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Ready Set, Wait? IFRS Adoption Option Raises Questions for Private Companies

SOUTHFIELD, Michigan — January 1, 2010 marked the first day that Small and Medium-Sized Entities (SMEs) with a December 31 fiscal year end were eligible to adopt a new version of International Financial Reporting Standards (IFRS). IFRS for SMEs represents a significantly scaled-down version of IFRS designed specifically for companies that do not have “public accountability”. Entities with “public accountability” include those that have publicly traded debt or equity securities, along with those that hold assets in a fiduciary capacity for a broad group of outsiders as a primary business. This latter group includes banks, credit unions, insurance companies, and similar types of organizations. While community banks and credit unions would not be eligible to use the new IFRS for SMEs standard, most private companies in the U.S. meet the definition of an SME. Yet according to professional standards and banking experts from Plante & Moran, PLLC, the nation’s 12th largest certified public accounting and business advisory firm, many companies are still unaware of the pros and cons of converting to IFRS.

First, some background. IFRS are the international counterpart to U.S. generally accepted accounting principles (U.S. GAAP) and represent an accounting framework that’s used in more than 100 countries throughout the world. Most major economic markets either currently require public companies to prepare their financial statements in accordance with IFRS or have a plan to switch to IFRS in the coming years. For example, public companies in the European Union have been using IFRS since 2005 and those in Canada will be making the change in 2011. While IFRS have been in place for more than 30 years, the new IFRS for SMEs standard was issued in July 2009 to provide an alternative financial reporting framework designed for the needs and capabilities of Small and Medium-Sized Entities. Plante & Moran’s David Grubb, CPA, says IFRS for SMEs has been evolving throughout the past decade.

“This standard has been in the works since 2003 and has generated a significant amount of interest because it provides relief for private companies from the most complex areas in IFRS and US GAAP,” says Grubb, a partner on Plante & Moran’s professional standards team. “For example, under IFRS for SMEs, goodwill will be amortized rather than tested for impairment and the standard includes a simplified set of financial statement disclosures.”

One measure of the simplification brought about by IFRS for SMEs is the size of the standard relative to IFRS and U.S. GAAP. The IFRS for SMEs standard totals 230 pages, whereas the full set of IFRS totals approximately 2,800 pages and U.S. GAAP is estimated to fill nearly 17,000 pages.

Making a change to prepare financial statements in accordance with IFRS is an important decision. Many forward-looking business owners and executives are looking at IFRS as the future of financial reporting and are already beginning to prepare their organizations for the change. Still, Brian Pollice, partner-in-charge of Plante & Moran’s financial institution practice, says it is important for private companies to understand that a change to IFRS is not simply an exercise in changing accounting policies.

“The adoption of a new set of financial reporting standards affects information technology systems, internal control processes, employee compensation and benefit arrangements, vendor and sales contracts, loan agreements, and many other aspects of the organization,” explains Pollice. “At the same time, progressive companies that have adopted IFRS used the change process as an opportunity to re-evaluate various aspects of their businesses and to make improvements, thereby leveraging the investment. At the initial adoption of IFRS, companies may have the opportunity to mark certain fixed and intangible assets to current fair value and rebuild equity.”

Pollice adds that because nonpublic companies in the United States do not have any legal or regulatory requirements that mandate the use of U.S. GAAP to prepare their financial statements, they can switch to IFRS for SMEs to prepare financial statements, as long as users of those financial statements are willing to accept them.

“Companies considering a change to IFRS should discuss the decision early in the process with their bankers and other lending sources and financial partners,” affirms Pollice.

Plante & Moran has a team of international accounting specialists charged with evaluating what a change to IFRS means to Small and Medium-Sized Entities, and offers IFRS impact assessments, implementation planning, conversion assistance, and ongoing technical support.

About Plante & Moran

Plante & Moran is among the nation’s largest certified public accounting and business advisory firms, providing clients with tax, audit, risk management, financial, technology, business consulting, and wealth management services. Plante & Moran has a staff of more than 1,600 professionals in 21 offices throughout Michigan, Ohio and Illinois with international offices in Shanghai, China; Monterrey, Mexico; and Mumbai, India. Plante & Moran has been recognized by a number of organizations, including FORTUNE magazine, as one of the country’s best places to work.

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