Countries’ adoption of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) – early empirical evidence

The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) is increasingly being adopted in a number of jurisdictions. Despite the economic importance of non-publicly accountable entities, little is known about what factors influence countries' decisions to adopt IFRS for SMEs. In a unique sample of 128 countries, we find that countries that are not capable of developing their own local generally accepted accounting principles are more likely to adopt IFRS for SMEs. We also provide evidence that in jurisdictions where full IFRS have been applied to private firms, the likelihood of adoption of IFRS for SMEs increases, suggesting that jurisdictions reduce the financial reporting burden on SMEs. Moreover, in line with prior literature, there is evidence that countries with a relatively low quality of governance institutions are more likely to adopt this new set of accounting standards. The results also hold under alternative measures and different estimation approaches. Overall, our results are helpful in understanding the worldwide diffusion of IFRS for SMEs. Standard setters and regulators might consider our study in the future development of accounting harmonisation of non-publicly accountable entities.     

Adopting International Financial Reporting Standards for Small and Medium‐sized Enterprises

Diverse complications and controversial issues in the adoption of International Financial Reporting Standards (IFRS) for Small and Medium‐sized Enterprises (SMEs) have been reported by many jurisdictions, prompting them not to adopt this set of standards. Conversely many jurisdictions have adopted or are in the process of adopting IFRS for SMEs. This study considers the impetus for successfully achieving accounting convergence with IFRS for SMEs in those jurisdictions. The possible transition issues that may arise when countries adopt IFRS for SMEs are also highlighted. Furthermore, to provide pioneering evidence on the problems accountants encounter when applying IFRS for SMEs, we conduct a survey on accounting practitioners in Fiji – an early adopter of this set of standards. Both the insights provided on the process of embracing IFRS for SMEs in Fiji and the opinions elicited from accountants highlight new dimensions to the inherent problems in IFRS for SMEs. Scant attention has been given to this issue so far; hence the empirical evidence provided by our study informs not only the global convergence of SME accounting but also the quality of the current suite of IFRS for SMEs.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Croatia

Abstract

We examine the changes in Croatian accounting regulation, in the context of 2013/34/EU Directive implementation and analyse indirect effects of IFRS on national reporting regulation for non-listed companies. The main goal is to determine the level of conformity between Croatian accounting rules and IFRS as adopted by EU. Analysis shows that IFRS are used in the great extent as a source for provisions in Croatian Financial Reporting Standards (CFRS). There are only a few major differences between Croatian financial reporting standards and IFRS. However, there are a number of IFRS standards that are considered not to be relevant in the context of CFRS, as CFRS are intended to be used only by SMEs. Nevertheless, the management is permitted to use provisions and guidance from IFRS, if CFRS provisions are not applicable to a certain transaction or event.     

The Political Economy of Convergence: The Case of IFRS for SMEs

This paper contributes to the discussion on the International Financial Reporting Standard for Small and Medium‐sized Enterprises (IFRS for SMEs) in the academic literature by examining the political economy of convergence, and illuminating the processes used by the International Accounting Standards Board (IASB) to achieve convergence and participation by developing economies. The IFRS for SMEs was developed to facilitate implementation of a two‐tier reporting regime in the developing economies. Since 2000, progress towards issuance of the IFRS for SMEs has been hindered by a lack of active engagement by SMEs and academics from developing economies. It is found that (1) a lack of grounded studies and empirical knowledge on SME users’ needs impeded the development of the IFRS for SMEs; (2) the capital market assumption adopted for the IFRS is clearly inappropriate; and (3) the under‐representation of developing economies in international standard setting remains an issue. It is recommended that the IASB ascertains the users of SME reports and their needs and then develops a coherent conceptual framework for SMEs (particularly those from developing economies). The IASB needs to take into consideration the needs, culture and regulatory infrastructures of the developing economies, the political agendas of the standard‐setting stakeholders, and barriers to implementation.     

