The U.S. accounting industry is in the process of replacing generally accepted accounting principles, or GAAP, the standard guideline for financial accounting currently used in the United States, with International Financial Reporting Standards by 2016. The net result will be a “lite” version of accounting rules that will help decrease complexity and cost for small and medium-size businesses.
The United States is one of only two countries among 105 industrialized nations that don’t currently use IFRS as the accounting standard for businesses. Since 2002, committees have been meeting and have successfully negotiated merging the attractive portions of GAAP into IFRS and modifying IFRS in a few areas to be more U.S. friendly. For the next three years, business owners can choose whether to use U.S. GAAP or IFRS.
IFRS vs. GAAP
IFRS is considerably simpler than GAAP for both big and small businesses. GAAP is a rule-based accounting system with more than 17,000 pages of requirements, while IFRS is a principles-based standard with 2,500 pages of instruction. The simpler IFRS should appeal to many in the U.S. business and accounting community.
Under GAAP, rules apply equally to large and small companies, causing small and medium-size enterprises to spend a disproportionate amount of their accounting dollars to become compliant. IFRS offers a “lite” version for small and medium-size businesses that makes compliance less costly.
According to the London-based International Accounting Standards Board IFRS manual for small to medium-size businesses released in July 2009, this version will feature simplifications not found in the standard IFRS:
- Some topics in IFRS are omitted because they are not relevant to typical small and medium-size businesses.
- Some accounting policy options in the full IFRS are not allowed because a more simplified method is available to small and medium-size businesses.
- Many of the recognition and measurement principles that appear in the full IFRS are simplified in the version for small and medium-size businesses.
- The manual includes substantially fewer disclosures and simplified redrafting.
What defines a small or medium-sized business under IFRS? IFRS leaves that to jurisdictions such as the American Institute of Certified Public Accountants. All publicly held companies must move to full IFRS, and those private companies that have complex accounting issues should move to full IFRS because of its more robust set of guidelines.
It’s important to remember that federal and state taxation rules are not affected by any general purpose accounting standard, such as GAAP or IFRS. It is not likely that any taxation rules will change because of IFRS.
Making the Change
Few accountants have started preparing to move their clients to IFRS, and only a handful of college accounting classes provide education about IFRS. So there will be a learning curve for both accountants and small and medium-size business owners.
Cash-basis bookkeepers will feel the most difference because IFRS recognizes only the accrual method of bookkeeping. This will only affect cash-basis bookkeepers during the first year of their conversion, and the effect could either make their financial statements look better or worse, depending on the company’s circumstances.
Sam Thacker is a partner in Austin, Texasbased Business Finance Solutions.