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July 9, 2013

Essay Sample on IFRS


The implication of the first adoption of IFRS for SMEs in U.S. Private Entities
Starting a new business requires proper planning and a thoughtful detailed plan to run the business successfully. When organizing a business, dangers and threats, which become risks and result as losses or harm to businesses, are always what the executive is concerned. Resulting damage of hazards and threats, which became risks, could be detrimental to the health and safety of employees, to plant, equipment or an entire installation, to the environment, to products, or to financial assets.
The management and business holders also should consider the risk that the company must take in their business affairs. Economic theory and common sense both say that a dollar of profit risk is less valuable than dollar gain some. The two common categories of risk management have to deal with business risk and financial risk, business risk being imposed by the business and economic environment. Financial risk is the risk posed by the way it is financed by the company. There are no set rules for the regulation to ensure success.
The International Accounting Standards Board (IASB) presented an International Financial Reporting Standards In July 2009 that is specially intended for the use of  small and medium-sized entities (SMEs)
            IFRS for SMEs is a self-sufficient, standalone set of financial accounting and reporting standards and the board has presented it with the guidline of implemeentation along with the rules and standards and also the board is on the edge of  developing detailed and easy to use  training cources and guidline materials for IFRS for SMEs.
 “IFRS for SMEs is intended for entities that do not have public accountability and that is required, or choose, to publish general purpose financial statements for external users.”  (Harris, 2004)
An entity possesses public accountability so it is supposed to use entire IFRS, if it fulfil s the certain conditions. In this connection it has issued equity or debt instruments in market for the public, or it has assets in a fiduciary capacity for, kit primordial goal of business for wide group of outsiders.
 The subsequent category of entity would consist of credit unions, insurance companies, securities dealer and broker, mutual funds, pension and investment banks. This standard does not force test in describing SMEs, despite the nomenclature utilized. Over 99 percent of private entities all over the world are hoped to be able to make use of this standard. If the listed company of subsidiary is not listed it on the stock exchange a company is in position of using its standard.
Even though SMEs (small and medium enterprises) are calculated to constitute more than 95% of all companies in the world, these commendable contributions of SMEs in the sector do not get the needed financial support from relevant ministries, the banking sector, financial institutions and corporate sector. SME sector is ignored by private banks and financial institutions, while public sector banks comply with the mandatory lending requirements. One reason for this state of affairs is the financial statements of SMEs, which are useful only for owner-managers of the tax authorities or authorities and government. The financial statements and products are not comparable, nor exert enough credibility. Users of financial statements of SMEs do not meet the needs of the public capital markets, but rather focus more on measuring short-term cash flow, liquidity and solvency.

