New International Accounting Standards

to Have Major Impact on Small and

Medium Size U.S. Businesses

By Jeffrey T. Deane, CPA, Partner

Malin, Bergquist & Company, LLP

A radical and long awaited alternative in how small and medium-size businesses account for their financial performance has finally been approved by the International Accounting Standards Board.  Considered by IASB as a “major breakthrough,” it signals the continuing transformation of traditional and national generally accepted accounting principles (GAAP) to international financial reporting standards (IFRS).

For the first time, says the IASB, these types of companies will have a “common high quality and internationally respected set of accounting requirements … felt in both developed and emerging economies.”

Small and medium size entities (SMEs) represent approximately 95 percent of all businesses. The finalization of IFRS for SMEs has led the Accounting Standards Board (ASB) in the United Kingdom to issue a proposal to replace U.K. GAAP with IFRS – could the United States be far behind, or even next? 

This conversion will be a major endeavor for first-time IFRS adopters.  In addition to significant accounting issues, companies will have to contemplate major, life-changing questions such as:  “Do we create a parallel accounting system within our accounting package or adjust our current general ledger?  Are our loan covenants or other financial agreements now in jeopardy?  What impact will there be on internal measurements and benchmarks used for bonuses and profit sharing?”

IASB states that IFRS will benefit SMEs in these three ways:

• Provide improved comparability for users of accounts;
• Enhance the overall confidence in the accounts of SMEs; and
• Reduce the significant costs involved with maintaining standards on a national basis.

It is crucial for U.S. companies to begin developing a transition plan to a new era of global accounting; one that revolves around IFRS.

Background - On July 9, 2009, IASB published a new standard designed for use by SMEs.  The standard finalized the five-year process designed to reduce the burden of IFRS implementation on private companies.

The objective of the project was to develop an IFRS tailored to meet the financial reporting need of entities that:

• Do not have public accountability; and
• Publish general purpose financial statements for external users.

The IFRS for SMEs publication condensed the accounting guidance to a document that is only 230 pages (including the glossary), which is approximately 99 percent shorter than U.S. generally accepted accounting principles (GAAP).  The publication layout is very well designed and is an easy read.  Overall the reporting requirements for SMEs have been minimized.  Certain accounting topics, such as earnings per share and segment reporting, have been eliminated as they are generally irrelevant to private companies.  Additional differences between full IFRS and IFRS for SMEs include:

• Accounting for business combinations;
• Accounting for deferred income taxes;
• Recognition of development costs; and
• Accounting for goodwill and certain other intangible assets.

While a roadmap for adoption of IFRS for public filers had been issued previously in the United States, there has been confusion as to how and/or if IFRS would apply to non-public companies within the U.S. and around the world.  The issuance of the SME Project has answered the question. 

AICPA President and CEO Barry Melancon endorsed the SME Project by stating, “The AICPA welcomes the introduction of IFRS for small and medium entities as an alternative accounting reporting option for private companies.”

As well, with finance ministers and central bank governors from the Group of 20 (G-20) preparing to hold their 2009 summit in Pittsburgh, some already are lobbying IASB to modify accounting rules as part of a broader overhaul of the U.S. financial system. European Central Bank governing council member Christian Noyer was quoted by Dow Jones saying he believes that uniform accounting standards are vital for "developing stronger prudential regulation.”

Thus there can be no question that general acceptance of IFRS in the U.S. is on the horizon. The burning question now is just how quickly it will arrive. 

While the Securities Exchange Commission (SEC) issued a roadmap for public companies to adopt IFRS, it has been overshadowed by the publication of IFRS for SMEs.  Now with the SME Project finalized and published, the push to adopt IFRS in the U.S. will be accelerated by the AICPA, FASB and others.  Private companies may lead the way, taking advantage of the simplicity offered by IFRS for SMEs.

How will the adoption of IFRS impact SME companies?  Differences between IFRS and U.S. GAAP have been reduced over the past several years due to convergence projects between the two standard setters.  Yet significant differences do remain and many of them can result in significantly different financial results.

What is the Impact?

Accounting Profession: There is a significant shortage in properly trained professionals within the accounting industry. Currently very few U.S. CPAs have exposure and knowledge relating to IFRS.  Based on the demographics of the profession, 75 percent of the CPAs will reach retirement age within the next 15 years.  The current CPA exam is void of questions on IFRS and college courses on IFRS are limited.  Just recently, I advised the American Institute of Certified Public Accountants in drafting initial questions relating to IFRS to be utilized on future CPA exams. 

Academia and Banking: The impact is far greater than just the accounting profession.  Adoption of IFRS as our accounting system affects academia where a survey conducted by the American Accounting Association and KPMG in July and August 2008 indicated that just 22 percent of 535 professors surveyed said they could incorporate IFRS into their courses in any significant way. Another 62 percent said they had not taken any significant steps toward integrating IFRS into course work.  The change to IFRS will also impact the banking and finance industry as it attempts to compare financial information prepared under IFRS against U.S. GAAP benchmarks, financial ratios and debt covenants.  The impact is far reaching.

Industry:  Industry is affected in several ways. The first is employee training. Fortunately some educational options already are emerging. Classes are being offered by industry groups, including the AICPA , various state accounting groups as well as private organizations. The training is not inexpensive – The cost for training often approaches $1,000 a day.

Secondly, internal accounting systems must be transformed from U.S. GAAP to IFRS.  This will be a major endeavor for companies as they adopt IFRS for the first time. 

The business world will be exploring new territory over the next few years.  It is crucial for U.S. companies to begin developing their IFRS transition plans now.

To receive an IFRS implementation briefing at your office at no charge, or a free "IFRS Implementation Guide" at no obligation, contact us at ifrs@malinbergquist.com or call toll-free at +01 866.739.1560.

About the Author – Partmer Jeffrey T. Deane, CPA, heads the International Businesses Group of Malin, Bergquist, which serves more than 40 international business clients.