Fallacy, ambiguity in Finance Act (2020) with respect to FIRS, financial statements and SMEs

By Innocent Okwuosa

It is no longer news that the Finance Act (2020), which was signed into law on 31st December, 2020 by President Muhammadu Buhari, came into effect on January 1, 2021. What is trending news now, is the realisation that the Act may have introduced about 80 changes to 14 different laws that will affect Nigerians in their different economic endeavours. These changes according to commentators will affect individuals when it comes to the tax they pay, be it income tax or VAT on purchases. The changes will affect big companies as well as small companies. Being an accountant, I am interested in FIRS and the prescription of alternative accounts for SMEs.

We are informed that by the provisions of the Finance Act, the FIRS may prescribe the form of accounts other than audited financial statements for small and medium companies as defined under Companies Income Tax Act (CITA). The first question is whether SMEs as defined under CITA is the same as defined under Companies and Allied Matters Act (CAMA). For example, section 394 (3) of CAMA (2020) defines an SME as a company with a turnover of ₦120 million and total assets of not more than ₦60 million. On the other hand, the Finance Act through CITA distinguishes between small company and medium company. A small company is a company whose turnover ranges between ₦1 – ₦25 million; and a medium company, above ₦25 million but less than ₦100 million.

So, who is an SME when it comes to FIRS prescribing the form of accounts other than audited financial statements for small and medium companies? Should FIRS prescribe the same form for both small companies and medium companies given that their turnover differs, that is the first controversy. The definition of medium firm is closer to what CAMA defines as SME and I am of the view that FIRS prescription of form of accounts should differ between small companies and medium companies. It will be unfair for FIRS to prescribe the same form of accounts for medium companies and small companies. Small companies should have less complex form of accounts compared to medium companies.

But are there forms of accounts other than audited financial statements? Herein lies the fallacy and ambiguity caused by the Finance Act as one will be under the impression that there is another form of accounts that is different from audited financial statements. This is a fallacy and it is ambiguous because both audited and unaudited accounts and financial statements are prepared using the same form or format.

Another fallacy and ambiguity is creating the impression that FIRS has power to overrule accounting standards usually adopted in preparing and presenting financial statements by prescribing a form or format of accounts other than audited financial statements for SMEs. This is fallacious and not correct, as FIRS has no power and cannot invent another form or format of accounts. There is no other form or format of accounts other than that stipulated by the accounting standards which a country has adopted. Nigeria has adopted International Financial Reporting Standards (IFRS) and has not abandoned it.

Another ambiguity and controversy emanating from this provision of Finance Act is whether it is within the jurisdiction of FIRS to prescribe forms of accounts other than audited financial statement. If there is anything we know, especially within accounting, which incorporates taxation, is that the relevant body charged with determining forms or formats of accounts and financial statements in Nigeria is the Financial Reporting Council of Nigeria (FRCN). Only the FRCN can vary forms of accounts but not arbitrarily, as that has to happen through the accounting standards.

I will therefore advise that in future, the Financial Reporting Council ought to have been consulted when wording the Finance Act provision which states that the FIRS may prescribe the form of accounts other than audited financial statements for small and medium companies to avoid the fallacy, ambiguity and controversies I have raised above. The accounting profit which serves as the starting point for tax computation is derived following accounting rules strictly as provided in the accounting standards for which the tax authorities have no say.

What the Finance Act would have simply stated is that the FIRS should accept unaudited financial statements from SMEs and not prescribe form of accounts. As earlier stated, there is no difference in the form of accounts between audited and unaudited accounts or financial statements. The only difference is that the external auditor expresses audit opinion on one – the audited financial statement but not on the other – the unaudited financial statement. Again another issue is that the FIRS may be under the impression that it is trying to save cost for SMEs by avoiding audit. This again is controversial.

By not insisting on audit, it means that FIRS is prepared to take any financial statement presented by SMEs. The purpose of audit is to inspire trust and confidence in the financial statements’ figures. Does the FIRS feel that these do not matter? Consequently, a financial statement in which anything goes could mean loss of huge revenue to government through avoided taxes, since there may not be trust and confidence in the financial figures presented. So if I were FIRS Chairman, I will prescribe no other form other than audited financial statement for SMEs.

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• Innocent Okwuosa, PhD, FCIB, FCA, is the Chairman, IFRS Experts Forum (IFRSEF), Nigeria and 2nd Deputy Vice President, Institute of Chartered Accountants of Nigeria (ICAN)