IASB Publishes IFRS For SMEs
July 9, 2009
FEI Summary
On July 9, 2009 London time -- the evening of July 8 in the United States -- the International Accounting Standards Board published International Financial Reporting Standards for Small and Medium-Sized Entities (IFRS for SMEs). An earlier draft of the guidance was entitled: IFRS for Private Entities.
Self-contained, Aimed at Simplification
As noted in IASB's press release:
The IFRS for SMEs is a self-contained standard of about 230 pages tailored for the needs and capabilities of smaller businesses. Many of the principles in full IFRSs for recognising and measuring assets, liabilities, income and expenses have been simplified, topics not relevant to SMEs have been omitted, and the number of required disclosures has been significantly reduced. To further reduce the reporting burden for SMEs revisions to the IFRS will be limited to once every three years.
In addition to the press release cited above, IASB has posted a six-page IFRS for SMEs Fact Sheet.
Note: Weighing in at about 230 pages, IFRS for SMEs is about 10-15 percent of the length of the full set of IFRS, commonly described as containing approximately 2,500 pages, and approximately 1-1.5 percent the length of U.S. generally accepted accounting principles, which were commonly described in recent years (prior to the Financial Accounting Standards Board's Accounting Standards Codification becoming effective July 1) as running approximately 25,000 pages in total. The statistics were cited most recently in this May 4 WebCPA article, which adds that FASB Chairman Robert Herz indicated the Codification has reduced the size of U.S. GAAP to about 17,000 pages, mainly by eliminating redundant references.
The IFRS for SMEs standards, basis for conclusions, illustrative financial statements and a presentation and disclosure checklist) can be downloaded free of charge from http://go.iasb.org/IFRSforSMEs. Free registration is required on the IASB Web site to access these materials.
Scope: IASB's Definition of SME Hinges on Public Accountability, Not Size; Jurisdictional Considerations
IASB's definition of SME for purposes of the IFRS for SMEs standards hinges on whether or not the entity has "public accountability" (see the detailed definition below, but in very broad terms, only privately held entities would be able to use IFRS for SMEs, not public comanies, and then only those privately held entities that are not deemed to have "public accountability," such as banks, insurance companies and other entites, as further described below.)
According to the definition provided in Section 1 of IFRS for SMEs, SMEs are entities that:
(a) do not have public accountability [defined below]; and
(b) publish general purpose financial statements for external users. Examples of external users include owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies.
For purposes of this standard, the IASB states an entity has public accountability if:
(a) its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or
(b) it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.
IASB notes: "Some entities may also hold assets in a fiduciary capacity for a broad group of outsiders because they hold and manage financial resources entrusted to them by clients, customers or members not involved in the management of the entity. However, if they do so for reasons incidental to a primary business (as, for example, may be the case for travel or real estate agents, schools, charitable organisations, cooperative enterprises requiring a nominal membership deposit, and sellers that receive payment in advance of delivery of the goods or services such as utility companies), that does not make them publicly accountable.
Aside from meeting the IASB's definition of SME, permissibility of using IFRS for SMEs versus full IFRS is a jurisdictional decision, as noted in IFRS for SMEs and in the IASB's press release.
The Basis for Conclusions to the IFRS for SMEs standard notes that although IASB does not use a quantified size criteria to define an SME, some jurisctions may apply quantified size criteria or other criteria. Additionally, the Basis for Conclusions addresses topics such as Suitability of IFRS for SMEs for Very Small Entities - the Micros, and The IFRS for SMEs is not intended for small publicly traded entities.
Global Education Initiative Launched
As further described in IASB's press release, IASB is launching a global education initiative on IFRS for SMEs, including a 'train the trainer' initiative, and free downloads of educational materials about the new standards will be posted by the IASB in various languages, with the English language version expected to be posted in late 2009.
AICPA Q&A
In related news, the American Institute of Certified Public Accountants released a Question and Answer document on the new IFRS for SMEs. AICPA's Q&A on IFRS for SMEs notes:
"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."
The AICPA Q&A also includes such questions as: "Why would a private company in the United States choose to prepare its financial statements in accordance with IFRS for SMEs?" and "Does the AICPA Support Use of IFRS for SMEs in the United States?"
Separately, an article on this subject -- authored by Paul Pacter, IASB's director of Standards for Small and Medium-sized Entities, will appear in the September issue of FEI's magazine Financial Executive.
Other Guidance From:
KPMG - Defining Issues
Updated July 13 2009 by Edith Orenstein, director, Accounting Policy Analysis and Communications, Financial Executives International (FEI). This summary does not reflect FEI opinion unless specifically noted above.