IFRS for Private Entities
What are the implications for private entities in Europe and the U.S. as the IASB considers how IFRS should be made accessible to them?
January 26, 2009
The International Accounting Standards Board (IASB) today largely focuses on the accounting requirements needed for high-quality reporting by publicly-accountable entities, often operating in global capital markets. The application of IFRS for individual entity financial statements remains an EU member state option.
However, there is a strong desire from European countries to have a common accounting platform for those entities that do not have public accountability. While this desire exists, it is by no means convergence at any price. Strong concerns have been raised both in terms of difficulty in interpreting International Accounting Standards (IAS) and also the perceived higher cost of preparing IFRS-compliant financial statements.
To meet these concerns, the IASB has produced 'IFRS for Private Entities', a simplified version of IFRS' intending to reduce the financial reporting burden on small- and medium-sized entities (SMEs) that want to use global standards.
Applicability of IFRS for Private Entities to the U.S.
The IFRS for Private Entities standard does not form part of the Memorandum of Understanding between the IASB and the FASB. Adoption of the IFRS for Private Entities by the FASB is uncertain at this time; there is debate whether the IFRS for Private Entities as produced by the IASB would be used as a model for financial reporting for private companies in the U.S. or whether the AICPA would advocate the retention of U.S. GAAP for private entities.
Meeting the Needs of SMEs and Their Stakeholders
Some of the concerns from SMEs over the complicated nature of full-IFRS will be mitigated by the proposed Standard: IFRS for Private Entities. Since the exposure draft was first issued back in February 2007 the proposed Standard continues to develop rapidly, with publication of the final standard expected in the first quarter of 2009.
This Standard is likely to provide the blueprint for the convergence of national accounting systems to IFRS. This is certainly the case in the U.K. where the Accounting Standards Board (ASB) has acknowledged that there is no longer a case for retaining two sets of GAAP. Indications are that U.K. GAAP would be rendered obsolete by 2011.
As a final version of IFRS for Private Entities is expected to be the catalyst for a fundamental change in financial reporting for some countries it is therefore critical that this Standard:
A key concern raised from a recent survey of SMEs was the difficulties in relation to interpretations of the full IFRS and therefore reducing complexity in financial reporting for SMEs in this proposed Standard is critical to its success.
Nevertheless, SMEs are still eager to assess themselves against their competitors and benefit from easier communication when using a common set of accounting principles. With the sheer number of entities meeting the IASB’s definition of SME, the potential take-up of these new rules is enormous and thus the proposed IFRS for Private Entities is certainly likely to be an important milestone in financial reporting.
So what developments have been made so far in order to simplify the proposed Standard? First, the IASB has decided to remove the cross-referencing to full-IFRS so that the Standard is a stand-alone document. They have also decided to provide accounting policy options to SMEs, as per the full-IFRS, however the simplest options would be included in the main body of the Standard and the more complex options relegated to a separate appendix. A stand-alone document will hopefully help to address some of the concerns regarding interpretations of IFRS.
Nevertheless, while welcoming these developments, one hopes that the IASB could still go further to improve the final Standard that it more closely meets the needs of the smaller SMEs and still remains relevant to the larger SMEs. In particular one would welcome focusing on simplifying the Standard still further to ensure that it is less of an administrative and cost burden for preparers of financial statements.
For example, the IASB could consider including more exemptions within the final IFRS for Private Entities in relation the preparation of cash-flow statements, the disclosure of inter-group related party transitions and the preparation of consolidated financial statements. Furthermore, to help with reducing the difficulties of interpreting IFRS, the IASB could consider including further simplifications with regard to IFRS 2 in relation to the recognition and measurement of share-based payments which on cost benefit grounds for SMEs should surely be accounted for by using intrinsic values measured only once at the time of issue.
Although many users may hope for greater simplifications, one should remember that standard-setting is not an easy process. Until now — at least — it appears that the proposed Standard is developing along the right track while trying to find a ‘middle-ground’ between the needs of smaller and larger SMEs.
With a few more months of re-deliberations scheduled by the IASB, we are still expecting some significant developments to be made before the final Standard is published in the first quarter of 2009. These late changes often prove crucial and thus we hope the IASB make the right choices as this is a very important Standard particularly in some countries where it is expected to form the bedrock of financial reporting for many businesses. What is certainly key to the success of this project is that the final IFRS for Private Entities adequately meets the needs of SMEs and their stakeholders.
Only after the IFRS for Private Entities has been published by the IASB will the FASB take a position on whether to adopt this for private entities in the U.S., it is however likely that a number of the concerns raised in Europe will feature in discussions in the U.S. We hope that the IFRS for Private Entities when it is issued in its final form by the IASB will allay most of the concerns in the EU and therefore the adoption of the standard in the U.S., should it be adopted, will be smoother than in the EU.
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Remi Forgeas is an audit and assurance partner for Mazars in the U.S. For European IFRS contact, you can reach Steven Brice, who is a technical partner in the financial reporting advisory group for Mazars in the UK