The United States is said to be a land of freedom and opportunity. It is a country filled with individual dreams and ideas of success. These may be the reasons why there are over twenty million entities which are classified as being small and medium-sized entities (SME's), not even to mention those that have grown beyond their original ideas and have created publicly traded corporations. Some now cross borders and oceans to involve individuals from other countries, backgrounds, and ideals. With the growing world comes innovation without boundaries, which in the end needs to be able to be receipted by others in order for them to understand what it is that these dreamers have now created.
On a more realistic and factual level, these businesses are not businesses without organization and reporting. In order for a company to be multi-national it requires the company to not only operate in several countries but to also to report their operations consistently throughout those countries. Even within single companies this is necessary for continuity and success, but the scale is on a smaller level. When one local baker needs to understand why his competitor is becoming more successful or the means to which they are able to budget what others cannot, comparability in financial records is the answer. The capability to record and document where an entity stands financially also gives support to investors and lenders before they take risks in a given company.
Reporting on finances is not new to the United States (or the world), with the installation of Generally Accepted Accounting Principles (GAAP) through the combined actions of groups and committees since the end of the Great Depression in conjunction with the laws and regulations which became the Principles. This system of reporting, though not agreed upon and signed into legislation by all countries and entities, created a system that seemingly created organization and comparability. But with new ideas and networks on the rise, the world has begun to shift towards international consistency. Smaller, less globalized entities are seeing increasing amounts of pressure to report in the same manner that mainstream stockholding companies of the world report as a result of the bigger entities needs to interpret statements from one country to the next. These actions are under the supervision and modification of the International Accounting Standards Board (IASB) (Grosu and Bostan 323).
The ISAB's set of accounting and reporting stipulations, International Financial Standards (IFRS), is relatively new, but the set of reporting laws which were created for these smaller businesses is even newer. The IASB (International Accounting Standards Board) published the 230 page IFRS for Small and Medium-sized Entities (SME) on July 9, 2009 (PwC 2) and has continued to monitor and revise the laws and limits as more countries and companies test the waters of the reporting system which had been simplified from the lengthier, more globalized set which had been created for entities who have business in numerous countries. IFRS for SME is simpler and more targeted towards the needs and standards of smaller entities (Moss Adams). But there continues to be negative effects and burdens which are placed on these groups which may seem to be unnecessary when Generally Accepted Accounting Principles (GAAP) had been working well up until this point.
One of the main effects IFRS for SME's has had on businesses that have used it so far, and it is assumed to continue for other SME's in the future, is the cost. Naturally there will be costs to any change within a system of reporting. For a small business without the knowledge and software that IFRS requires, the possibility of significant increases in cost have the potential to wipe out an entity entirely (#6). Between the expenses for a new software system, training from an IFRS expert and the costs to either hire new personnel or properly train existing employees, certain companies will not be able to keep their heads above the high tides of IFRS conversion. The complete conversion can possibly run as much as one percent of revenue. To add to this, if a SME uses LIFO in their reporting of inventory, they will need to spend additional time in order to be in accordance with IFRS ruling principles and this, "Accounting change frequently results in negative tax consequences," (ERRC). On top of this, until IFRS is actually placed into effect or removed entirely, clients and other companies may still continue the use of GAAP reporting. This would cause entities that are in the mist of conversion to report twice, adding a large sum of hours to the sometimes monotonous labor load already.
Regardless of the modifications which were meant to create a simpler set of IFRS for smaller companies who do not trade publicly, IFRS for SME's continues to be unproductive and unsuccessful. This is evident in other countries where IFRS for SME has already been enacted and tested. Companies from countries such as those found within the European Union have tested the waters and used the new regulations to begin the process of international reporting. Looking back on businesses in these countries experience with this reporting method shows that IFRS for SME still, though it is a vast improvement from full IFRS, is not ideal for these sized entities. They have stated that, "The average age of tax accountants is going up because no one wants to enter the profession anymore," as a result of the high compliance cost and large amount of change within the skill set and knowledge base as IFRS takes its toll on SME's (Beer 2). As for the actual regulations' consideration and modifications to better suit SME's reporting (particularly within Europe), feedback has shown that the benefit to SME's are still not kept in mind. "The IFRS for SME's as well as the full IFRS are based on a top-down-approach. This is completely incompatible to the important "think small first"-principle of European legislation," (UEAPME 5). In order for IFRS to be effective globally, there needs to be feedback which portrays the advantages of this system in all strata of classification. For one, fairly large, portion of the required field to be inflicted with such burdens and risk, IFRS cannot be the proper step for the world.
Due to the large amount of SME's that exist and, "dominate the business world, almost in every developed country from the economic... point of view," and on the basis that a large portion of even these companies have under fifty employees (Grosu and Bostan 323), even the SME variation of IFRS is not worth forcing upon them. The high costs of both set up and maintenance of the new system could potentially force these smaller companies to either remove themselves from operations or cause them to spiral out into bankruptcy or be bought out by larger companies to grow and expand. To go with this, the amount of negative feedback and evaluations from entities in countries where IFRS for SME's has been previously implemented shows that even with the modifications of its original full intent, SME's continue to struggle finding value in the cost of converting to IFRS. Overall, these large costs which are incurred in the process are not counteracted with sufficient outcomes. In order for IFRS to be successful for SME's in the future, the board must constantly and consistently monitor the implementation of the specialized SME version and find proper changes which will become beneficial to these smaller entities whose business and operations remaining within a single country, which can be handled by the current reporting system (GAAP in the case of United States businesses).
Beer, Stan. "Small Firms, Bog Worry; ACCOUNTING." Sydney Morning Herald 13 Nov. 2004, First ed., My Career sec.: 2. Print.
Grosu, Veronica, and Ionel Bostan. "IAS/IFRS Standards for SMEs and the Impact on the Romanian Accounting System." International Journal of Academic Research 2.4 (2010): 323-28. Print.
Moss Adams, LLP. "IFRS for SMEs/Private Companies." 2 Sept. 2009. Lecture.
Pricewaterhouse Coopers, comp. IFRS for SMEs: A Less Taxing Standard? PricewaterhouseCoopers, LLP, 2009. Print.
UEAPME, comp. Consultation of the International Financial Reporting Standard for Small and Medium-sized Entities. Rep. Belgium: European Commission: Internal Market and Services DG, 2010. Print.
"What the Latest IFRS Developments Mean to Private Companies - Mid-Market Blog." Economic Recovery Resource Center (ERRC). 27 Aug. 2010. Web. 8 Nov. 2010. http://blogs.cbh.com/midmarket/?p=2273.
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