What is the International Financial Reporting Standard
for Small- and Medium-Sized Entities ("IFRS for
SMEs")?
IFRS for SMEs is a modification and simplification of full
IFRS aimed at meeting the needs of private company
financial reporting users and easing the financial reporting
burden on private companies through a cost-benefit
approach. IFRS for SMEs is a self-contained global
accounting and financial reporting standard applicable to
the general-purpose financial statements of, and other
financial reporting by, entities that in many countries are
known as small- and medium-sized entities. Full IFRS and
IFRS for SMEs are promulgated by the International
Accounting Standards Board ("IASB").
What is meant by small- and medium-sized entities
("SMEs")?
IFRS for SMEs is intended to be used by SMEs, which are
entities that publish general purpose financial statements
for external users and do not have public accountability. An
entity has public accountability under the IASB's definition if
it files, or is in the process of filing, its financial statements
with a securities commission or other regulatory
organization for the purpose of issuing any class of
instruments in a public market; or it holds assets in a
fiduciary capacity for a broad group of outsiders. Examples
of entities that hold assets in a fiduciary capacity include
banks, insurance companies, brokers and dealers in
securities, pension funds and mutual funds. It is not the
IASB's intention to exclude entities that hold assets in a
fiduciary capacity for reasons incidental to their primary
business (for example, travel agents, schools and utilities)
from utilizing IFRS for SMEs.
Practically speaking, IFRS for SMEs is viewed as an
accounting framework for entities that are not of the size
nor have the resources to use full IFRS. In the United
States, the term "SME" would encompass many private
companies.
The term "SME" is not a familiar one in the United
States. What kinds of entities in the U.S. would be
SMEs, as that term is used by the IASB?
The IASB's IFRS for SMEs is geared toward private
company reporting. In fact, when developing the standard,
the IASB focused on the needs of a typical mid-size private
company. Given the IASB's definition of a SME, many
private companies would fit the definition of the type of
entity for which the IASB developed IFRS for SMEs.
What has the International Accounting Standards Board
accomplished by issuing IFRS for SMEs?
The types and needs of users of SME financial statements
are often different from the types and needs of users of
public company financial statements and other entities that
would likely use full IFRS. Full IFRS were designed to meet
the needs of equity investors in companies in public capital
markets. Users of the financial statements of SMEs (or
private companies in the U.S.) don't generally have those
same needs. Rather, users of the financial statements of
SMEs are more focused on shorter-term cash flows,
liquidity, balance sheet strength, interest coverage and
solvency issues. Also, full IFRS impose a burden on SME
preparers in that full IFRS contains topics and detailed
implementation guidance that generally are not relevant to
SMEs. This burden has been growing as IFRS have
become more detailed. As such, a significant need existed
for an accounting and financial reporting standard for SMEs
that would meet the needs of their financial statement users
while balancing the costs and benefits from a preparer
perspective. IFRS for SMEs was designed to meet that
need. With the issuance of IFRS for SMEs, many SMEs
around the world, including private companies in the United
States, will have the option of using a much simplified,
IFRS-based accounting framework to prepare their financial
statements.
What significance does the issuance of IFRS for SMEs
have in the United States?
U.S. private companies are not "required," like public
companies, to use a particular basis of accounting when
preparing their financial statements. The factors that drive a
private company's choice of which financial accounting and
reporting framework to follow in preparing its financial
statements depend upon each company's objectives and
the needs of their financial statement users. Currently,
private companies in the United States can prepare their
financial statements in accordance with U.S. GAAP as
promulgated by the Financial Accounting Standards Board
("FASB"); an other comprehensive basis of accounting
("OCBOA"), such as cash- or tax-basis; or full IFRS, among
others. Now, with the issuance of IFRS for SMEs, U.S.
private companies have an additional option.
Which entities in the United States can use IFRS for
SMEs?
The IASB intends IFRS for SMEs to be used by entities that
meet their definition of a SME (publish general purpose
financial statements for external users and do not have
public accountability). Practically speaking, this means that
many private companies in the United States can prepare
their financial statements in accordance with IFRS for
SMEs. Of course, a variety of factors will drive that
decision, such as the needs of financial statement users
and possible regulatory reporting requirements.
Are there any barriers to U.S. private companies using
IFRS for SMEs?
In May 2008, the AICPA governing Council voted to
recognize the IASB as an accounting body for purposes of
establishing international financial accounting and reporting
principles. This amendment to Appendix A of AICPA Rules
202 and 203 gives AICPA members the option to use IFRS
as an alternative to U.S. GAAP. As such, a key professional
barrier to using IFRS and therefore IFRS for SMEs has
been removed. CPAs may need to check with their state
boards of accountancy to determine the status of reporting
on financial statements prepared in accordance with IFRS
for SMEs within their individual state. Any remaining
barriers may come in the form of unwillingness by a private
companys financial statement users to accept financial
statements prepared under IFRS for SMEs, and a private
companys expenditure of money, time and effort to convert
to IFRS for SMEs.
Can CPA practitioners report on financial statements
prepared in accordance with IFRS for SMEs?
Yes. The AICPA's governing Council has recognized the
IASB as an accounting body for purposes of establishing
international financial accounting and reporting principles.
With the Council action, the AICPA's Auditing Standards
Board and the Accounting and Review Services Committee
have developed clarifying language on how audit, review
and compilation reports can be modified when reporting on
financial statements prepared in accordance with IFRS.
(See Interpretations No. 14 and No. 19 of AU section 508
and Interpretation No. 30 of AR Section 100.)
Are IFRS and IFRS for SMEs considered generally
accepted accounting principles?
Yes. The AICPA's governing Council recognizes the IASB
as an accounting body for purposes of establishing
international financial accounting and reporting principles.
