Should U.S. private companies use IFRS for SMEs?

• Author: Pacter, Paul
• Position: Financial reporting - Financial Reporting Standard - Small and Medium-sized Entities

The International Accounting Standards Board (IASB) has released an exposure draft (ED) to adopt a simplified, self-contained International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). IFRS for SMEs is less than 15 percent of the size of full IFRS (currently around 2,700 pages).

This substantial reduction was achieved by removing choices for accounting treatments, eliminating topics and detailed implementation guidance that are not generally relevant to SMEs, simplifying methods for recognition and measurement, substantial disclosure reductions and "plain English' redrafting.

Since full IFRS were designed to meet the needs of equity investors in companies in public capital markets, they cover a wide range of issues, contain a sizeable amount of implementation guidance and include disclosures appropriate for public companies.

Users of the financial statements of SMEs (or private companies in the U.S.) don't have those needs, but, rather are more focused on shorter-term cash flows, liquidity and solvency issues, such as: If I make a loan, will the interest and principal be paid? If I extend credit, will my invoice be paid?

Also, the full standards impose a burden on SME preparers--a burden that has been growing as IFRS become more detailed and more countries begin to use them. Thus, in developing the proposed IFRS for SMEs, IASB's twin goals were to meet user needs while balancing costs and benefits from a preparer perspective.

In most countries, many or even all entities have a statutory obligation to prepare financial statements that conform to a required set of generally accepted accounting principles (GAAP). Often, an audit is required by law (with tiny companies often exempted). Those statutory financial statements are normally filed with a government agency or put on a website and thus are available to creditors, suppliers, employees, governments and others.

In Europe, where there are over 20 million business enterprises, more than 5 million SMEs have a statutory audit and reporting obligation. Virtually every European country has developed its own simplified national GAAP for SMEs--some countries have two or even three levels of SME GAAP. The same is true in Asia and elsewhere across the globe.

This begs the question: Why shouldn't SMEs just use existing national GAAP in each country? Consider the following:

1. Lack of comparability in global markets. The world's business markets are integrated, even...