Abstract
Increasingly, over the past quarter century, small- and medium-sized entities (SMEs) have expressed concern that the accounting standards they are required to follow are becoming more and more burdensome. Some of that burden is unavoidable. Traditional simple accounting principles just were not designed for the complex transactions that some small companies enter into – for instance, derivatives and hedging, foreign operations, business combinations, asset sales with ‘strings attached’, pension obligations, and revenue transactions with multiple deliverables. But, certainly, part of that burden has arisen because accounting standards designed for public capital markets are increasingly being ‘pushed down’ to entities without public accountability, either because their jurisdiction has replaced its national GAAP with International Financial Reporting Standards (IFRSs) or has been, little by little, converging its national GAAP with IFRSs. The International Accounting Standards Board (IASB),1 which develops IFRSs, is working on a separate IFRS for Private Entities. As part of that project, in February 2007, the IASB published for comment an exposure draft (ED) of a proposed private entity standard titled IFRS for Small and Medium-sized Entities. During the 3 years, that the IASB worked to develop the proposal, the Board had been using the term SMEs to describe the entities that would be within the scope of the resulting standard. That term is widely used throughout the world, although less so in the United States. For reasons explained later in this article, in May 2008 the IASB decided to replace the term ‘SMEs’ with ‘private entities’. The resulting standard will be titled the IFRS for Private Entities. This article uses the term private entities. The IASB’s February 2007 ED is a simplified, self-contained set of accounting principles that are appropriate for smaller, non-listed companies. It is based on full IFRSs, which have been developed to meet the needs of listed companies in public capital markets, with modifications for a private entity environment as explained more fully later in this article. Comments were due by 30 November 2007. By removing choices for accounting treatment, eliminating topics that are not generally relevant to private entities, simplifying methods for recognition and measurement, and omitting many disclosures, the ED reduces the volume of accounting guidance applicable to private entities by more than 85 per cent when compared with the full set of IFRSs. As a result, the ED offers a workable, self-contained set of accounting standards that would allow investors for the first time to compare private entities’ financial performance across international boundaries on a like for like basis.This article discusses: the IASB’s reasons for issuing an IFRS for private entities,the types of entities at which it is aimed,what the IASB has proposed in the ED and why,what the IASB has not proposed, and why not,how the IASB reached the conclusions that it did,how the IASB plans to maintain the standard after it is issued,comment letter responses to and field testing of the ED,the IASB’s re-deliberations through July 2008,the remaining steps leading to a final IFRS for Private Entities, andplans for training materials.
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