The Impact and Implications of International Financial Reporting Standards in the United Kingdom: Evidence from the Alternative Investment Market

This paper investigates the implications of the adoption of International Financial Reporting Standards (IFRS) from the perspective of small and growing companies listed on the United Kingdom's (UK) Alternative Investment Market (AIM). We consider the cost–benefit issues of IFRS adoption and investigate its economic consequences. The results reveal that only a small number of comparatively larger AIM companies have voluntarily adopted IFRS for some anticipated economic objectives. The results also suggest that most of the mandatory adopters have done so for regulation compliance purposes and they would not have adopted IFRS if a choice was available to them. As the existing literature mainly covers the impact of IFRS adoption on large listed companies, the findings of this study will give better insights into extending IFRS to private companies. The findings show an association between the early adoption of IFRS and firm size and conclude that size matters in both the adoption and implications of IFRS. This study also contributes to the debate on the implications of the new IFRS‐based UK GAAP for SMEs‐FRS 102, which will replace the majority of existing UK accounting standards for small and medium enterprises (SMEs) with effect from 2015. Our findings have implications for managers, regulators, market participants, practitioners and other stakeholders.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from the UK

Abstract

Drawing on secondary data, we examine the transposition of the Accounting Directive 2013 into UK GAAP with a specific focus on references to IFRS. The process involved consultation and regulatory impact assessment on the options in the Accounting Directive and proposed changes to accounting standards for non-publicly accountable entities. This led to an IFRS-based approach from 2016 with three tiers: EU-adopted IFRS for group listed companies and other publicly accountable entities, an adaptation of IFRS for SMEs for non-publicly accountable entities, and a simplified version for micro-entities incorporating the requirements of the Accounting Directive. This outcome is not surprising since the UK was one of the founding members of the original International Accounting Standards Committee and a strong proponent of little GAAP. Indeed, the UK’s former Financial Reporting Standard for Smaller Entities provided a model for the IFRS for SMEs. In the past, there were few references to IFRS by the UK’s enforcement and interpretation bodies. Today, guidance is taken from IFRS Interpretations Committee. We contribute to the literature by describing the main processes involved in implementing the Accounting Directive and the move to an IFRS-based approach in UK GAAP. Our analysis should be of interest to researchers and policymakers alike.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from the Netherlands

Abstract

Dutch law (B2T9) is positive towards IFRS. IFRS may be used by all entities, there is a specific option for entities using IFRS in the consolidated financial statements to apply an IFRS-friendly version of B2T9 in its separate financial statements, and IFRS for SMEs can be used by non-listed and non-regulated companies in combination with B2T9. In the process of adoption of the 2013 EU Accounting Directive only limited references have been made to IFRS. This is not an indication of a reduced interest in IFRS, but is a result of limiting the changes of B2T9 to those that are necessary as a result of changes at the EU level. The Dutch Accounting Standards Board, issuing Dutch Accounting Standards (DAS), considers IFRS when developing and changing its standards. In addition to the IFRS option DAS often include one or more additional optional treatments that are considered suitable for non-listed companies. The Dutch regulatory authority AFM is also positive towards IFRS and even advocates elimination of non-IFRS options from Dutch GAAP as much as possible. The number of major differences between Dutch GAAP and IFRS is relatively limited, with only a few differences that cannot be avoided by an entity when preparing financial statements under Dutch GAAP.     

Australia's switch to international financial reporting standards: a perspective from account preparers

This study reports the findings of a structured telephone survey on adoption of international financial reporting standards (IFRS) from 60 firms drawn from among Australia's top 200 corporations. Although we find evidence of strong systematic variation in survey responses with factors such as firm size, industry background and expected impacts on financial performance, the general results indicate that many respondents have not been well prepared for the transition and are generally very sceptical about the claimed benefits of IFRS as enunciated in the government's Corporate Law Economic Reform Program. The results have implications to other international reporting jurisdictions, particularly the European Union, where adoption of IFRS is already underway.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Norway

Abstract

Although not a EU member, Norway is required to implement the EU Accounting Directive through its obligations under the EEA agreement. An expert group has prepared a draft law that will be decided upon by the legislator, most likely during 2017. The draft law has a strong orientation towards IFRS, which is evidenced in particular by the choice of IFRS for SMEs as the basis for Norwegian accounting standards.     

Convergence in accounting standards: Insights from academicians and practitioners

The efficiency and competitiveness of global capital markets depends on the ability of financial statement preparers to communicate effectively with investors through financial reports. Despite the global movement to adopt IFRS, US adoption of IFRS is still uncertain. To assess potential for convergence, this study compares perspectives of academicians and practitioners regarding convergence to a set of global accounting standards. The majority of respondents believe that effective convergence to a set of globally accepted accounting standards would be beneficial to preparers, users, auditors, analysts, and standard setters. Convergence in accounting standards can require extensive and possibly costly changes to the standard-setting infrastructure and enforcement process in the US and other countries, and will also require proper training for management, auditors, and investors.     

