 590 of 2000 and Decree 957 of 2019). However, that same company for accounting purposes is obliged to apply the Standard for SMEs, only for having more than 10 workers or more than 500 minimum monthly legal salaries in force -smmlv- in assets (DUR 2420 of 2015), a contradiction for which no technical explanation can be found.

For example, Gerardo Osorio’s bakery was subject to this chaos in its convergence process. A specialist in International Standards told him that he should value the ovens that appeared fully depreciated in his accounting, as they belonged to group 2 of the regulatory technical frameworks (since the bakery has 11 workers).

The microentrepreneur does not have all the information and the decisions end up depending on the professional judgment of the person who sells him this idea, so he ends up assuming an unnecessary cost, without anyone in the State being concerned.

It seems a purpose (or rather a nonsense) that many entities are classified as SMEs and have to assume high costs of maintaining accounting and tax information. This ends up affecting the same professional guild of accountants, as it generates a loss of credibility in the market.

Right of petition to the CTCP

In this regard, I sent a right of petition to the Technical Council of Public Accounting -CTCP-, with a negative response, on February 6, 2020, requesting that the commercial definition of microenterprise and SME contained in Law 590 of 2000 be also applied for accounting purposes, thus reducing a giant gap by allowing the microentrepreneur to apply simplified accounting, i.e. a cost-based accounting that does not necessarily require general purpose reports for investors in public securities markets.

“If this proposal were applied, many companies that today are in convergence group 2 would be classified in group 3.”

If this proposal were implemented, many companies that are today in convergence group 2 would be classified in group 3. If this were reinforced in the concepts of the CTCP, clearly stating that co-ownerships and micro-companies are only obliged to keep cost-based accounting, there would be an important market efficiency and the door would be closed to those who have sold exaggerated criteria to SMEs.

In the right of petition that I sent and that received a negative response from the CTCP and the regulator, the proposal to reduce these thresholds that do not seem to defend the economic interests of micro, small and medium entrepreneurs is expressed in detail.

Multiple accounting books

In addition, since approximately 2010, the market has been confused with the supposed obligation to keep two or even three accounting books (an IFRS book, a ColGAAP book and a tax book). Many accounting software houses sold this “solution” to companies and the Government legalized this strange practice with Decree 2548 of 2014, although only for the year 2015.

However, years have passed and in 2020 companies are still being sold the “need” to replicate the information from one book to another, when in the world a single book is used to record differences, in order to comply with both accounting and tax regulations.

Allowing or consenting two or three accounting books is not only anti-technical, but the confusion contributes to potential accounting and tax frauds that are facilitated by maintaining such duplicity, especially when electronic invoicing technologies and other more advanced technologies such as blockchain speak of electronic books and advanced systems that leave behind the melancholy idea of columnar books.

Other unnecessary adjustments in the International Standards

Many companies have even been told that it is “mandatory” to decompose assets from their initial purchase, making them spend significant resources, when in fact the Standard calls components to the traditional “additions and improvements” that are presented in the subsequent measurement.

Many have conducted studies to “decompose” assets under the passive gaze of the accounting profession.

Other issues of abuse in the application of the normative technical frameworks has been the supposed mandatory application of estimates, i.e., appraisals, present values, implicit interests and similar to non-profit entities, without any distinction whatsoever.

This has led to churches being told that they must value a rectory or even the temples, to speculate with the valuation of religious works of art, and many universities have been told that they had to value assets and depreciate them again, which generates new expenses unnecessarily, especially when the valuation is made even on movable assets, generating immaterial adjustments, but with a negative cost-benefit ratio in their administrative and accounting management.

In this regard, I wrote the article “Why IFRS do not apply to non-profit entities: a look at fair value”, in which real cases of costly implementations of criteria outside IFRS are shown, based on the lack of clarity and vigilance of the State.

Accounting standards themselves are not neutral. Legal science theories indicate that there are always interests, good or bad, in regulation. This is not necessarily intentional, but in some cases the standards end up benefiting third parties.

Although this is not a problem of the standard setter (i.e., the Technical Council of Public Accounting), it does require that the State regulate the application of professional practice and that ethical problems be measured in cases such as this one.

Source: Actualícese