Full IFRS and IFRS for SMEs are not an other
comprehensive basis of accounting. Rather, they are
generally accepted accounting principles.
Why would a private company in the United States
choose to prepare its financial statements in

accordance with IFRS for SMEs?
The reasons why a private U.S. company would prepare
IFRS for SMEs-based financial statements are varied,
depending upon the objectives of the company and the
needs of its financial statement users.
Some U.S. private companies may find the simplified IFRS
for SMEs an attractive alternative to the more complicated
and voluminous U.S. GAAP. Those private companies may
find IFRS for SMEs to be a more relevant and less costly
financial accounting and reporting standard than U.S.
GAAP.
Other examples of why a private company in the U.S. may
decide to use IFRS for SMEs include the following:
the private company is owned by a foreign parent
the private company has a foreign investor
the private company is a supplier to foreign companies
the private company has a foreign venture partner
An ever increasing amount of private companies are
looking to conduct business outside the Unites States and
obtain foreign financing. Using a common global financial
accounting and reporting standard, like IFRS for SMEs,
increases comparability between companies and improves
the efficiency of conducting business across borders. Users
of private company financial statements prepared in
accordance with IFRS for SMEs would benefit from a
common global standard. In conducting business with
private companies in different countries, lenders, venture
capitalists and other users would just need to understand
and work with one financial accounting and reporting
standard.
Many foreign countries maintain a simplified version of their
national GAAP. With the issuance of IFRS for SMEs, U.S.
companies now have a similar option to use accounting
standards tailored for smaller, private entities.
Does the AICPA support the use of IFRS for SMEs in the
United States?
The AICPA welcomes the introduction of IFRS for SMEs in
the United States. Private companies should be allowed to
choose the financial accounting and reporting framework
that best suits their objectives and the needs of their
financial statement users. IFRS for SMEs represents
another valuable financial accounting and reporting option
for private companies to consider using, depending upon
their unique circumstances.
How can financial statement preparers and CPA
practitioners stay abreast of IFRS for SMEs
developments?
Information about IFRS for SMEs and about the activities of
the IASB can be found at www.ifrs.com. Information about
IFRS for SMEs available at the International Accounting
Standards Board website can be found
at http://www.iasb.org/IFRS+for+SMEs/IFRS+for+SMEs.htm.
What are some key differences between U.S. GAAP and
IFRS for SMEs?
IFRS for SMEs is an approximately 230 page, significantly
reduced and simplified version of full IFRS. In creating IFRS
for SMEs, the IASB eliminated many accounting topics that are
not generally relevant to private companies (for example,
earnings per share and segment reporting). Being based on
full IFRS and missing many accounting topics, IFRS for SMEs
therefore differs from U.S. GAAP in a variety of areas. Some of
the key differences under IFRS for SMEs are:
Disclosures are simplified in a number of areas including
pensions, leases and financial instruments.
LIFO is prohibited.
Goodwill and indefinite life intangible assets are amortized
over a period not exceeding ten years.
Depreciation is based on a components approach.
A simplified temporary difference approach to income tax
accounting.
Reversal of impairment charges, if certain criteria are met, is
allowed.
Accounting for financial assets and liabilities makes greater
use of cost.
What does one do when an entity has a transaction not
addressed in IFRS for SMEs?
If IFRS for SMEs does not specifically address a
transaction, other event or condition, an entity's
management shall use its judgment in developing and
applying an accounting policy that results in information that
is:
(a) relevant to the economic decision-making needs of
users, and
(b) reliable, in that the financial statements:
(i) represent faithfully the financial position, financial
performance and cash flows of the entity;
(ii) reflect the economic substance of transactions, other
events and conditions, and not merely the legal form;
(iii) are neutral (in other words, free from bias);
(iv) are prudent; and
(v) are complete in all material respects.
In making the judgment described above, management
should refer to, and consider the applicability of, the
following sources in descending order:
(a) the requirements and guidance in IFRS for SMEs
dealing with similar and related issues, and
(b) the definitions, recognition criteria and measurement
concepts for assets, liabilities, income and expenses and
the pervasive principles in Section 2, Concepts and
Pervasive Principles, of IFRS for SMEs.
In making the judgment described above, management
may also consider the requirements and guidance in full
IFRS dealing with similar and related issues.
What are some of the key challenges that a private
company in the United States would face in using IFRS
for SMEs?
Some key challenges that may be present in choosing to
use IFRS for SMEs include understanding the differences
between IFRS for SMEs and U.S. GAAP; the willingness of
financial statement users to accept financial statements
prepared under IFRS for SMEs; working with and accepting
a more principles-based set of accounting standards
compared to the more rules-based U.S. GAAP; the impact
on taxes and tax planning strategies; and the impact on
financial reporting metrics.
What resources are or will be available to help me
understand and implement IFRS for SMEs?
The final IFRS for SMEs (together with the basis for
conclusions, illustrative financial statements, and a
presentation and disclosure checklist) can be obtained
without charge from the IASB Web site
(iasb.org/IFRS+for+SMEs). The IASC Foundation is
developing training modules associated with the different
sections of IFRS for SMEs. These modules are expected to
be available for free by late 2009.
The AICPA is developing a publication that will provide a
technical comparison between IFRS for SMEs and U.S.
GAAP. Such a tool would be valuable to anyone thinking
about adopting or reporting on IFRS for SMEs and trying to
understand how IFRS for SMEs compares to U.S. GAAP. In
addition, the AICPA will be developing CPE courses related
to IFRS for SMEs. Visit www.ifrs.com to stay abreast of
other AICPA resources that become available to help you
better understand and implement IFRS for SMEs.