Adoption of the International Financial Reporting Standards by Greek non-listed companies: The role of coercive and hegemonic pressures

In this paper, we examine the motivations for preparers in Greek non-listed companies to adopt International Financial Reporting Standards (IFRS). Previous literature has focused on listed companies and assessed the effect of IFRS on market efficiency to justify its adoption. Using data from a cross-sectional survey and from interviews with senior managers, our analysis indicates that the motivations to adopt IFRS in Greece are not primarily related to the technical competence of the standards. We draw insights from literature on institutional theory and hegemony based on the Selections from the Prison Notebooks of Gramsci, and show that the decision to comply with IFRS can also be motivated by coercive and hegemonic pressures, which are exerted by powerful institutional constituents as they interact with organisations’ strategic interests at the international and national level. The adoption of IFRS is driven predominantly by the pressures exerted by parent companies on their subsidiaries and by the legal requirements of the state, but also through borrowing and debt-contracting requirements as enforced by civil society actors, such as financial institutions. This mobilisation of power plays a pivotal role in supporting the establishment of IFRS among non-listed companies.     

The effect of IFRS for SMEs on the financial reporting environment of private firms: an exploratory interview study

I investigate how the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) contributes to the development of private firm financial reporting. I interview a sample of leading accounting experts from 24 jurisdictions around the globe to understand the role of private firm financial reporting and financial transparency in their jurisdiction as well as the importance of IFRS for SMEs. I find significant variation across jurisdictions in my sample and document that IFRS for SMEs predominantly influenced private firm financial reporting and transparency by serving as a blueprint for national regulatory reforms. In some jurisdictions, IFRS for SMEs has also been adopted as an optional reporting framework. Direct firm-level adoption of IFRS for SMEs has been low in these jurisdictions with the exception of South Africa where it seems to be used relatively widely. Based on my response data, I suggest some potential rationales for my findings and discuss potential reasons for the observed cross-jurisdiction variation in private firm financial transparency and IFRS for SMEs adoption.     

IFRS FOR SMEs: THE IASB'S DUE PROCESS

This study explores the role of the International Accounting Standards Board's (IASB) due process in developing its International Financial Reporting Standards for Small and Medium‐sized Entities (IFRS or SMEs) standard. There were tensions between the IASB's desire to minimise divergence from full IFRS and preserve recognition and measurement principles, and the primary reasons for undertaking the project – to meet the needs of users of financial statements of SMEs and to reduce the financial reporting burden on SMEs. Examination of events during the development of the project reveals much that was not apparent from material in the public domain. Most significantly, the IASB recognised that the final title of the standard, IFRS for SMEs, does not necessarily describe the scope of the standard. This paper also shows that the due process followed in the case of the IFRS for SMEs project barely reflected the ‘will of people’ but was more inclined towards acting as a communicative function for the IASB without any commitment to change its stance on the SME standard.     

‘57 Varieties of Serious Defect in IFRS?’

In a previous issue of this journal, Haswell and Langfield‐Smith (HLS) recorded 57 ‘serious defects' in IFRS. This commentary suggests that some of these are not defects and some others are not serious. Points are also made about the different implementation dates of standards in Australia compared to elsewhere, and about HLS's comparison of IFRS and previous Australian standards. HLS's conclusion that IFRS is not yet ready for world‐wide adoption is challenged on the grounds that a world standard is already needed for listed companies and that no plausible alternative to IFRS would be better.     

The Effect of IFRS Adoption Conditional Upon the Level of Pre-adoption Divergence

Prior studies on whether or not International Financial Reporting Standards (IFRS) adoption improves earnings quality have found mixed results. We note that some of the countries that have adopted IFRS had national accounting standards similar to IFRS prior to adopting IFRS, while others had national accounting standards divergent from IFRS. We examine the effects of IFRS adoption by taking into account the level of divergence prior to the adoption of IFRS. We find that countries experience a greater drop in earnings management when they have a higher level of divergence from IFRS prior to IFRS adoption. More specifically, high divergence countries with higher levels of enforcement benefit the most followed by high divergence countries with lower levels of enforcement. Lower divergence countries with higher levels of enforcement do not significantly benefit from IFRS adoption. Lower divergence countries with lower levels of enforcement do not benefit from IFRS adoption at all. Our results support the contention that countries with lower quality local accounting standards prior to IFRS adoption benefit more from IFRS adoption.     

