This report, published in 2021, looks at how a small company is defined, who the users of small company financial reports are, and the differences in China and in the UK between big-GAAP and little-GAAP.
Defining a small company
There is a long history of distinguishing between companies based on their size, although the criteria used to determine this varies between countries. The size of revenue and number of employees are among common criteria, but sectoral comparability can be a problem. Size does not always affect the GAAP used. This report makes a number of international comparisons, but the focus is on China and the UK.
The International Accounting Standards Board (IASB) distinguishes between listed and unlisted companies, rather than big and small, when setting accounting standards. In China, the distinguishing criteria for "differential reporting" is more complex.
Potential users of financial reports
Academic research suggests three types of potential users of financial reporting information, including managers within a company, external users with special access (such as tax authorities), or other external users of publicly available information. This can also, for example, include banks, credit rating agencies and investors. The report considers potential users and uses of financial reports of small companies in the context of the UK and China.
GAAP comparisons and changes in application
The report examines four GAAPs: IFRS, FRS 102, China’s Accounting Standards for Business Enterprises (ASBE) and Accounting Standard for Small Business Enterprises (ASSBE). ASBE is required for reporting by listed companies, financial institutions (whether listed or not) and any other unlisted companies that are not small or micro.
The report notes that IFRS and ASBE are fairly similar, and ASBE has been updated with developments in IFRS, such as reforms to revenue recognition (IFRS15) and lease accounting (IFRS 16). Some of the differences between ASBE and IFRS in 2021 are also highlighted. ASSBE/11, however, is noticeably different from the other GAAPs, says the report, and it is much closer to the tax rules.
The report considers how and when a company can or must change its GAAP. This can include mandatory adoption, when a country adopts a GAAP for certain purposes. It can also involve a change to GAAP after a company changes its status, such as when it exceeds the size limit for ASSBE/11 or becomes listed. In some cases, a company may have a choice of GAAPs.
Conclusions and lessons
The report finds key differences between China and the UK and considers whether there are lessons the two countries can learn from each other. It also examines whether the accounting rules and their scope are suitable for the intended uses and users.
The UK rules deal mainly with corporate entities, whereas the Chinese rules have a much wider scope of types of business enterprise, the report states. The UK rules also distinguish between listed and unlisted companies, whereas the real distinction in China is based on size. China requires small enterprises to prepare financial statements even if they are not published.
There are much larger differences between the two types of Chinese GAAP than there are in the UK between listed and unlisted GAAPs.
Importantly, the great mass of companies (in any country) are not listed. Although unlisted companies in both countries are allowed to follow IFRS, they mostly choose to follow the national accounting systems designed for them.