To eliminate the setback faced by SMEs, IFRS for SMEs was designed to fill the gaps mentioned above since to compile and highlight the financial statements is the credibility and compatibility of the company. IFRS for SMEs are of high quality and internationally recognized accounting standards for SMEs. IFRS for SMEs will provide a platform for the corporate culture as they prepare to enter the capital markets where the application of full IFRS is required.
Maintenance of the IFRS for SMEs
SMEs do not only concern the complexity of IFRS as of expression but also on the frequency of exchange standards. To address these issues, the IASB intends the IFRS for SMEs to upgrade about once every three years by a compilation. Users are thus relatively stable requirements to ensure financial reporting requirements.
Users of financial statements of SMEs are often users of different financial statements under IFRS or U.S. GAAP. Users of financial statements of private companies (in general, lenders, creditors and owners) tend to focus more on cash flow in the short term liquidity, strong balance sheet, interest coverage, and solvency issues. This means that they legitimately need an accounting standard for private companies that meet the needs of users of financial statements while balancing costs and benefits from the perspective of the preparer.
Transition to IFRS for SMEs
The new financial standard includes a section on the transition that sees all the exemptions in IFRS 1, First-time Adoption of IFRS with additional simplifications of relative information. The initial application of exceptions that permit prospective application of certain requirements, allow a cost shift to IFRS for SMEs to business that decide to adopt. Entities, select the designed transition to the IFRS for SMEs would need accounting policies on decisions in the standard basis and arrange at least two years accounts and opening balance sheet for the earliest year of application of these measures.
Advantages
For centuries, accountants in the United States in all fields have recognized the need for a simple set of financial reporting standards for small firms, but regulators have not been willing to provide a second set of standards. The AICPA recognizes now the International Accounting Standards Board (IASB) recently issued International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), as an official set of accounting standards that must be checked against.
Some private U.S. companies find the simplified IFRS for SMEs is an attractive alternative to the increasingly complex and extensive U.S. GAAP related to "the AICPA .By the use of the SME is less expensive and relevant than with U.S. GAAP for some U.S. companies. There are other reasons for the U.S. private companies, the adoption of IFRS for SMEs are the property of foreign parent relationship or foreign investors or business partners. The new Standard differs from full IFRS and is available for any authority to adopt whether or not it has agreed to full IFRS.
The medium or big private companies in the United States most likely to accrue a fresh choice of an accounting and financial report like slimmed down account of IFRS modified for to their requirements. FRS for SMEs (small- and medium-size entities) is overview of full IFRS.
The international Accounting Board that is bound to release the fresh standard in July five years later of project work, implies SMEs as business that is responsible to publish general goal that are for external users and devoid of public accountability. Most of the American companies would fit for definition.
At 230 pages the IFRS for SMEs is notably minor version of complete IFRS. The things that is not commonly relevant to private companies like earning per share and segment report because of it the IASB was eliminated. S MEs are keenly focused on short spell term cash that floats like liquid balance sheet strength interest, coverage and the issues of solvency.
The new fledged bench mark is expected to ease some of the financial pressure that has extended as complete FIRS has grown more thorough, on SME prepares. Some American companies probably find the simplified IFRS FOR SMEs and fascinating alternative to the more difficult and voluminous American GAAP the AICPA believes regularly asked question document. By means of SMS framework may cost more précised as compared to us American GAAP for specific companies.
 There are many companies in America which are able to prepare their respective financial statement according to American GAAP, there is another inclusive basis of accounting for instance tax basis or cash or accounting body for the establishment of international financial accounting as well reporting rules. It is possible that CPSs required checking along with their state board s of accountancy to encompass the rank of report for financial statements made in connection with IFRS for SMEs in their certain circle.
With a similar internal reporting system within the company, it gives the chance of better comparisons; less confusion and mistakes between the parts of the company (Neil 2002). By using one set of Accounting Standards in various jurisdictions and capital markets it allows uncomplicated communication and transfer of finance personnel. Further cost savings can be realized, because the preparation of consolidated financial statements will be easier for companies. IFRS will make the consolidation of parts of company easier as there will be no longer costly changes from several different accounting systems of each subsidiary. With one set of Accounting Standards like IFRS, the credibility of the external reporting could be raised (Neil 2002).
            International companies can realize significant cost savings if they do not have to change their financial statements to conform to each country's rules, when listing on security exchanges (Neil 2002) and IFRS does exactly that. In other words IFRS makes the access to main financial markets easier for global acting companies and by this it will be possible to acquire capital simpler for them.
There are a number of advantages and disadvantages in choosing to apply full IFRS to IFRS for SMEs. If IFRS will eventually be adopted in the United States, as many expect, SOEs are required to adopt full IFRS. By choosing full IFRS for non-US subsidiaries, companies will have the opportunity to optimize the alignment of IFRS statutory reporting local policies with Group Policy. Accordingly, U.S. firms may be able to streamline their process of consolidation and increasing use of shared services centers. In addition, full IFRS, due to the financial reporting requirements in global markets provides over previous accounting and disclosure. Some believe Full IFRS would be easier to implement because of the precedent with respect to IFRS for SMEs may have difficulties in implementation due to lack of specificity and jurisprudence on the market. Moreover if companies possibly intend to seek public financing, they may be best positioned to do so by using full IFRS to avoid the need to convert their accounting down the road.
But this debate over the full and SMEs IFRS reveals that, it cannot be ignored that full IFRS are more complex and demands the recognition and preparation of numerous additional information each year. On the other hand IFRS for SMEs proposes a simple model accounting to be applied, which can reduce time and cost of preparing annual statutory filings. Because it is less accurate in many areas, some believe that the IFRS for SMEs may also allow companies to choose models of accounting even easier for their affiliates.
Furthermore, many believe that as the use of IFRS for SMEs is increasingly allowed for statutory filings around the world, shared services centers would be able to be used to further centralize accounting expertise, create efficiencies and reduce costs.
Disadvantages of converting to IFRS
Though IFRS is the successful recipient of many of the inevitable many medium and small entities at global level, some others still believe that there are due disadvantages to adopt the new system. They have the opinion that U.S. GAAP is the reliable and well established standard, and that a certain quality level will be lost with full adoption of IFRS and the standards set by it.
Additionally, certain U.S. issuers with no important clients or operations outer the United States may refuse to adopt IFRS because of no market inducement to arrange IFRS financial statements. They may think that the major costs related with adopting IFRS may be more important than the benefits.
While IFRS for SMEs that are not currently well known in the United States neither is similar to the full IFRS, nor is well recognized in the United States. Among investors, businesses, lenders, educators and users of financial statements, few have spent time to understand the differences in GAAP and the corresponding impacts and are not ready to adopt, or make decisions important to these standards in mind.
Another opinion found regarding the disadvantages of the adoption of IFRS is that in the adoption of IFRS there is a possible lack of comparability for the medium or big companies. Since IFRS for SMEs, like full IFRS, has more flexibility, the roles that are not very particular and more opportunities to relate professional judgment, there is a dissimilar possibility that the same type of contract entered into by different medium and big companies could be reported in a different ways in the financial statements. Thus, the comparability may undergo to a great extent.
Adoption considerations
But these advantages and disadvantages must be considered within the two broader contexts_ system capabilities and tax and cash flow planning. Continued Global adoption will require companies to assess whether their financial reporting systems are capable of multi-GAAP reporting in the transition from local GAAP to full IFRS or IFRS for SMEs and for ongoing reporting purposes.
Taking on IFRS, a company may present its financial statements on the same source as its foreign competitors, making assessments easier. In addition, companies with subsidiaries in countries that require or permit IFRS may be able to use a company-wide accounting language. Companies may also need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use IFRS. Businesses can also benefit IFRS if they wish to raise capital abroad.
The costs would be largely determined by the size and nature of the respective company. Although the initial cost to identify and quantify the differences between U.S. GAAP and IFRS, staff training and implementation of IT support could be significant, the conversion would also reduce the final cost of capital and financial reports related to operations. In its roadmap proposed to move all U.S. publicly traded companies with global standards issued in November 2008, the Securities and Exchange Commission believes that the greatest United States registered the adoption of IFRS at the beginning incur $ 32 million per company in additional costs for their first IFRS-prepared annual reports and that the average company in the United States would cost between 0.125% to 0.13% of turnover.
IFRS for SMEs is an important development that can have a real impact on the future of accounting and auditing standards issued by the organizations participating in the standardization process.

