Financial Accounting

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A

& AUDIT
international accounting

CCOUNTING

ING

Accounting for Small Businesses:
The Role of IFRS
By Nancy Christie, John Brozovsky,
and Sam Hicks

F

or decades, U.S accountants in all
fields have recognized a need for a
simpler set of financial reporting
standards for small businesses, but regulators have not been willing to provide a second set of standards. Now, for the first time, there may be an answer for small
firms desiring relief from the onerous
reporting requirements of GAAP. The
AICPA now recognizes the International
Accounting Standards Board’s (IASB)
recently released International Financial
Reporting Standard for Small and MediumSized Entities (IFRS for SMEs), as an official set of accounting standards to be audited against. Now that separate accounting principles designed specifically for small

businesses exist, how will it be received
by CPAs? Will small businesses and their
accountants change their methods?

sonal property, and payroll to the necessary tax authorities. The relative importance of different uses of accounting reports
varies with the size of the business. The
full set of financial statements is subject

Companies.” It states, “FASB and the
AICPA recognize the need to carefully
evaluate whether financial reporting standards meet the needs of users of private company financial reports and whether the

to close review by government regulators,
such as the SEC, and market analysts. In
the United States, Generally Accepted
Accounting Principles (GAAP) are formulated by FASB and reviewed by the SEC. Currently, FASB does not distinguish
between different types of businesses. In
2006, however, FASB and the AICPA
issued a joint proposal, “Enhancing the
Financial Accounting and Reporting
Standard-Setting Process for Private

changes can be implemented by private
companies in a cost-effective manner.”
Private companies are not specifically
defined in the proposal but are presumed
to be for-profit entities of any size whose
stock is not publicly traded.
In July 2009, the IASB released IFRS
for SMEs. The SMEs are described as
entities that do not have public accountability and publish general purpose financial statement for external users. IFRS for

Different Businesses, Different Needs
Businesses can be classified into three
broad categories: public companies, private
companies, and small businesses. The distinction between the latter two is the size of the company. Small businesses generally
have less than $10 million in revenue and
fewer than 50 employees. Though small,
these businesses are important in the aggregate as the major creator of new jobs. Small businesses also constitute a major
source of clients for local and regional
CPA firms.
The need for accounting reports varies
among the three classes of businesses.
Public companies listed on stock exchanges
must prepare a full set of financial statements with comprehensive notes and disclosures. Accounting reports are also used to comply with various government reporting requirements. Primary among these is the need to report a business’s income, per-

40

JULY 2010 / THE CPA JOURNAL

SMEs does not differentiate by size of the
business. Thus, by definition, SMEs
include small businesses as well as private companies.
Because IFRS for SMEs has only
recently been released, it remains to be seen
whether CPAs in smaller practitioner firms
and in small and medium-sized businesses will accept them as desirable reporting standards. Until recently, CPAs were presented with two methods for preparing financial reports:
■ GAAP, as issued by FASB and
reviewed by the SEC; and
■ Other comprehensive basis of accounting (OCBOA).
Now, additional methods include—
■ IFRS, as issued by the IASB; and
■ IFRS for SMEs, for nonpublic
companies.
A potential additional method is the private company accounting standards that are in the process of being developed jointly
by the...
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