Small Companies Will Lag, but By How Much?

Switching to IFRS is inevitable for private companies — eventually.
Josh HyattNovember 1, 2008

Let this be a warning to CFOs of private companies: The shift to new global financial reporting standards may yet happen during the Bush Administration. That would be the Jenna Bush Administration.

Such was the tone of the most recent meeting of the Private Company Financial Reporting Committee (PCFRC). While the Securities and Exchange Commission currently proposes to require big public companies to change from generally accepted accounting principles (GAAP) to international financial reporting standards (IFRS) around 2014, the outlook for private companies “is far from settled,” says Judy O’Dell, who chairs the PCFRC, an advisory group to the Financial Accounting Standards Board.

While private companies aren’t required to file audited financial statements with the SEC, they often prepare them for lenders, investors, and potential acquirers. Some favor converting to international standards, since they are simpler and likely cheaper to prepare. Keeping public and private companies on the same standard also “will make it easier for us to do business,” in terms of giving outsiders confidence in private-company financials, says Jerry Murphy, PCFRC member and CFO of Todd & Sargent, a privately held construction and engineering firm.

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Among the potential drawbacks of IFRS is the current uncertainty around inventory valuations. Now, the Internal Revenue Service accepts the LIFO method (last in, first out), which results in favorable tax treatment. LIFO is not permissible under IFRS, however, portending “much bigger tax liabilities” if an alternative method becomes mandatory, notes O’Dell.

At this point, there’s no telling whether public companies will convert to IFRS on schedule, since the SEC’s proposed timetable is unlikely to gain traction before a new Administration takes office. But assuming the changeover eventually occurs, IFRS will be “an inevitability” for private companies, says Ted Rose, who runs an accounting-outsourcing firm in Rockville, Md. Meanwhile, the International Accounting Standards Board plans to publish its recommendations for private companies early next year.

Where do all these potentially monumental changes leave financial executives at private companies? For now, advises O’Dell, “keep an eye on what goes on, but stay busy running your business.”