U.S. private companies have a new choice for accounting and financial reporting—a slimmed-down version of IFRS tailored more to their needs. IFRS for SMEs (small- and medium-size entities) is a simplification of full IFRS. The International Accounting Standards Board (IASB), which released the standard Thursday after five years of work on the project, defines SMEs as businesses that publish general-purpose financial statements for external users and do not have public accountability. Many U.S. private companies would fit that definition.
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 generally irrelevant 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 United States 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. Full IFRS and IFRS for SMEs are generally accepted accounting principles.
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’s 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.
Some key challenges of using IFRS for SMEs, according to the AICPA FAQ document, include understanding the differences between the new standard and U.S. GAAP; the willingness of financial statement users to accept financial statements prepared under the standard; working with a more principles-based set of accounting standards compared to the more rules-based U.S. GAAP; the impact on taxes and tax planning strategies; and the impact on financial reporting metrics.