As a daily user of client business financial statements, I welcome international financial reporting standards (IFRS) because I believe it will be much easier for private businesses to learn and use than current American standards. I understand there will be a learning curve but in the long term it should be easier to manage a business using IFRS compliant financial statements rather than the current standard. Most importantly, I think IFRS will bring the kind of accounting structure for small businesses that are badly needed by banks when they are considering businesses loans.
Drew White, CFO of Sageworks, Inc, a Raleigh N.C. company that provides real-time analytical and comparison software to the banking and accounting industry, thinks IFRS has the potential to give financial institutions a better picture of a company’s financial health than GAAP. Sageworks’ client banks analyze financial statements and tax returns in order to make a thumbs-up or thumbs-down decision on a business loan. With IFRS, White says banking regulators and banks will be able to see a more complete picture of the average business loan customer. He tells me that banks and banking regulators are increasingly looking for transparency, documentation, and justification that support a company’s ability to repay its loan.
The whole debate about these standards reminds me of all of the fuss over Y2K in 1999. No, the sky isn’t falling. Most accounting professionals believe that conversion to IFRS won’t be expensive except for the most complex public companies, and many of them are already using IFRS in countries they have operations. Over the long term those multi-national companies may actually save money.
Currently there are a few state boards of public accountancy that have IFRS training for accountants, but there are not many universities and colleges that have it as part of their accounting curriculum yet.
The good news is there is considerable discussion in the U.S. about the plan to adopt IFRS. Most of the disagreement about adoption relates to issues that SMEs don’t face like fair valuation, goodwill and more rigorous audit disclosures.
Pushed by the Securities and Exchange Commission (SEC) and the American Institute for Certified Public Accountants (AICAP) IFRS is poised to replace Generally Accepted Accounting Principals (GAAP) which has been the accounting standard in the U.S. for many years. Since over 125 countries around the world use IFRS and only a few use some form of GAAP, I find it a bit humorous that so many special interest groups are fighting the conversion; especially since there are so many potentially positive reasons why we should adopt IFRS.
If your business is a small or mid-sized private business, here are some of the highlights of what you should know.
- GAAP is principles based and IFRS is a rules based system. Generally speaking, GAAP is a set of specific guidelines and IFRS is more principles and judgment based.
- While it is difficult for small businesses to comply with the entire set of GAAP principles, IFRS offers a “light” version for privately held SMEs. While publically held companies will be required to comply with the full version of IFRS, the intent is for IFRS for SME to be easier to use than GAAP.
- Standards are available now for IFRS for SMEs. The complete set of rules is only 237 pages. The full IFRS rules are 2,700 pages and U.S. GAAP which impacts SMEs now has an estimated 17,000 pages.
- IFRS is designed to be an open transparent system that provides both company management and outside users of your financial statements such as banks and investors all of the information they need to assess your company on level playing field.
- It is designed for the “typical SME” company with users who focus on: – Shorter term cash flows and liquidity – Balance sheet strength – Historical operating results – Interest coverage
- Given our increasingly global economy, it makes sense for U.S. businesses to adopt IFRS. Many American SMEs buy from companies based in other countries, most of them using some variation of IFRS. Knowing the basics of IFRS will make it easier for local businesses to evaluate financial statements of global vendors and customers.
- Under the plan currently being promoted by American groups, IFRS for SMEs can be adopted by a business now as long as the users of financial statements agree. Public companies will have a multi-year time frame to convert.
I know all the acronyms in accounting are annoying and complicated. The profound simplification of accounting principles and rules for SMEs from 17,000 pages in GAAP to a mere 237 pages for IFRS alone should be enough to support the change.