International Standards for Small and Medium-Sized Entities

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Analyzing the IASB Exposure Draft

On February 15, 2006, the International Accounting Standards Board (IASB) issued for public comment the exposure draft (ED) of its International Financial Reporting Standard (IFRS) for Small and Medium-Sized Entities (SME). The stated aim of the proposed standard is to provide a simplified, self-contained set of accounting principles derived from the full IFRS to be used by smaller, nonlisted companies. If this proposal is adopted, the full IFRS would become primarily of interest for listed companies, although SMEs could make reference to the more expansive set of standards as necessary or desirable.

The perceived need for a standalone set of simplified standards has become increasingly manifest in recent years, and FASB is also weighing development of such a streamlined group of financial reporting requirements. This latest development follows by about a decade a similar undertaking in the United Kingdom, where Financial Reporting Standards for Smaller Entities (FRSSE) have been successfully implemented.

Responses to the Proposal

The support for the IASB's project from national accounting standards setters throughout the world stems mostly from the widely perceived complexity of the full IFRS, and from the different statutory requirements for financial reporting in many countries, compared to the United States. The complexity of the full IFRS (or, for that matter, full U.S. GAAP) imposes a high cost of implementing and applying these standards. In addition, in most countries, in contrast with the United States, SMEs are legally required to file statutory financial statements prepared in accordance with national GAAP, and to make them available to all users. For example, in the European Union about 7,000 listed companies were implementing the IFRS in 2005, but more than 5 million SMEs have to prepare their financial statements in accordance with national GAAP (resulting in a lack of comparability). Additionally, many believe that the IFRS for SMEs would allow companies as well as countries an easier transition to the full IFRS.

Some commentators do not support the approach taken in the development of IFRS for SMEs (or private companies). They argue that, rather than simply streamlining existing standards, the IASB should have taken a user-based, more conceptual approach in creating "differential accounting" for SMEs. They insist that fundamental differences exist between the objectives of financial reporting for SMEs (being primarily focused on the role of stewardship) and those of reporting by large public companies, and that these differences should be incorporated into the conceptual framework.

Opponents of a separate set of standards for SMEs believe that all entities should follow the same basic accounting principles for the preparation of general purpose financial statements, whether the IFRS or U.S. GAAP. Some have noted that complexity in accounting is merely a symptom-the inevitable result of the everincreasing complexity of transactional structures, such as the widespread use of "engineered" financial products. Based on observations of the difficulties faced by companies implementing and applying the full IFRS, others have concluded that the problem is not that SMEs need simpler accounting, but that all entities need reporting requirements that are less complex and more principles-based.

In addition, some opponents note that SME standards would adversely affect accounting education, by shifting the focus from preparing professionals to choose the best means of reporting the economic effects of any given transaction or event, to merely following what the "single solution" rulebook says. A worst-case scenario result would be a two-tiered accounting profession, wherein some practitioners would be seen as capable of handling only "little GAAP" assignments.

Because the IASB lacks the power to require any company to use its standards, the adoption of IFRS for SMEs will be a matter for each country to decide; that is, a country's government legislators and regulators, an independent standards setter, or a professional accountancy body. …