In July 2009, the International Accounting Standards Board (IASB) released International Financial Reporting Standards designed for use by small and medium-sized entities (SMEs).
IFRS for SMEs is a self-contained, standalone set of financial accounting and reporting standards. Along with the standards, the board released implementation guidance, such as example financial statements and disclosure checklists. The board is also developing training materials for IFRS for SMEs.
At approximately 230 pages, IFRS for SMEs is a simplified version of full IFRS. This guidance is the result of the overall cost-benefit analysis by the board in considering the needs of non-publicly accountable entities (see definition below) and their financial reporting users, with the goal of providing a practical alternative to full IFRS. With this view, the IASB eased certain recognition and measurement requirements by generally allowing only one accounting treatment. The accounting treatment in the standards is generally simpler than that allowed or required by full IFRS. Also, disclosure requirements are reduced from full IFRS, and topics not relevant to SMEs have been omitted from the standards. The IASB has further simplified the standards’ usability by limiting revisions to IFRS for SMEs to once every three years. These simplifications provide a version of IFRS that is less costly to implement than full IFRS and perhaps more relevant to the users of SME financial statements.
WHAT ARE SMEs?
Small and medium-sized entities (SMEs) in the scope of the standards include entities that:
Publish general-purpose financial statements for external users, and
Do not have public accountability.
Examples of external users include owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies. Although the standards refer to “small and medium-sized” entities in the title, there are no parameters of “size” for companies to consider, thus there is no minimum or maximum quantitative threshold for determining if this guidance could be applied.
An entity has public accountability if:
Its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market, or
It holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.
As written, IFRS for SMEs was not intended to be used by not-for-profit organizations or governmental entities.
CAN IT BE USED HERE?
In 2008, the AICPA governing Council voted to amend AICPA rules 202 and 203 to recognize the IASB as an accounting standard-setting body. Thus, AICPA members may report on financial statements prepared in conformity with either IFRS or IFRS for SMEs. Additionally, practitioners should become familiar with how their state board’s rules are written regarding compliance with professional standards. While the AICPA has amended its rules, most state boards have not yet done so in order to specifically reference the standards of the IASB. Depending on how the rules of each state board of accountancy are written, it may be possible to use IASB standards without changes to your state’s rules.
WILL IT BE USED? USER PERCEPTION VIEWS
We believe that preparers of SME financial statements in the U.S. will readily support adopting a set of accounting standards that were written with them in mind. Each company we have spoken with regarding the release of IFRS for SMEs is especially optimistic regarding the size of the standards compared with approximately 17,000 pages in FASB’s Accounting Standards Codification. Though, if the size sounds too good to be true, it may be. There will likely be many transactions and circumstances that will not be specifically addressed in 230 pages of guidance. The lack of specific guidance is certain to create significant challenges for preparers and their auditors.
Also, significant hurdles remain for widespread use of IFRS for SMEs in the U.S. These challenges are similar to those that companies face when contemplating a move from U.S. GAAP to full IFRS. For instance, most financial statement users in the U.S., such as personnel at banks and credit rating agencies, have not been trained on IFRS or IFRS for SMEs. Furthermore, most preparers and their auditors also have not been trained on IFRS or IFRS for SMEs, nor do most have any practical experience applying these standards. Additionally, educators are just beginning to familiarize themselves with the international accounting rules. The time and cost of concurrently training users, preparers and auditors on U.S. GAAP, full IFRS and IFRS for SMEs is likely to be large. Therefore, a clear path to the adoption of IFRS and/or IFRS for SMEs will be critical before companies begin large-scale investments in training.
If the SEC mandates IFRS for public companies, possible future scenarios for private companies may include one or more of the following:
U.S. adapted version of IFRS for SMEs
Full IFRS as published by the IASB
Separate U.S. Private Company GAAP
SIMILARITIES AND DIFFERENCES
Generally speaking, while each has its nuances, U.S. GAAP, IFRS and IFRS for SMEs are similar with basic accounting concepts such as comparability, going concern and materiality. U.S. GAAP, despite its detailed guidance and rules, still has basic concepts and principles that need to be considered, evaluated and applied to transactions. Likewise, a framework underlies IFRS and provides a foundation for IFRS and IFRS for SMEs. Exhibit 1 highlights some of the differences between each in financial accounting areas that are common to many companies.
