Magazine article The CPA Journal

IFRS for SMEs: Not for Private American Companies

Magazine article The CPA Journal

IFRS for SMEs: Not for Private American Companies

Article excerpt

The International Accounting Standards Board (IASB) published an abridged version of its International Financial Reporting Standards (IFRS) titled IFRS for Small and Medium-sized Entities (SME) on July 9, 2009. IFRS for SMEs was released in response to protests from private companies in regions with limited accounting resources and where public and private companies alike are required to file financial statements; neither of these conditions applies in the United States.

The AICPA officially recognizes the IASB as a standards setter, which means that private companies may use full IFRS or IFRS for SMEs to prepare their financial statements, provided that state law permits this. It has also joined the Financial Accounting Federation (FAF) and the National Association of State Boards of Accountancy (NASBA) to create a blue ribbon panel to discuss the possible adoption of a set of standards for private company accounting. Nevertheless, the author believes that a separate set of standards is not the best long-term choice, in light of forecasted accounting developments and the perspective of financial statement users.

Decreased Comparability

In the context of the rules-based culture of the United States, it is important to recognize that U.S. GAAP is already a highly technical set of accounting standards to which most private companies adhere. According to a survey conducted by Deloitte, approximately 88% of SMEs (defined as private companies earning less than $1 billion in revenue annually) currently prepare their statements using U.S. GAAP (IFRS Survey 2009 for Private Companies, www.iasplus.com/usa/0907 deloittesmesurvey.pdf). There are a few SME proponents who argue that full IFRS imposes too much of a burden on preparers and users; in fact, the end users of financial statements in the United States are accustomed to the precise requirements of U.S. GAAP and would be less prepared to accept statements prepared on the basis of standards even more simplified than full IFRS. Because private companies would be able to choose between the two versions, this would create inconsistencies and drastically reduce the comparability of their financial statements.

Allowing private companies to choose between two sets of standards would be detrimental to the transparency of financial statements and end users' ability to compare them, especially if they have doubts regarding the relevant treatment for a transaction. For example, if two private companies had similar, complicated transactions not treated by IFRS for SMEs - which would be their sole explicitly permitted reference - they might account for the transaction differently, and their financial statements would be less transparent and informative. While complicated transactions may not be commonplace among most private companies, those who engage in them should have to account for them just as a public company would and may need the more specific guidance of full IFRS. In this case, separate standards only present an obstacle between the financial statement preparer and the proper accounting treatment for a given transaction and could lead to discontinuity in the presentation of similar transactions among private entities.

Many of the setbacks of IFRS for SMEs stem from the standard's definition of eligible companies. According to section 1.2 of the standard, companies that may apply it are not publicly traded and "publish general financial statements for external users." The problem is that this definition encompasses businesses with less than a handful of employees, as well as private companies earning billions in yearly revenues. Under IFRS for SMEs, the latter would use a different accounting treatment than comparably sized public companies for similar transactions simply because of their status as private entities. This is neither logical nor in the interest of financial statement users. If full IFRS were universally adopted, however, companies could be more easily compared as needed. …

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