Most financial reporting in the United States is currently on the basis of Generally Accepted Accounting Principles (U.S. GAAP). However, International Financial Reporting Standards (IFRS) may be the future.

The Securities and Exchange Commission (SEC) has developed a “roadmap” for publicly traded companies to eventually convert to IFRS. The timetable has wavered, but both the SEC and the American Institute of Certified Public Accountants (AICPA) have declared the adoption of IFRS inevitable.

The currently proposed roadmap sets 2014 as the year when all public companies must convert to IFRS. About 100 countries, including most of Europe, have already adopted IFRS in whole or in part. Canada will require IFRS reporting for domestic public companies in 2011.

The most common difference between IFRS and U.S. GAAP is that IFRS tends to rely on guiding principles while U.S. GAAP sets out more specific rules. Many questions still remain about IFRS. Some of the biggest, and still largely unaddressed questions, involve the adoption of IFRS by nonpublic companies.

If, when, and how privately-owned businesses in the U.S. should adopt some form of IFRS is still unknown. There is no question that closely held businesses are operating on a global scale.

Our firm has worked with several local businesses with IFRS reporting requirements tied to foreign ownership. However, many privately held businesses may be entirely unaware of IFRS and investing in the training and infrastructure to switch to new accounting standards is not likely a high priority.

To date, most of the IFRS debate has occurred among the SEC, publicly traded companies, and the Big Four accounting firms. There has been little consideration of the net costs and benefits of smaller companies switching to IFRS. As awareness expands among other businesses and CPA firms, the inevitable march toward IFRS may become more complicated.

It is possible that a reasonable alternative to IFRS could already exist: IFRS for SMEs (small- and medium-size entities). These are designed to meet the needs of private company financial statement users, who are primarily lenders and are focused on shorter-term cash flows, liquidity, balance sheet strength, interest coverage, and general solvency. Standards specific to public companies are largely eliminated.

There has long been a debate about whether U.S. GAAP should be divided into a “little” GAAP and a “big” GAAP, as accounting standards become increasingly voluminous and complex. On the IFRS side, IFRS for SMEs is an attempt to remedy this problem.

The AICPA recently allowed members the option to use IFRS, including IFRS for SMEs, as an alternative to U.S. GAAP. While most private companies will not make a change from U.S. GAAP unless it becomes mandatory, IFRS for SMEs could provide an alternative that is easier to understand and requires less effort to implement than either full IFRS or U.S. GAAP.

In any case, business owners, accountants, and users of private-company financial statements should begin now to familiarize themselves with the ongoing developments involving accounting standards. Changes seem certain to happen, though the timing and effects on private companies are still unknown.

Dave Smith is a CPA and MBA with Wright, Griffin, Davis and Co. Business Accounting is a recurring column at AnnArbor.com's Business Review.