How is the IFRS for SME accepted in the European context? An analysis of the homogeneity among European countries,users and preparers in the European commission questionnaire

In this paper we analyze the answers to the “Questionnaire on the public consultation of the IFRS for SMEs”, promoted by the European Commission. Our aim is to evaluate the homogeneity among respondents, according to the different perspectives of analysis between both users, preparers and also in European Countries. Results show a substantial diversity among respondents. In particular, preparers demonstrate a strong opposition to the IFRS for SMEs, while users are more favorable. Concerning Country classification, German-speaking Countries and Latin Countries show much less appreciation for that standard with respect to Anglo − Nordic Countries. Relevant consequences for European public policy issues and for accounting studies on differential reporting arise from this result, concerning respectively the role of European accounting system and the acceptance of “user primacy” principle.     

The Role and Current Status of IFRS in the Completion of the National Accounting Rules – Evidence from Estonia

Abstract

The main purpose of this paper is to provide an overview of International Financial Reporting Standards (IFRS) application in Estonia. After restoration of independence, development of the Accounting and Financial Reporting System in Estonia has been based on internationally accepted accounting principles where IFRS and EU Directives have had an important role. From 2003 to 2013, the system based on the Full IFRS and after that, the switch from the Full IFRS to the IFRS for Small and Medium-sized Entities (SMEs) took place. Estonian position on IFRSs is very positive. IFRSs were heavily used in the system of setting local guidelines and despite switching to the IFRS for SMEs as base for the local guidelines, they are still used as a very important reference point and source of interpretation for national accounting rules based on the EU Accounting Directive.     

Implementing IFRS from the perspective of EU publicly traded companies

This study examines implementation of International Financial Reporting Standards (IFRS) by European Union (EU) companies. All listed EU companies are required to prepare their consolidated financial statements in accordance with IFRS for years beginning on or after January 1, 2005 (Regulation (EC) 1606/2002). The paper provides insight into the IFRS adoption process based on a questionnaire sent to EU-listed companies in 2004. The 112 responses received indicate: (1) a majority of respondents have adopted IFRS for more than just consolidation purposes; (2) the process is costly, complex, and burdensome; (3) companies do not expect to lower their cost of capital by implementing IFRS; (4) the more comprehensive the approach to conversion, the more respondents tend to agree with the benefits and costs of the transition; (5) companies expect increased volatility in financial results; (6) the complexity of IFRS as well as the lack of implementation guidance and uniform interpretation are key challenges in convergence; and (7) a majority of respondents would not adopt IFRS if not required by the EU Regulation. The results of our questionnaire were confirmed by several personal interviews with finance and accounting executives of EU publicly traded companies.     

The Challenges Faced by Reporting Entities on Their Transition to International Financial Reporting Standards: A Qualitative Study

Abstract

This study explores the challenges of implementing International Financial Reporting Standards (IFRS) at the organisational level. Based on interviews with experts with aggregated experience relating to the transition projects of over 170 reporting entities, this paper highlights the main challenges in delivering a successful implementation of IFRS. The findings show that the problems faced in implementation include lack of education and training, securing executive-level support, identifying and responding to the wider business-related implications of the transition, and issues with capturing the necessary information for reporting under IFRS.This paper complements the existing literature and offers a qualitative alternative to considering the transition to IFRS, offering insight into the organisational context of IFRS implementation. These insights are useful not only from a historic perspective, but also for organisations and regulators in the many jurisdictions where IFRS is permitted but not required, where more reporting entities will voluntarily move to IFRS-based reporting in the future. More broadly, they are also applicable to the challenges faced in implementing new and significantly revised IFRSs.     

Transitioning to IFRS in Japan: Corporate Perceptions of Costs and Benefits

This paper examines the ongoing transition to International Financial Reporting Standards (IFRS) in Japan with a particular focus on recent institutional developments and corporate concerns. While Japan has committed to the convergence of Japanese generally accepted accounting principles (J‐GAAP) with IFRS it has not as yet formally adopted IFRS. This paper reports on Japanese corporate perceptions of the likely costs and benefits of adopting and implementing IFRS using survey data collected from senior financial executives of 292 Japanese listed companies in 2013–14. Our findings reveal that Japanese companies identify a number of major areas of general concern with the adoption and implementation of IFRS. Most importantly, uncertainty regarding the interpretation of standards followed by staff training, IT systems, technical knowledge and differences between J‐GAAP and IFRS were reported as major concerns. Our survey also highlights that revenue recognition, depreciation, consolidated financial statements, financial statement presentation and the retrospective application of IFRS were viewed as key IFRS accounting issues. While the large majority of companies expected a moderate degree of benefits to arise from IFRS, substantial benefits were perceived more likely to apply to large and overseas listed companies mainly arising from improvements in the international comparability of financial statements.