global shift to ifrs and its implication small

8/6/2019 Global Shift to Ifrs and Its Implication Small

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CATHERINE O. AKINDELE (ACCT491)

ARTICLE ON

GLOBAL SHIFT TO IFRS AND ITS IMPLICATIONS ON SMALL AND MEDIUM

ENTITIES

International Financial Reporting Standards (IFRS) are standards, interpretations and the

framework for the preparation and presentation of financial statements. IFRS was formed

through (IAS) International Accounting Standards, (IASC) International Accounting Standards

Committee.

On July 2009, the International Accounting Standards Board finally issued the standards

for small and medium entities (SMEs). International Financial reporting standards for small and

medium companies is a miniature of full standards intend to meet the needs of private

companies, this is done through a cost-benefit approach. Size does not matter where accounting

is concerned. International Accounting Standard Board tried to change the name SMEs to

different names like Non-publicly Accountable entities, and private entities, at the end of

everything they end up with its original name SMEs.

International Accounting Standard Board (IASB) defines SME as a company or entity

that can have no publicly traded debt or stock, or the entity that cannot be deemed as having

public accountability such as holding assets in a fiduciary capacity for a broad group of outsiders

(banks, credit unions, broker-dealers and mutual funds). Most countries already have their own

standards for their private companies, when IASB added this project to their agenda, it was not

controversial as they expected.

FASB over the years has continued to issue controversial and complex standards, these

standards are expensive and complicated to comply with. Even large organizations have


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difficulties in following the standards. The Sarbanes-Oxley Act mandates that Securities and

Exchange Commission (SEC) should oversee FASB. The funding for the standard comes from

public companies; previously, the funding came from donations from wider constituency. Many

private entities in the United States no longer use U.S. Generally Accepted Accounting

Principles (GAAP). Lots of private companies in the United States are using comprehensive

basis of accounting (tax basis or cash basis) or U.S. GAAP exception in their audit report to

avoid the burden of compliance with recently issued accounting standards irrelevant to their

users. In so many cases now, users of Financial Statement have requested reporting other than

U.S. GAAP, as GAAP fails to meet their needs. The issuance of IFRS for SMEs has a lot of

implication on the world as a whole; this is because the world has already decided that

differential Accounting Standards make sense.

With the issuance of IFRS for SMEs, many SMEs around the world, including the

private companies in the U.S., will have the options of using a much simplified standards of

IFRS-based accounting framework to prepare their financial statement. Private companies in the

U.S. have options in using the standards for their organization. The IFRS for SMEs is an

attractive alternative. The GAAP comes in at 17,000 pages, while the IFRS for SMEs is 230

pages. Private entities may find IFRS for SMEs to be a more relevant and less costly financial

accounting and reporting standard than U.S. GAAP. In 2008, AICPA- American Institute of

Certified Public Accountants voted to recognize IASB as an accounting body for the purpose of

establishing international financial accounting and reporting principles. The AICPA noted that

CPA will need to check with their states boards of accountancy to determine the status of

reporting on financial statements prepared in accordance with IFRS for SMEs within their

individual states. This effectively opens the door for U.S. companies to use IFRS.


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While the SEC continues to debate on whether to join the rest of the world in adopting

IFRS for U.S. Public companies and private companies, some challenges have been diagnosed in

adopting IFRS for SMEs; These include, having an understanding of the major differences

between IFRS for SMEs and U.S. GAAP; calculating the cost, time and effort to convert to IFRS

for SMEs and winning support from the users of private company financial statements. IFRS for

SMEs cannot be perceived as a lesser set of standards, they must provide information useful to

make decisions. The IFRS standards permit subsidiaries of foreign companies that use full IFRS

to use IFRS for SMEs for their separate statutory reporting requirement as long as they meet the

definition as not publicly accountable.

The major differences between IFRS for SMEs and full IFRS is that IFRS for SMESs

eliminates many accounting topics generally irrelevant to private companies, also most of the

disclosures are reduced, accounting policy choices are limited to the simpler option and

recognition and measurement are simplified.

In conclusion, the question that is needed to be asked is Will the rest of the world adopt

IFRS for SMEs? No one knows the answers to that. As countries adopted full IFRS in the last

decade, many of these countries kept their national standard for their private entities. All these

might be as a result of political issues in each countries (if private companies in the U.S. adopts

IFRS for SMEs and public companies follow suit with IFRS (full) then FASB will become

obsolete.) It is likely that IFRS for SMEs will be embraced by developing nations. South Africa

adopted the draft IFRS for SMEs as its standards in 2007. Only in the U.S. there are less than

20,000 public companies and more than 20 million private companies. The AICPA and FASB


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created the private company financial reporting committee. Their objectives were to outline

several alternatives that U.S. should consider for private companies, including the move to IFRS

for SMEs. This may be the beginning of the end of the FASB.

global shift to ifrs and its implication small

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