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December 14, 2008

The public battle over private entities

The combat lines between supporters and opponents of the IFRS for Private Entities have been well defined for some time – simplified standards are not simple enough. New research from The Accountant drawn from a survey of 42 institutes around the world finds vastly different responses to the simplified standards.

The first quarter of 2009 promises to be an interesting time for small- to medium-sized entities. The International Accounting Standards Board (IASB) is set to release IFRS for Private Entities (IFRS for PEs), a controversial standard that aims to make it easier for non-listed entities to report in a global language, balancing the costs and benefits of internationally recognised financial reporting.

The Accountant has conducted research into sentiments surrounding the proposed standard by surveying 42 accounting institutes in 35 countries worldwide (for country-by-country response see Research: IFRS for private entities).

The survey found support for the standards often depends on how evolved a country’s standard setting process is.


The IASB says IFRS for PEs will be derived from full IFRS with appropriate modifications based on the needs of users of private entity financial statements and cost-benefit considerations.

However, there is widespread support for a stand-alone document, with minimal references to IFRS. A stand alone document is seen as easier to understand and simpler to use.

IASB deputy chair Tom Jones says the new IFRS for PEs will be “terrific” if the board manages to simplify issues around pensions, depreciation, amortisation and financial instruments in January.

One issue still to be resolved is the name of the standards, which has already changed once from the original IFRS for SMEs.

Jones is confident it will be widely adopted. He names Denmark, Australia, Latin America and Africa as strong candidates, despite a lack of enthusiasm in some European countries, including traditional detractors such as Germany and France who have highly developed local standards for private entities and are highly unlikely to adopt the new standard.

There appears to be few developing nations with local standards for private entities. Those using full IFRS for all entities, including South Africa, Zambia, Bangladesh and Uganda, support a simplified financial reporting standard to reduce the complexity. Countries using local standards, such as Mexico, see little need for the new standard.

South Africa has been a test case for the new standard after it took the unusual step of adopting the full text of the IFRS for SMEs exposure draft outright, issuing a Statement of GAAP for SMEs, based on the exposure draft, in October 2007.

The South African Institute of Chartered Accountant has subsequently made representations to the IASB on issues it has encountered in implementation of the exposure draft for consideration in preparation of the final standard.

The increasing mobility of cross-border business is one of the main reasons for support of the proposed standard, especially in developing markets.

The Institute of Chartered Professional Accountants of Kenya says business is increasingly global and financial reporting needs to be international to enhance the comparability of entities.

The Order of Chartered Accountants of Tunisia agrees the introduction of IFRS for PEs will increase comparability, opportunities for finding business partnerships and locating funding.

Still too complex

While many developing countries support the moves to reduce the complexity of international standards, many of the main critics from developed markets believe IFRS for PEs remains too complex.

For example, French institute Compagnie Nationale des Commissaires au Comptes says the standard is still much too complex, including issues regarding the recognition or derecognition of financial instruments; share-based payments; revenue recognition; finance lease; grants; post-employment benefits; the split of financial liabilities between equity and liability; the accounting for derivatives; and the recognition of deferred tax assets and liabilities.

The US currently applies US GAAP to all companies and has decided not to simplify US GAAP for small to medium-sized (non-public) entities.

The recent SEC roadmap moving public companies towards using IFRS by 2011 does not affect SMEs. National Association of State Boards of Accountancy (NASBA) president David Costello says there are no concrete plans to adopt IFRS, though there could be an impetus for change.

“If two sets of standards are in place in the US, emerging companies who decide to seek public funding may be saddled with a costly convergence process in order to move from the ‘small company’ GAAP to ‘public company’ GAAP,” Costello says.

Countries such as Sweden and the UK are considering how the standard could be integrated into their current structures.

The UK Accounting Standards Board is considering introducing three tiers of reporting in the UK. Tier 1 will be full IFRS for all quoted and publicly accountable entities, Tier 3 will be the local standard for smaller entities and Tier 2 will be for everyone else and would apply the IFRS for Private Entities.

The board stresses these are tentative decisions and will only be adopted after public consultation.

Gaining consensus around a global standard for PEs remains a distant goal for the IASB. While developing economies are eager to introduce and adopt the upcoming standard, some developed markets warn efforts to reduce complexity have not gone far enough.

The controversy over IFRS for Private Entities may be a long way from over.


IFRS for Private Entities

Proposed release: Early 2009

Of 42 institutes from 35 countries surveyed to see if they will adopt IFRS for Private Entities:

8 to adopt soon after release

8 to eventually adopt

8 undecided

11 unlikely to adopt

Source: The Accountant

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