Following the release of a private-company version of international accounting standards this summer, most smaller U.S. companies are not signing on to the idea of switching from U.S. rules — at least not yet. Accounting firms that focus on smaller businesses say their clients are in no rush to adopt International Financial Reporting Standards for small and medium-sized entities (SMEs), or "IFRS light."

"There will have to be a cultural shift" before companies begin adopting IFRS light on a voluntary basis, posits Sal Collemi, a senior manager at accounting and audit firm Rothstein Kass. That cultural change is related to the biggest disparity between IFRS and U.S. generally accepted accounting principles: that IFRS allows for more professional judgment on the part of company management and accountants, while U.S. GAAP shields both groups with more rules and implementation guidance.

The culture of using extensive professional judgment when applying accounting rules varies from country to country but is rare in the United States, contends Collemi. He calls that kind of judgment a "soft skill" that requires training in how to "think differently" about transactions.

There's also a more practical reason why private companies in the United State aren't moving quickly to adopt IFRS light, despite its lure of attracting global investors, partners, and customers. That is, American banks, creditors, and investors — which still hold enormous sway in the global economy, especially over smaller U.S. companies — are not yet "up to speed" on IFRS, notes Collemi, who works on IFRS training programs for his firm, as well as for clients.

The new SME standards are based on full IFRS but have been whittled down from 2,500 pages to a mere 230 pages. The pruning took five years of discussion, debate, and editing, but now that the trimmed-down standards have been issued, the International Accounting Standards Board has promised that IFRS light will only be revised every three years, so smaller companies that use the standards won't have to worry about the time and expense of implementing new rules every year, which is usually the case with full IFRS.

The pared-down version of the standards is available for use by SMEs, which the IASB defines as nonpublic entities that publish general-purpose financial statements for external users (i.e., owners who are not involved in managing the business, existing and potential creditors, and credit-rating agencies). In practice, that means IFRS light was written for private companies, which according to the IASB make up 95% of the world's businesses.

"The IFRS for SMEs will provide businesses with a passport to raise capital on a national or international basis," noted Paul Pacter, director of the project, in a statement when the standards were released.

In theory, smaller private companies that want to raise capital from foreign investors, or borrow from foreign lending institutions, should find it easier to report results in a format that is accepted by the 100 or more countries that now recognize IFRS. Further, companies that deal with foreign suppliers and customers, or are owned by a foreign parent, may find that using IFRS light, instead of country-specific versions of GAAP, saves a lot of time and money with respect to reconciling financial statements within their own companies, says Collemi.

When the diminutive standards were released this summer, Big Four accounting firm Deloitte surveyed 220 private-company financial professionals, 77% of them from companies with less than $1 billion in annual revenues. More than half (51%) of the smaller-business finance executives claimed they favored the idea of having separate accounting standards for public and private companies.

Deloitte experts say the support for IFRS light is likely to swell as more company executives become familiar with the standards and their potential benefits with respect to capital raising. "Some private companies are still not aware of the IASB's efforts in addressing the needs of private companies," noted Deloitte partner D.J. Gannon after the survey results were released. In fact, when the rules were issued, 43% of the SME respondents were unaware of the IFRS light project.

The IASB launched the project because it concluded that full IFRS were heavily weighted to meet the rigorous disclosure needs of equity investors in publicly traded companies. Illustrating the burden public-company rules placed on private companies, consider that IFRS light contains 300 to 400 disclosure requirements, while full IFRS mandates 4,000.

Full IFRS also covers a wide range of issues specifically geared toward public-company investors, such as rules dealing with earnings per share, interim financial reporting, and segment reporting, and it contains a significant amount of implementation guidance surrounding those provisions. By contrast, SMEs and their investors and lenders focus their attention on assessing shorter-term cash flows, liquidity, and solvency.

In addition, IFRS light removes some of the options that full IFRS allows public companies to use, such as those related to the revaluation at fair value of intangibles and property, plant and equipment. Recognition and measurement issues are also simplified under IFRS light. For instance, when goodwill is amortized, SMEs can stop testing after 10 years, instead of being required to test for impairment over its useful life, as is the case with full IFRS.

• 1
• 2
• next »

LinkedIn Company Connections:

• Rothstein Kass |
• Deloitte