IFRS for Privately Owned Businesses

By Werner, Charles A. | The CPA Journal, August 2012 | Go to article overview

IFRS for Privately Owned Businesses


Werner, Charles A., The CPA Journal


In 1976, the AICPA's Committee on Generally Accepted Accounting Principles [GAAP] for Smaller and/or Closely Held Businesses issued a report and achieved something of a breakthrough: as a result of its work, FASB abolished the requirement for mandatory disclosure of earnings per share data and business segment information for privately held companies. Accordingly, FASB approved the idea that there could be a different set of required disclosures under GAAP for privately held companies. Since that time, the AICPA has addressed the problems caused by one set of U.S. GAAP for both privately and publicly held enterprises on a number of occasions.

Since 1976, U.S. GAAP has grown to more man 10,000 pages of rules, not counting the publications of the Emerging Issues Task Force (EiTF). In the meantime, the International Accounting Standards Board (IASB) and its predecessor, the International Accounting Standards Committee (IASC), have issued more than 2,500 pages of standards, currently styled as International Financial Reporting Standards (IFRS) and previously known as International Accounting Standards.

In July 2003, the IASB commenced deliberations on a project, carried over from the agenda of the IASC, to produce a document on accounting standards for small- and medium-sized entities (SME). The discussion below focuses on accounting standards for SMEs and related problems, such as complexity and accounting standards overload.

IFRS for SMEs

In July 2009, the IASB issued IFRS for SMEs, which created a standalone set of accounting principles and disclosures for SMEs. One of the members of the IASB has reported that '74 jurisdictions have adopted [IFRS for SMEs] or announced plans to do so" ("International Adoption Issues: A View from the IASB," The CPA Journal, December 201 1, p. 10).

Although the term "SME" is used here because it is widely understood internationally, the IASB definition does not limit the term to small- or medium-sized entities. Instead, the definition merely requires that an entity does not have public accountability and that an entity publishes general-purpose financial statements for external users. Public accountability means that an entity has debt or equity instruments mat are publicly traded, or mat the entity is contemplating issuing such instruments. The term also refers to entities that hold assets as fiduciaries for a broad group of outsiders, such as "banks, credit unions, insurance companies, securities broker/dealers, mutual funds, and investment banks" (TFRS for SMEs, p. 226, http://eifrs.iasb.org/ eifrs/sme/en/IFRSforSMEs2009.pdf).

IFRS for SMEs boils down the 2,500 pages that make up IFRS to 230 pages. To achieve this result, the IASB did not only propose vastly simplified and reduced disclosures; it also provided for simplified - and, in some cases, diflerent-^neasurement standards. Thus, a company that adopts IFRS for SMEs will not only have different disclosures in its financial statements, but it will also classify debits and credits in the statements differently.

IFRS for SMEs represents an important milestone in the search for a simplified and less costly approach to accounting in general-purpose external financial statements of privately held entities - a problem on which the accounting profession in the United States had previously expended a good deal of effort (e.g., Invitation to Comment: Financial Reporting by Private and Small Public Companies, FASB, November 1981; Sunset Review of Accounting Principles, Technical Issues Committee of the AICPA Private Companies Practice Section, 1982; Report of the [AICPA] Special Committee on Accounting Standards Overload, February 1983).

In 1976, many respected CPAs believed that the profession should not have two or more sets of allowable accounting principles in the United States; today, accounting professionals believe that U.S. GAAP is more complex than ever and that IFRS is complex as well. But many also believe that the SEC will prescribe IFRS for U. …

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