IFRS for SMEs: The Next Standard for U.S. Private Companies?

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EXECUTIVE SUMMARY

* 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.

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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-sired 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-sired" entities in the title, there are no parameters of "sire" 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:

Ill 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. …