Divider
Divider

SMEs Not Off IFRSí Hook

The International Accounting Standards Board (IASB) recently released International Financial Accounting Standards (IFRS) for small- and medium-sized entities. What’s the impact?

July 20, 2009
by Sukanya Mitra

Where there’s IFRS (International Financial Reporting Standards), there has been much speculation. In recent days, most of that buzz has been about the extended deadline (2011) when large U.S. companies need to adopt IFRS. And yet, the IASB (International Accounting Standards Board) just released an IFRS for small- and medium-sized entities (SMEs). Why the rush? Why peg these SMEs for an earlier adoption? And by the way, which companies fall in this precious group?

“IFRS — SMEs is designed to meet the financial reporting needs of entities that: a) do not have public accountability and b) publish general purpose financial statements for external users  e.g. owner not involved with managing the business,” said Cecil Nazareth, CPA/ACA.

Digging deeper, Remi Forgeas, CPA and audit and assurance partner at the U.S. branch of Mazars LLP, said that “public accountability” went beyond simply the source of financing. “Obviously, a company that has debt or equity instruments publicly traded is publicly accountable. Other entities that are viewed as publicly accountable are those holding assets in fiduciary capacity for a broad group of outsiders as one of their primary businesses. This category includes banks, mutual funds insurance companies,” said Forgeas. “Most of private companies in the USA would meet the criteria set by the standard for SME,” he added.

Since  IFRS is being adopted as a “global” unified standard, we wondered whether this new standard would apply even to those SMEs that did not have dealings globally or have such a presence. According to Forgeas global refers to IFRS itself and not companies applying IFRS. “As stated in the preface of IFRS for SMEs, the decision on the use of IFRS rests with ‘legislative and regulatory authorities and standard setters’ individual jurisdictions’,” said Forgeas. “In the United States, following the decision of the AICPA in May 2008 to recognize the IASB as a standard setter, IFRS for SMEs would be an acceptable accounting standard for a U.S. company that meets requirements set in the standard,” he explained.

Adoption of IFRS by SMEs

According to IASB’s press release issued on July 9, IFRS for SMEs is effective immediately and yet IFRS adoption for public companies does not take place till 2011. Why the rush? “IFRS for SME is considered distinct and separate from IFRS–full,” noted Nazareth. “Hence SMEs can benefit from simplified reporting and disclosure right away without waiting from countries to adopt IFRS–full on a national basis.” Forgeas differed and opined that this statement meant that each country could choose the date it implemented these standards. “I would believe that a calendar-year company will be able to choose to adopt IFRS for SMEs for the year ending December 31, 2009. Obviously, it would have to apply the transition rule set in Section 35 of the standard for first-time adopters.”

In case you’re confused about the IFRS deadline extension to 2011 and the current immediate adoption of IFRS by SMEs, Forgeas noted that they are two different matters. He explained that while SEC’s roadmap and time frame are for first-time adopters of IFRS, IASB’s new standard is geared towards those European Union (EU) countries that have already adopted IFRS or countries that authorize the use of IFRS such as the U.S. He did not believe that there has been any rush in creating these standards. In fact, he pointed out that the need for SME standards had been raised as early as 2000 and that the main “objective of the standard is to address the concerns raised by constituents from countries with limited or non existent financial markets.”

Pros and Cons

There’s always two sides of a coin and we wanted to know what they were for IFRS for SMEs. Both Forgeas and Nazareth noted that while a key benefit is a simplified and comprehensive accounting standard that is comparable globally, it can also be a detriment in that this oversimplification of complex transactions can lead to non-disclosure and therefore misleading financial statements. Forgeas exemplified this: “IRS agents will need to get used to the standard and first tax returns with adjustments from IFRS to tax may be subject to more scrutiny. As well, a company that entered in a loan agreement with covenants based on U.S. Generally Accepted Accounting Principles (GAAP), measures may prefer to delay the adoption of IFRS.”

Unlike Nazareth, Forgeas believed that an added benefit of IFRS for SMEs was the “increased comparability even for small entities is deemed to have a positive impact on transactions (exports/imports, mergers and acquisitions) and financing.” Likewise, he also thought that the reluctance of moving from one standard to the other will prove to be a major hurdle. “Even if IFRS for SMEs are less complex than U.S. GAAP the transition may require expertise that could be not easily accessible to small companies (time and cost concerns).” He expected these problems to eventually subside once the U.S. Securities and Exchange Commission (SEC) made its final decision on IFRS.

Omissions

To simplify the complexities of IFRS for SMEs, the IASB and other standard-setters decided to leave out topics that were not necessarily relevant to SMEs. These omissions include:

  • Earnings per share;
  • Interim financial reporting;
  • Segment reporting; and
  • Special accounting for assets held for sale;

Other topics that have been omitted in IFRS for SMEs, but are included in the full IFRS are:

  • Revaluation model for property, plant, equipment and intangible assets;
  • Proportionate consolidation for investments in jointly-controlled entities;
  • Investment property — measurement is driven by circumstances rather than allowing an accounting policy choice between cost and fair value models;
  • Various options for government grants.

One topic that is not being included in IFRS for SMEs is “financial instrument options, including available-for-sale, held-to-maturity and for tangible assets.” And yet, under subtopic of Recognition and measurement simplifications, it suggests that financial instrument is one of the topics that have been simplified for SMEs from the full IFRS. So if your firm is an SME, should you or should you not address financial instruments?

Forgeas said that under IFRS for SMEs, small- and mid-sized businesses can choose whether they want to fully implement IAS 39 Financial Instruments: Recognition and Measurements or simply adopt the requirements set in the standards. “A company that elects to apply requirements set in Section 11 and 12 of the Standard has to record changes in the carrying or fair value of the financial instruments through income statement,” explained Forgeas.

IFRS Training

Whether you adopt IFRS now or later, training seems to be an issue that is often overlooked. Where’s the best place you can get some good IFRS training? “AICPA’s Web site on IFRS is a good source, along with the IASB Web site,” said Forgeas. Nazareth agreed and also points CPA Insider™ readers to the IASC foundation, which has developed a “comprehensive training manual” and works with individual agencies to provide instructors for regional workshops.

Conclusion

As with anything that’s new, accountants and auditors this side of the pond are apprehensive in adopting the new standards. While both Forgeas and Nazareth pointed out a unified global standard is a necessity with the shrinking global stratosphere, Nazareth noted that there were more similarities between U.S. Generally Accepted Accounting Principles (GAAP) than the IFRS and exemplified it as more a “philosophical rather than a complex issue.”

Like your PDA, all you need to do is sit back and check your PJD. “The basic transition needs to be looked at,” advised Nazareth. “It all has to do with Principle, Judgment and Documentation,” he quipped.

Rate this article 5 (excellent) to 1 (poor). Send your responses here.

Sukanya Mitra is Managing Editor of the Insider™ e-newsletter group. Please note the opinions expressed in this article are strictly those of the interviewees and do not necessarily reflect the views of the AICPA or AICPA CPA Insider™. Should CPA Insider™ readers have questions about IFRS, they are free to either participant via the e-mail links in their names that are embedded within the article.