Simplified accounting principles on the horizon for small firms

Internal Auditor, April, 2007 by A. Cain

THE IASB HAS ISSUED A DRAFT STANDARD AIMED AT providing a simplified, manageable set of accounting principles suitable for small, nonlisted companies. The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) is a stand-alone document for organizations with 50 or fewer employees that is comparable to the full IFRS developed primarily for publicly listed companies. The standard is expected to be finalized in mid 2008.

According to IASB Chairman Sir David Tweedie, "The small and medium-sized entities standard will make the accounting requirements more accessible to smaller preparers in both developed and emerging markets." The proposed standard reduces the accounting guidance applicable to SMEs by more than 85 percent by eliminating inapplicable topics and simplifying methods for recognition and measurement of assets, liabilities, equity, income, and expenses. To assist firms preparing accounts based on the standard, many IFRS requirements have been rewritten to be easier to understand.

Because both sets of standards are based on the same principles, SMEs can use the proposed standards as a basis for upgrading to the full IFRS standards if their size increases or listing status changes. Moreover, the SME standards will enable investors to compare the financial performance of small companies across international boundaries on a like-for-like basis, according to the IASB.

Adoption of the IFRS for SMEs will be left up to individual countries or jurisdictions. For example, the EU requires listed companies to comply with the full IFRS, but will leave it up to member states to decide which standards SMEs should follow. However, publicly listed companies, regardless of size, may not use the proposed SME standards.

[ILLUSTRATION OMITTED]

The IFRS for SMEs exposure draft is available in French, German, and Spanish at www.iasb.org. The IASB will accept comments on the exposure draft until Oct. 1, 2007.