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Steven Brice
 

IFRS for SMEs Gains Momentum

Here’s why.

March 28, 2011
by Steven Brice

One can’t fail to notice that U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) are fast becoming more intricate and complicated to follow as they adapt to the needs of the most complex organizations. For those companies that are nowhere near the complexity and size of a blue-chip organization, the IFRS for Small and Medium sized Entities (IFRS for SMEs) is an accepted accountancy practice with international backing that many see as the only simplified alternative to “full” general accepted accountancy practice.

The International Accounting Standards Board (IASB) published IFRS for SMEs as a simplified version of IFRS. Companies that do not have public accountability can use this Standard. CPA Insider™ readers should note that while “Standard” is in the title, there are no actual size criteria in it.

In 2008, the AICPA recognized the IASB as an accounting body for establishing international financial accounting and reporting principles. This meant that nonpublic companies in the U.S. could prepare their financial statements under IFRS or the IFRS for SMEs as an alternative to U.S. GAAP. CPAs should check with their state boards of accountancy to determine the status of reporting on financial statements prepared in accordance with IFRS for SMEs within their individual state.

For a private company in the U.S. any potential decision to move away from U.S. GAAP is a major decision. That said, IFRS for SMEs brings many advantages and should not be overlooked as a realistic alternative accounting basis.

It is anticipated that those private companies in the U.S. that gain the most from the adoption of the IFRS for SMEs are likely to be the same firms that have a foreign parent company or foreign investors or those that are looking to conduct business outside the U.S. and are looking to raise foreign capital.

IFRS for SMEs: Purpose and Benefits

The IFRS for SMEs was developed to provide an accounting framework for companies that delivered quality financial statements and met the needs of financial statement users while balancing the costs and benefits from the preparer’s perspective.

As such, many of the principles for recognizing and measuring assets, liabilities, income and expenses in full IFRSs have been simplified, while topics that were not relevant to SMEs were omitted. In addition, the number of required disclosures was reduced significantly.

To further lessen the reporting burden for SMEs, revisions to the IFRS have been limited to once every three years.

Current Users of the IFRS for SMEs

Some countries around the world have already adopted the IFRS for SMEs and allowed companies to prepare their financial statements under this accounting framework. The South African Institute of Chartered Accountants was the first country to adopt IFRS for SMEs as its national SME standard. Another 67 jurisdictions have either adopted IFRS for SMEs or have indicated publicly that they plan to adopt it in the next three years.

For European countries, there are certain necessary legislative changes that have delayed its usage. However, plans are in place in many countries in which the IFRS for SMEs are welcomed. For example, the U.K. is intending to replace current U.K. GAAP with virtually all of the requirements of the IFRS for SMEs, making the IFRS for SMEs mandatory for use in the U.K. for non-public companies. The current anticipated application date is accounting periods beginning on or after July 1, 2013.

Implementation Support for the IFRS for SMEs

Due to the wider uptake in the application of the IFRS for SMEs, the IASB is channeling resources to ensure that they are appropriately supported.

IFRS for SMEs was first issued in 2009 with an implementation guidance that consisted of illustrative financial statements, a presentation and a disclosure checklist, which were invaluable to ensuring consistency of financial statements on an international basis. In addition, the IFRS Foundation education staff created training modules on each chapter of the Standard so preparers could better understand how to apply IFRS for SMEs. The Standard together with the implementation guidance is freely accessible from the IASB’s website.

Conclusion

After a slow start to the acceptance of the IFRS for SME standard, with upcoming international acceptance, the momentum to adopt the Standard appears to have begun. Many countries that did not have a second tier of financial reporting for nonpublic companies now welcome IFRS for SMEs on an international basis.

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Steven Brice is a technical partner in the financial reporting advisory group for WeiserMazars LLP UK. For U.S. IFRS, you can contact Remi Forgeas, CPA, who is an audit and assurance partner for WeiserMazars LLP in the U.S.

* The views expressed in this article are the author’s own and do not necessarily reflect the views of the AICPA or AICPA CPA Insider™.