Ask FERF about ... draft IFRS for SMEs.

• Author: Sinnett, William M.
• Position: Resources - International Financial Reporting Standards for Small and Medium-sized Entities - International Accounting Standards Board - Financial Executives Research Foundation

On Feb. 15, 2007, the International Accounting Standards Board (IASB) published for comment an exposure draft (ED) of its International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs).

In the press release announcing the ED, IASB states: "The aim of the proposed standard is to provide a simplified, self-contained set of accounting principles that are appropriate for smaller, non-listed companies, and are based on full International Financial Reporting Standards, developed primarily for listed companies."

What Is an 'SME'?

IASB defines an SME as an entity with no public accountability. An entity has public accountability if it has issued debt or equity securities, or it holds assets as a fiduciary for a broad group of outsiders.

Financial executives from privately held companies should take a keen interest in this exposure draft. Arthur Neis, a member of FEI's Committee on Private Companies (CPC) and the committee's Standards Subcommittee, says this proposal is important.

"It is a significant first step towards recognizing that there is a difference in the accounting requirements of companies that access public capital and those that build from owner-supported capital," says Neis.

Why Global Financial Reporting Standards for SMEs?

The IASB Staff Overview argues that "high-quality global financial reporting standards enhance the comparability of financial information." This is obviously important to the investors and lenders who provide capital in the public markets, but why should privately held companies and other SMEs be interested in comparability?

The IASB Staff Overview provides some examples:

* Financial institutions make loans to SMEs, often across borders;

* Vendors want to evaluate the financial health of buyers before they sell goods or services on credit;

* Credit rating agencies try to develop ratings uniformly across borders;

* Venture capital firms provide funding to SMEs across borders; and

* Many SMEs have outside investors who are not involved in the day-to-day management of the entity.

The IASB Staff Overview notes that "by removing choices for accounting treatment, eliminating topics that are not generally relevant to SMEs and simplifying methods for recognition and measurement, the resulting draft standard reduces the volume of accounting guidance applicable to the SMEs by more than 85 percent when compared with the full set of IFRSs."

Paul Pacter, IASB director of Standards for SMEs...