By: BJ Davis, Supervisor, Assurance Services, BJ.Davis@BCGCompany.com
It has been a year and a half since the IASB released IFRS for small and medium-sized entities (SMEs). However, its use has not gained much traction in the U.S. despite the fact that it’s a viable option for many entities. The question now is – will it ever be a viable option?
Currently, any entity that meets the following definition of a “small and medium-sized entity” is eligible to use IFRS for SMEs:
- Do not have public accountability, but
- Do publish general purpose financial statements for external users.
But what is meant by “public accountability?” An entity is considered to have public accountability if it:
- Has debt or equity instruments that trades in a public market or it is in the process of issuing such instruments, or
- The entity holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.
A key point to note is that there is no size restriction on an entity as long as it meets the above conditions. It should also be noted that IFRS for SMEs is not designed to be used by not-for-profit or government entities. Therefore, U.S. GAAP remains the only viable accounting standard for these entities.
So why would an entity want to use IFRS for SMEs? For starters, at approximately 230 pages, it’s simpler and less complex than regular IFRS and it’s much simpler than U.S. GAAP, which runs about 17,000 pages, depending on your font of choice. IFRS for SMEs also reduces disclosure requirements and cuts out topics from regular IFRS and U.S. GAAP that are not relevant to those entities, such as earnings per share and segment reporting. Also, the IASB has committed to only revising IFRS for SMEs once every three years, thus adding stability to the standard.
But there are some drawbacks regarding IFRS for SMEs. Most notable is the significant knowledge gap surrounding IFRS for SMEs in the U.S. Financial statement preparers, as well as users, must be trained on IFRS for SMEs and this takes time as well money. Even educators, such as university professors and teachers, are just now beginning to address IFRS in the classroom setting.
Hopefully, once this knowledge gap is closed, it will become clearer whether IFRS for SMEs is right for a given entity. For additional thoughts on IFRS for SMEs, see this article in the Journal of Accountancy: http://www.journalofaccountancy.com/Issues/2009/Dec/20091928.
