Accounting standards have a large impact on how businesses function. The IFRS’s goal is to help a business’s financial statements paint a true picture of its financial health. However, the standards will also influence how businesses operate so that their financials exhibit the best picture possible. Most businesses in the United States perform accounting under the General Acceptable Accounting Principles (GAAP) standards, but there is a possibility that these standards may change to the International Financial Reporting Standards (IFRS) in the near future. If they do, what might it mean for your small business?
The standards that make up the IFRS used to be known as the International Accounting Standards (IAS), which were developed between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). The IASB has continued to develop standards which they now call the IFRS. Most of the IASB current activities are concentrated on convergence with U.S. GAAP.
Many professionals feel that IFRS should be easier to understand and manage business under than GAAP As it’s designed, the hope is that also it should be easier for owners that are not well versed in accounting to understand and explain the firm’s financial statements. In theory, this should also help business owners in situations that require the review of financial statements such as applying for debt financing.
Drew White, CFO of Sageworks, Inc, a Raleigh, N.C. company that provides software to support the banking and accounting industries, believes that the IFRS hasthe potential to provide financial institutions and business partners with a better, more realistic picture of a firm’s financial healththan compared to GAAP.
Sageworks’s client banks analyze financial statements and tax returns in order to underwrite a company’s financial statements for business loans. White believes that financial institutions and banking regulators will get a better, more complete picture of the small business customer.
This conversion to international standards should not be expensive for most small businesses, but large complex public companies with large accounting departments and software platforms will need to retool when converting to the new standards. Overall, the possibility of switching to IFRS has been pending for some time, and since many of these corporations are already using non-GAAP standards in foreign subsidiaries, the impact of conversion should be minimal. In fact, in the long term, the reduction in cost of the new standards should more than cover the initial cost of conversion.
Supported by the Securities and Exchange Commission (SEC) and the American Institute for Certified Public Accountants (AICAP), IFRS is poised to replace Generally Accepted Accounting Principles (GAAP), which has been the accounting standard in the U.S. for many years. Disagreement about its adoption relates to issues about fair evaluation, the calculation and amortization of goodwill and IFRS’s more rigorous audit disclosures.
If you own an SME (small and medium-sized entities), the following are some highlights that you should know about IFRS:
It is clear that at some point soon most U.S. businesses, especially those that do business with or compete against foreign entities, will adopt IFRS. Small businesses that already work with foreign suppliers or service foreign clients should consider adopting IFRS sooner rather than later. Small firms that can benefit from simpler regulations and accounting requirements should also consider converting now. Since a major task of small business owners is to promote their company as a credible and trustworthy entity to do business with, being able to better display their operations and financial health should be impetus for converting to IFRS. Although conversion may be difficult at first, the long-term benefits for SME far outweigh any initial costs.