Is IFRS for SMEs for your company?

• Author: Miller, Robert S.
• Position: Private companies - International Financial Reporting Standards - Small and medium sized companies

Imagine if the federal tax code were reduced to the length of a novella. Well, something nearly as unlikely has taken place. Private companies--which make up more than 95 percent of United States businesses--now have the option of replacing 17,000 pages of accounting regulations with the newly-published 230-page International Financial Reporting Standards for Small-and Medium-Sized Entities, known as IFRS for SMEs.

Until recently, U.S. generally accepted accounting principles was 25,000 pages, or more than 100 times longer than IFRS for SMEs. Can accounting standards that have been reduced to 230 pages still be effective?

IFRS for SMEs is a condensed version of the full IFRS, which runs about 2,800 pages, and is, in many ways, as complex as U.S. GAAP. The big difference is that IFRS is based on principles--rather than rules--which attempt to address every potential situation.

IFRS for SMEs also omits standards that are irrelevant to private companies. For example, standards relating to earnings per share, interim financial reporting and segment reporting are gone.

Where standards are not eliminated, they are simplified. For example, IFRS for SMEs simplifies the methodology for determining how assets, liabilities, income and expenses are recognized and measured. In addition, where IFRS allows policy choices, IFRS for SMEs allows only the easiest option; there is no option to revalue property, equipment or intangibles. Finally, IFRS for SME requires about 300 disclosures, compared with roughly 3,000 for full IFRS.

Pros and Cons of Adoption

If it sounds so good, why are many businesses reluctant to adopt IFRS for SMEs?

The biggest hurdle is adoption itself. American companies are accustomed to following regulations, not principles. GAAP standards are lengthy, but address virtually everything. It takes an adjustment to adapt to a new way of accounting.

Changes will be required for accounting software and lending agreements, for example, and users of financial statements will need to be educated about the new standards. Some companies may need to change their accounting firms to find firms that understand and know how to apply IFRS for SMEs.

Conversely, those who currently use U.S. GAAP can quickly learn IFRS for SMEs. It's well organized and is written in easy-to-understand language.

Some may also think the vagueness of principles will lead to inconsistencies or at least make it more difficult to defend their company's accounting if outside...