IFRS for most private companies goes live.

• Author: Pacter, Paul
• Position: INTERNATIONAL - International Financial Reporting Standard

In July, the International Accounting Standards Board published the International Financial Reporting Standard for Small and Medium-sized Entities (known as IFRS for SMEs).

It is a standalone pronouncement of 230 pages that sits alongside the full set of IFRS now used in more than 100 nations. IFRS for SMEs is built on full IFRS foundations, but with simplifications that reflect how SMEs' financial statements are used and cost-benefit considerations.

It is intended for any entity that does not have public accountability, which means that its securities do not trade in public markets and it is not a financial institution (such as a bank or insurance company). Full IFRS are designed for entities with public accountability. IASB uses SME as the name for entities eligible to use the new standard; in other places, such entities are referred to as "private entities" or "non-publicly accountable entities."

IFRS for SMEs was more than five years in development, and the going was not always smooth. Though from the outset, some board members supported a standard that reflected significant simplifications from full IFRS, a majority did not. In fact, in June 2004, the board published a Discussion Paper in which its preliminary view was that there should be no changes for SMEs in the principles for recognizing and measuring assets, liabilities, income and expenses.

Another preliminary view was that if IFRS for SMEs did not specifically address an issue, an entity would be required to look to the full IFRS (a volume that, this year, is more than 2,800 pages long).

The mood swing within the board from 2003 to recently was palpable--from skepticism to acceptance to enthusiasm. The result is a standard that reflects significant simplifications based on two criteria--the needs of users of SMEs' financial statements and the technical and financial capabilities of small companies to produce them. There are many recognition and measurement simplifications, and there is no requirement for an entity using IFRS for SMEs to ever look to the full IFRS.

Why IFRS for SMEs?

IASB took on the project in response to an overwhelming demand from regulators, standard setters, small companies and auditors in developed and emerging economies across the globe. Their reasons fall into two broad and overlapping categories--public interest and the SMEs' self-interest.

Lenders, vendors, customers, rating agencies, venture capitalists and outside investors use financial statements...