International Standards Set to Aid Smaller Entities (Guest Commentary)

During the development of International Financial Reporting Standards, it became apparent that standards that met the needs of publicly traded entities were not necessarily compatible with small- and medium-sized non-public entities.

In response to the growing demand for a single set of global accounting standards for non-public entities, the International Accounting Standards Board issued IFRS for Small & Medium-sized Entities in July 2009. This simplified version of IFRS is a self-contained set of financial accounting and reporting standards that is 230 pages long, written in less technical language and available for use by small- and medium-sized entities that publish general-purpose financial statements and don’t have public accountability.

The IFRS for SMEs don’t have size criteria, meaning any private entity may use the standards. While IFRS for SMEs are more principle- and judgment-based than U.S. Generally Accepted Accounting Principles, the international set of standards does provide guidance for implementation of its concepts and principles.

United States standards still require professional judgment to apply concepts and principles despite the detailed guidance and rules contained in the GAAP codification. Without the specific accounting guidance or “bright-line” rules present in U.S. GAAP, the more judgment-orientated IFRS for SMEs allow management to focus on the economics and business objectives of transactions instead of sifting through accounting standards to identify applicable regulations.

As do U.S. GAAP, IFRS for SMEs require the use of the cost-depreciation-impairment accounting methodology for property, plant and equipment. However, IFRS for SMEs do differ from U.S. GAAP in that they prohibit the use of “last-in-first-out” inventory costing, require fair value measurement of investment property and expense all borrowing cost.

IFRS for SMEs also permit reversals of impairment allowances and write-downs in all areas except goodwill. The standards allow the amortization of goodwill and indefinite life intangibles for 10 years.

Resembling U.S. GAAP, IFRS for SMEs state that a complete set of financial statements includes statements of financial position, comprehensive income, changes in equity and cash flows as well as disclosure notes. However, the international standard does require a classified statement of financial position and the presentation of at least one year of comparative information.

While the American Institute of Certified Public Accountants permits qualified members to provide opinions on IFRS for SMEs statements, challenges exist to the business community’s acceptance and use of IFRS for SMEs. First and most important, there is a general lack of knowledge regarding IFRS for SMEs in the United States. Bankers, accountants, managers and business owners will all need IFRS for SMEs training before adoption of these standards can flourish in this country. Currently, the accounting profession and the business community are encouraging full IFRS education in anticipation of the future required use of IFRS by public companies; however, there is no anticipated legislation requiring the use of IFRS for SMEs by private entities.

Nevertheless, many private entities may consider IFRS for SMEs an attractive alternative to U.S. GAAP. The IFRS for SMEs focus on the financial reporting needs of a private entity; therefore, this set of standards doesn’t require the SME to comply with costly and complex accounting regulations that may be more appropriate for public entities.

Since the Financial Accounting Standards Board’s Accounting Standards Codification is about 17,000 pages long, it is difficult for SME owners and management to fully understand and comply with all the regulations. In contrast, the IFRS for SMEs are much more concise but lack the comprehensive guidance of U.S. GAAP.

As U.S. private entities seek to increase their international business activities, financial statements prepared in accordance with IFRS for SME may improve comparability with other international SMEs. With the expanding global adoption of IFRS for SMEs, private entities may find it advantageous to transition to the standards to provide knowledge to international users in a format that they understand better than U.S. GAAP. 

The SME standards allow entities to prepare financial statements in a less complex and less expensive way while still meeting the informational needs of the entity’s constituents. IFRS for SMEs provide non-public entities in the United States a quality alternative to U.S. GAAP.

For more information on IFRS for SMEs, visit IASB.org and IASplus.com/standard/ifrsforsmes.htm.

Doris K. Feltham, a Jonesboro CPA, is working on a doctorate in business with an accounting specialization. She can be reached at [email protected].