IASB Renames IFRS For SMEs: 'IFRS For Private Entities'
June 4, 2008
FEI Summary

At a board meeting in May, 2008, the International Accounting Standards Board (IASB) began redeliberating its Exposure Draft (ED) on International Financial Reporting Standards for Small and Medium-Sized Entities (IFRS for SMEs), including comment letters received on the ED. FEI's Committee on Private Companies (CPC) Standards Subcommitee was among those who filed a comment letter on the ED last fall. The IASB board also considered the results of field tests of the ED.

At the May meeting, the IASB board voted to rename the project 'IFRS for Private Entities,' as noted in this IASB board meeting summary.

Members of FEI Committee on Private Companies, Standards Subcommittee, Endorse Change

Bill Koch, Chair of the Standards Subcommittee of FEI’s Committee on Private Companies (CPC), said, “Our view is that private companies have a lot in common from a user needs perspective.  While private companies tend to be smaller on average than public companies, size is of lesser importance in differentiating user needs than is the public / private ownership distinction. Therefore, we endorse the change in the naming convention.”

George Beckwith, a member of the CPC standards subcommittee, said of the change in name of the IFRS project: “I believe this is an important acknowledgement.” He added, “All private companies in the US, regardless of size, have become frustrated with the accounting standards. Private company statement users do not have the same regulatory issues when it comes to communication with companies and management.”

“In the US, the regulatory bodies that oversee publicly registered entities have had to change all GAAP in order to accomplish their regulatory oversight duties,” said Beckwith. “This has resulted in private companies complying with public standards without the benefits of access to capital the public companies enjoy.” He continued, “Many of the added disclosures and recognition standards don't add value to the average user. When shareholders complain about complexity in financial reporting, there was no alternative prior to the SME standards.”

Koch  who signed the CPC standards subcommittee letter to the IASB last fall, noted, “Our committee has been of the opinion for some time that the private/public user needs are different.” He added,  “Our review of the proposed IFRS for SMEs Exposure Draft last fall is that the proposed standards (now called IFRS for Private Entities) seem to be more appropriate for private companies than US GAAP.”   

Beckwith believes the IFRS for Private Entities proposed standards are a more principles-based set of standards than US GAAP, and cover a majority of issues faced by companies. He also noted, “The more streamlined standards which address the important issues are welcome by all non- regulated entities regardless of size. Having those standards called private company standards recognizes that more clearly.”

Concurring with the change in name of the project, Beckwith states, “Size was never the issue. Complexity and regulation were the issues. The recognition that private company users can use more streamlined standards is an important event. It allows regulators to influence their special purpose reporting standards while leaving the general purpose standards for companies that are not regulated.”

”I think that over time,” said Beckwith, “the private company standards will be more widely understood and can be effectively used by micro companies. When size is a concern, it is a resource availability concern, not an issue of different standards for different size companies.”

He continued, “A clear set of easy to understand standards which are based on sound theory and principles will be easy for micro companies to apply.  The level of expertise needed to apply the standards may be an issue, but the IASB’s new private company standards have the potential to be far superior to the previous alternatives available.”

Arthur V. Neis, a member of the CPC standards subcommittee, is a member of the IASB’s Working Group on the IFRS for Private Entities project.

Prepared by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.