IFRS for Small and Medium-sized Entities

In February 2007, the International Accounting Standards Board (IASB) published an exposure draft of an International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs).  A final standard is expected to be issued July 2009.

Based on full IFRS, the new standard will be a simplified, self-contained set of accounting principles designed for use by private entities.  With the AICPA’s recognition of the IASB as an accounting standards setter in 2008, the door is open for U.S. private companies to adopt IFRS, and with the release of the new standard, IFRS for SMEs.

While the concept of GAAP tailored for small and medium-sized entities is new in the U.S., other countries are used to accounting standards developed for smaller entities.  For example, the U.K.’s Accounting Standards Board (“ASB”) publishes the Financial Reporting Standard for Smaller Entities (FRSSE).  Companies that qualify as small under the U.K. Companies Act may apply FRSSE.  The definition for small entities encompasses most companies with an annual turnover (sales) of up to 6.5 million pounds sterling (GBP).  However, small companies can elect to follow full financial reporting standards issued by the ASB or international accounting standards. 

One of the challenges associated with developing IFRS for SMEs was the title of the standard.  Originally titled IFRS for SMEs, the proposal went through an identity crisis and was at one point called IFRS for Private Entities and then IFRS for Non-Publicly Accountable Entities before settling back on the original title.  The IASB provides a definition of what a small- and medium-sized entity is.  However, decisions on which entities are required or permitted to use the IASB’s standards rest with legislative and regulatory authorities and standard-setters in individual jurisdictions. The intent of the standard, though, is to meet the needs of private entities that prepare general-purpose financial statements and do not have public accountability. The standard is also intended to meet the needs of the users of those financial statements, including owners, lenders and other creditors.

In the U.S., many crosscurrents will affect private company financial reporting in the future.  The debate over IFRS for public companies has overshadowed the needs of private companies.  While there are less than 20,000 public companies in the U.S., there are estimated to be over 20 million private businesses.  The Private Company Financial Reporting Committee (PCFRC), a group formed by the AICPA and FASB to provide advice on accounting standards for private companies, prepared a Roadmap for possible financial reporting models for private companies, assuming the SEC decides to mandate IFRS for public companies in the future.

In addition to the possible use of full IFRS for private entities, other possible reporting models include:

• IFRS for SMEs
• U.S. Adapted Version of IFRS for SMEs
• Full IFRS with Differential Reporting
• Separate U.S. Private Company GAAP-Revised
• Separate U.S. GAAP-Maintained and Updated in Future

Explanations of the scenarios are provided in the PCFRC Roadmap document.  One note, the PCFRC Roadmap document uses one of the interim titles – IFRS for Private Entities – instead of the most recent title, IFRS for SMEs.

Issuance of IFRS for SMEs and the debate over IFRS generate many questions.  Here are two:

• IFRS for SMEs or full IFRS might be right for subsidiaries of foreign private companies.  Do you think IFRS for SMEs will be relevant for other U.S. owned private companies? 
• If the SEC requires U.S. public companies to adopt IFRS, what do you think is the best financial reporting model for U.S. private companies in the future?

Add your voice to the debate.  Let us know what you think.

- Paul Parks|www.IFRS.com

Comments

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[Tax Foreclosures]

I prefer General Accepting Accounting principles for financial accounting as a comprehensive method for small to medium organizations after the switch to IFRS

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[John Dow]

IFRS 8 is a shame to the spirit of accounting!!

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No justification for enhanced economic value (except the threat that non-adoption will slow foreign investment). AICPA leadership continues its efforts to turn over our sovereignty and turn its back on our long history and evolution of the uiquely American GAAP.

[Joe Jefferis]

Should the AICPA change its name to match its new mission? The present use of "American" in the AICPA's never ending public relations campaign to push IFRS as inevitable borders on treason. This campaign is ostensibly self serving to the global accounting firms. No justification for enhanced economic value (except the threat that non-adoption will slow foreign investment). AICPA leadership continues its efforts to turn over our sovereignty and turn its back on our long history and evolution of the uiquely American GAAP. Read chapter 13 of Dick Morris' book Catastrophe. The chapter is titled - Slow Surrender;How Our Banks and Investment Firms Are Opening the Door to Sharieh Law and Muslim Extremist Domination. Here in America, we try to separate the state (rule of law) from our religious beliefs. Accounting principles should follow our Constitution's guidance. Did anyone ever see the notorious list of 100 countries the AICPA intends to for us to become faithful followers? How many are free enterprise capitalistic Democracies? Please help take back our country.

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As I have said before GAAP will become a "another comprehensive method of accounting" for small to medium organizations after the switch to IFRS "Information From Rotten Sorcery" Thank God I only have a few years left in my formal career as a CPA in public practice.

[Christine Baker, CPA/ABV/CFF]

As a valuation specialist who works primarily with private and family-owned business clients, benchmark financial data (including, at times, much larger company data) is a required input. We must be able to answer the question, value relative to what?

Without somewhat uniform methods of reporting financial condition and results of operations, the valuation profession may be facing a significant retooling of our modus operandi.

This will impact the private business owner, the private equity profession, merger & acquisition consultants, auditors wrestling with fair value issues for SME subsidiaries, to name just a few.

Perhaps a default to cashflow metrics will be our best solution.

This debate may be of interest to the AICPA's entire community of valuation specialists.

[SjSterk]

As I have said before GAAP will become a "another comprehensive method of accounting" for small to medium organizations after the switch to IFRS "Information From Rotten Sorcery" Thank God I only have a few years left in my formal career as a CPA in public practice.