Click here to open Exhibit 1 in a new window
ADVANTAGES OF IFRS FOR SMEs
Concise, complete set of simplified accounting principles organized by topic.
Might better meet the needs of financial statement users. Most companies that are eligible for IFRS for SMEs focus on shorter-term cash flows, liquidity and solvency. The complex and sometimes detailed accounting and reporting requirements of U.S. GAAP or full IFRS are not always relevant and can be costly to apply in practice.
DISADVANTAGES OF IFRS FOR SMEs
Not well known in the United States (currently). While IFRS for SMEs is similar to full IFRS, neither is well known in the United States. Among investors, businesses, lenders, educators and financial statement users, few have spent the time necessary to understand the differences from U.S. GAAP and the corresponding impacts and are not prepared to adopt, or make important business decisions with these standards in mind.
Possible lack of comparability. Because IFRS for SMEs, like full IFRS, has more flexibility, less-specific rules and more opportunities to apply professional judgment, there is a distinct possibility that the same type of transaction entered into by different companies could be reported differently in the financial statements. Thus, comparability may suffer.
PRACTICAL SHORT-TERM TAKEAWAYS
Without proper planning, companies may find themselves reacting to a decision to adopt IFRS or IFRS for SMEs, instead of taking a more strategic, proactive approach. The activities we suggest in the short term are:
Monitor convergence efforts of FASB and the IASB. We’ve been in, and will continue to be in, a period of significant change for a long of time. Don’t tune out! FASB and the IASB are beginning several convergence projects that will have a significant impact on U.S. GAAP and IFRS in the near term. These projects include topics such as revenue recognition, income taxes, lease accounting and financial statement presentation. The expected changes will impact most major line items in companies’ financial statements.
Stay informed on SEC developments. Public companies will be directly impacted by the SEC’s decision to adopt IASB standards. The future of private company reporting will also likely be impacted by an SEC mandate to adopt IFRS.
Develop a high-level analysis of the potential impact on accounting policies, processes and systems, contracts, legal agreements and financing and tax structures.
IFRS for SMEs is a simplified version of full IFRS. It is a self-contained, stand-alone set of accounting and reporting standards that is 230 pages long. The IASB has also published implementation guidance and is developing training materials for the standards.
The scope of the standards includes small and medium-sized entities (SMEs) that publish general purpose financial statements for external users, and do not have public accountability. IFRS for SMEs is not intended to be used by not-for- profit organizations or governmental entities.
The AICPA has recognized the IASB as an accounting standards- setting body. AICPA members may report on financial statements prepared in conformity with either IFRS or IFRS for SMEs provided it is permissible under their state laws and regulations.
If the SEC mandates IFRS for public companies, alternatives for private companies may include: IFRS for SMEs, U.S. adapted version of IFRS for SMEs, full IFRS as published by the IASB, separate U.S. private company GAAP, or U.S. GAAP.
Advantages: Concise, complete set of simplified accounting principles organized by topic; might better meet the needs of financial statement users.
Disadvantages: Not well known in the United States; possible lack of comparability.
Short-term takeways: Monitor convergence efforts of FASB and the IASB. Stay informed on SEC road map developments. Develop a high-level analysis of the potential impact on accounting policies, processes and systems, contracts, legal agreements and financing and tax structures.
Mark Fitzpatrick (firstname.lastname@example.org) and Fred Frank (email@example.com) are partners in Seattle-based Moss Adams LLP.
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IFRS for Non-publicly Accountable Entities (#IA1041)
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Questions and Answers on IFRS for SMEs, tinyurl.com/ykl2yk3
Downloadable free IFRS for SMEs fact sheet and complete copy of the standard along with the basis for conclusions, illustrative financial statements, and a presentation and disclosure checklist, tinyurl.com/yldxa3k