Over the past decade, there has be an enormous increase in the complexity of accounting standards. The entire profession— both domestically and internationally—has struggled with the burden posed by increasingly complex rules. This frustration has created a groundswell of support for a different set of standards for private companies, and both the Financial Accounting Standards Board and the International Accounting Standards Board have struggled to find a way to address the needs of nonpublic entities.
Because the IASB has been focused on creating a common international set of standards, it recognized the importance of encouraging all entities to adopt its Internal Financial Reporting Standards. As a result, the IASB created IFRS for small and medium-sized entities, which is a set of self-contained standards that are substantially less complex than the full IFRS. IFRS for SMEs is available in jurisdictions that have adopted IFRS, including those jurisdictions that have either adopted IFRS in full or partially.
IFRS for SMEs is essentially intended for companies that are required, or choose, to prepare financial statements for lenders, creditors, investors, employees, management or owners. In determining who qualifies as an SME, the size of the entity does not restrict the use of IFRS for
SMEs; however, publicly listed companies and financial institutions are not allowed to use the simplified set of standards.
Some of the differences between IFRS and IFRS for SMEs include:
- A substantial reduction in the volume of the standards due to the elimination of topics not relevant to SMEs
- A significant reduction in the number and complexity of financial statement disclosures
- Simplification of the principles related to recognizing or measuring assets, liabilities, income and expenses
- IFRS for SMEs is based on the simplest option available under full IFRS when there are optional methods of reporting.
- The IASB mandated that changes to IFRS for SMEs will only be made once every three years.
Currently, more than 80 countries have adopted IFRS and, therefore, allow the use of IFRS for SMEs.
However, the IFRS has not yet been widely adopted in the U.S. due to the fact that the Securities and Exchange Commission has not yet officially endorsed IFRS. If and when the SEC officially endorses IFRS, other users of financial statements in the U.S. might start to gradually accept financial statements prepared in accordance with IFRS, opening the door for IFRS for SMEs for privately held businesses.
In the meantime, the FASB continues to try to strike a balance between the needs of less complex companies and public companies. In late 2011, the Financial Accounting Foundation Board of Trustees issued a document titled, “Plan to Establish the Private Company Standards Improvement Council.” This plan essentially establishes a new council with a purpose of identifying, proposing and voting on improvements to U.S. accounting standards for privately-held companies.
However, the drawbacks of the plan include the fact that there will not be a separate set of standards and all changes are subject to ratification by the FASB. The AICPA believes that without a separate board that is not subject to FASB’s authority, the application of standards by non-public entities will continue to be a challenge. Regardless of the outcome of U.S. adoption of IFRS or developments at the FASB, one thing is certain: Significant changes are on the horizon, and it is critical that businesses stay on top of the developments in order to proactively ad ss the impact of the changes.