Private Companies Get IFRS Made Easy

At a mere 230 pages, a new version of the international accounting standards for nonpublic entities may win a big following, sooner or later.
David McCann - CFO.com US
July 10, 2009
Private U.S. companies have a new option in accounting standards following Wednesday's release of a simplified, vastly slimmed-down version of International Financial Reporting Standards.
Private firms in the United States could already choose IFRS. Yet relatively few have done so, even though the full version of IFRS, at about 2,500 pages, is roughly a tenth the size of U.S. generally accepted accounting principles. It remains to be seen how many companies will find it harder to resist the new "IFRS for SMEs," which weighs in at just 230 pages.
SME is an acronym, used widely outside the United States, for small and medium-sized entities. However, the International Accounting Standards Board, the promulgator of IFRS, does not include a size test in its definition of SME; rather, the smaller version of the standards is reserved for entities that have no "public accountability." In other words, it is not available to companies that publicly trade equity or debt, or those that hold assets as a fiduciary for a broad group of outsiders as one of their primary businesses, as is typical for banks, insurance companies, securities broker/dealers, and mutual funds.
Adoption has the potential to be truly widespread: more than 95% of the companies in the world are SMEs, according to the IASB. But while private U.S. companies can start using the abbreviated standards right away, other jurisdictions may choose not to allow it. At the same time, some may choose to allow it even if they've previously spurned the international standards. "IFRS for SMEs is separate from full IFRS and is therefore available for any jurisdiction to adopt whether or not it has adopted the full IFRS," the IASB said in a press release.
Even in the United States, though, a broad rush to broad adoption is hardly a given. "I will consider adopting the new standard when the primary users of financial statements are fully educated in it and can intelligently evaluate it," says Ron Box, CFO at Joe Money Machinery, a Birmingham, Alabama-based regional dealer of heavy construction equipment.
Box is concerned that, for example, a bank analyst who doesn't understand the new accounting concepts might deny a credit request from an early adopter. "Credit markets for small businesses are already volatile and very perplexing to most CFOs," says Box. "Prematurely adding a new set of accounting rules to this mix could be very counterproductive."
But Paul Pacter, the IASB's director of standards for SMEs, is not so sure the pace of adoption will be all that slow in the United States. "It may be a little slower [than in Europe], but I think there's going to be a lot of interest," he says.
To be sure, there aren't any rules that would prevent a private company from switching to the new standard. Last year the American Institute of Certified Public Accountants recognized the IASB as an official accounting standard setter. With that decree, "any professional barrier to using IFRS and therefore IFRS for SMEs [was] removed," the AICPA said on its Website in response to the issuance of the shortened standards. It also said: "Private companies may find IFRS for SMEs to be a more relevant and less costly financial and accounting standard than U.S. GAAP."
Other major accounting organizations, including the Institute of Management Accountants and Financial Executives International, have also suggested that companies should at least consider switching to the simplified standard.
It's in Europe, though, where high adoption levels would have the most profound early impact. In the 27 European Union countries, there are at least 55 local accounting standards in use by SMEs, Pacter notes. A consistent, simplified standard would make it easier and less costly to do business in multiple countries, which is common in Europe even for tiny companies. "This will be a godsend for the millions of little companies that trade across borders," he says.
Lenders and private investors may also benefit from widespread adoption. "Today there is no comparability of small-company financial statements," says Pacter.
One potential thorn could apply to the relative handful of companies that will switch to the simpler standard and later be acquired by a company that uses full IFRS. In that case, some items in the historical financials would have to be reconciled. For example, while full IFRS requires borrowing and research and development costs to be capitalized, in the slimmed-down version they are recorded simply as expenses. But Pacter says that in most cases there would be only one or two such items to worry about.