At 230 pages, the document is a significantly smaller version of full IFRS. The IASB eliminated from the standard many accounting topics, such as earnings per share and segment reporting, that are not generally relevant to private companies. Instead, users of the financial statements of SMEs are more focused on shorter-term cash flows, liquidity, balance sheet strength, interest coverage, and solvency issues. The new standard is expected to ease some of the financial burden, which has increased as full IFRS has become more detailed, on SME preparers.
“Some U.S. private companies may find the simplified IFRS for SMEs an attractive alternative to the more complicated and voluminous U.S. GAAP,” the AICPA says in a frequently asked questions document. Using the SME framework may be less costly and more relevant than using U.S. GAAP for certain U.S. companies, the Institute says in the FAQ. Other reasons for U.S. private companies to consider adopting IFRS for SMEs are ownership by a foreign parent or relationships with foreign investors or business partners.
Private companies in the U.S. can prepare their financial statements in accordance with U.S. GAAP, an “other comprehensive basis of accounting” (OCBOA), such as cash- or tax-basis; or full IFRS, among others. The governing Council of the AICPA recognizes the IASB as an accounting body for purposes of establishing international financial accounting and reporting principles. CPAs may need to check with their state boards of accountancy to determine the status of reporting on financial statements prepared in accordance with IFRS for SMEs within their individual state.
The new standard is separate from full IFRS and is available for any jurisdiction to adopt whether or not it has adopted full IFRS, the IASB said in a press release. It does not have an effective date.
Some of the key differences between IFRS for SMEs and U.S. GAAP are:
- Disclosures are simplified in a number of areas including pensions, leases and financial instruments.
- LIFO is prohibited.
- Goodwill and indefinite life intangible assets are amortized over a period of 10 years or less.
- Depreciation is based on a components approach.
- There is a simplified temporary difference approach to income tax accounting.
- Reversal of impairment charges, if certain criteria are met, is allowed.
- Accounting for financial assets and liabilities makes greater use of cost.