            The successful implementation of IFRS for SMEs will be determined for each jurisdiction of its national regulatory authorities and standardization, and not by the IASB. South Africa was the first country that has adopted this standard because it reduces the cost of maintaining standards on a national basis.
Currently, private companies in the United States prepare their financial statements in accordance with U.S. GAAP issued by the FASB, the other comprehensive basis of accounting (OCBOA), such as money or the tax base, or full IFRS, among others. Now, with the publication of IFRS for U.S. companies SMEs companies have a private alternative. According to the AICPA, a company owned by a foreign investor or business partner could be a candidate to start using the new standard. In addition, other companies may find the IFRS for SMEs an attractive alternative to the more complex and voluminous U.S. GAAP (AICPA, 2009).
U.S. companies should keep abreast of developments in IFRS; several challenges require attention of businesses on the IFRS front. Companies face an extraordinary rate of change in financial reporting standards uniting positioning over the next 2-3 years, in addition to addressing the continued adoption of IFRS by non-US subsidiaries. 
The conversion of local GAAP to full IFRS or IFRS for SMEs requires a commitment of resource management and targeted funding. The transition will affect processes, systems, people and tax and can be costly, complex and tedious. However, as non-US subsidiaries rather than the U.S. adopt IFRS, there may be substantial benefits for the company as a whole, for example, reformation of their process of consolidation. To maximize these benefits, the supervision of the U.S. parent company is essential to make sure that there is a uniform approach to the adoption of IFRS in all subsidiaries.
Consistent with the general suggestions that US companies should take a measured approach to IFRS conversion in light of the current environment, it is believed that there are a number of steps that need to be taken to keep up with the conversion process, some of them are
·         Careful analysis and determination of the most appropriate adoptable version of IFRS by monitoring the impact of decisions on subsidiaries’ transition and strategies.
·         Identification of policy decisions and the guarantee that the group head office is in control of accounting policy that determines IFRS. Although the consistent application of IFRS by U.S. affiliates is not important, the company must not lose sight of the fact that country-specific factors may justify the application variable, for example tax and impact of dividends. The cost-benefit assessments may be necessary for adoption of IFRS, IFRS for SMEs or their other versions.
·         Identification of key differences between local GAAP and IFSR and classification of wider impacts on people, systems, processes and taxes is an important aspect of conversion. It must be ensured that appropriate cross-functional stakeholders are involved so that a full understanding of the broader impact of the conversion is completed. Additionally it is to be made certain that adequate training on IFRS and IFRS for SMEs to key stakeholders is provided.
Hence since it is very important that the international union of accounting standards should come with by a convergence of auditing standards, accounting for different SMEs will have an impact on regulators such as the Public Company Accounting Oversight Board (PCAOB) and Securities and Exchange Commission (SEC). IFRS for SMEs can be a welcome relief for auditors because this would reduce the inherent risk that the results of many choices and judgments required by management when using the full version of IFRS. Ultimately, the market will boost demand. The achievement of the IFRS for SMEs will be the result of the extent to which users, preparers and auditors believe that the standards meet their needs. Therefore International Financial Reporting Standard (IFRS) is gradually becoming very vital as major accounting rule makers globally and IFRS works in the direction of the goal of meeting the beneficial standards. At the front position is the IASC, dedicated to increasing values and principles that will bring reliability to accounting and financial policies worldwide. To protect interests of United States, American business community and government personals have to work harder and closer with IASC, to ensure that American small or medium companies are secure to adopt IFRS standards and secure its point in international capital market.


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