Why Small Biz Isn’t Ready for IFRS

In spite of their interest in the proposed "little GAAP," small businesses are not ready to move on "IFRS light."

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.

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