Proposed Changes in SEC Accounting Standards

July 8, 2008

The Securities and Exchange Commission (SEC) is planning to unify America’s current Generally Accepted Accounting Principles (GAAP) with the International Financial Reporting Standards (IFRS). The update in accounting standards would require U.S. companies to prepare financial statements using IFRS. The SBA Office of Advocacy recently sent a letter to the SEC stating its commitment to helping the SEC reduce the overall burden on small businesses related to this potential change in policy.

In 2007, the SEC issued guidance that permits SEC-regulated businesses the option of preparing financial statements using IFRS. This guidance also contemplated the appropriateness of requiring all businesses to prepare financial statements in accordance with IFRS in the future. Since the issuance of this guidance, the SEC has indicated that the agency may require U.S. companies to use IFRS rather than GAAP.

This change has invoked concern among the small-business community because of fear they would no longer be permitted to utilize the last in, first out (LIFO) inventory accounting method if the SEC requires American companies to use IFRS rather than GAAP. According to Advocacy, prohibiting businesses from using LIFO would raise business taxes in two ways.

First, a business would see higher future taxes because it would be unable to use LIFO to protect itself from rising inventory costs. Under LIFO, the most recent (higher) costs of goods are expensed to the cost of goods sold, while the older (lower) costs remain in inventory. Without LIFO, businesses would be taxed on the basis of the larger first in, first out (FIFO) cost of inventory--the difference between the older (lower) costs of goods and the more recent (higher) price realized once the goods were actually sold.

Second, a business would be required to pay taxes on its existing LIFO reserve. The LIFO reserve is an inventory account that will reflect the difference between FIFO cost and LIFO cost of a businesses inventory. As a consequence of consistently increasing costs due to inflation, the balance in the LIFO reserve account will have a credit balance. This credit balance is used to offset costs reported in a business’ inventory, and therefore, results in lower taxes on the business.

NSBA will work with the SEC in gathering more information on how to minimize the burden on small businesses related to the unification of GAAP and IFRS. Eliminating the ability of small businesses to use LIFO would result in a tax increase that could ultimately drive many owners out of business.