«HOW RELEVANT IS SIZE FOR SETTING THE SCOPE OF THE IFRS FOR SMEs? Cătălin Nicolae ALBU1 The Bucharest University of Economic Studies, Romania ...»
Accounting and Management Information Systems
Vol. 12, No. 3, pp. 424–439, 2013
HOW RELEVANT IS SIZE FOR SETTING
THE SCOPE OF THE IFRS FOR SMEs?
Cătălin Nicolae ALBU1
The Bucharest University of Economic Studies, Romania
The International Financial Reporting Standard for Small and
Medium-sized Entities (IFRS for SMEs) is currently considered for
adoption by national regulators in many emerging economies and a few developed countries. The cost-benefit approach is advanced as useful to investigate how the scope of the IFRS for SMEs should be set.
Size is used in many jurisdictions as criterion to set financial reporting obligations, but it is questioned if it represents an appropriate criterion for the scope of the IFRS for SMEs. The aim of this paper is therefore to empirically investigate the applicability and consequences of using various criteria to set the scope of IFRS for SMEs, and to discuss the implications of using size instead of other criteria. Data consists of a sample of 194 questionnaires completed by accountants employed by Romanian SMEs. I find that the choice between size and other criteria is related to placing greater emphasis on preparers or users, or on costs versus benefits. Also, findings suggest that while size is correlated with users-based criteria, the level of agreement between various criteria for setting the scope of the standard is medium.
Therefore, in order to capture the cost-benefit tension two criteria might be used in deciding the scope of the standard.
IFRS for SMEs, emerging economies, Romania, quantitative criteria JEL code: M41, M48 Correspondence address: Bucharest University of Economic Studies, Romania, Faculty of Accounting and Management Information Systems, 6 Piaţa Romană, sector 1, Bucureşti, 010374, Tel: +40 21 319 1900/365, Email: firstname.lastname@example.org How relevant is size for setting the scope of the IFRS for SMEs
INTRODUCTIONThe International Accounting Standards Board (IASB) issued in 2009 the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) (IASC Foundation, 2009a), as a response to “strong international demand from both developed and emerging economies for a rigorous and common set of accounting standards for smaller companies” (IFRS Foundation, 2010).
Recent surveys about the IFRS for SMEs adoption reveal that over 80 countries have adopted or announced plans to do so (IFRS Foundation, 2012).
While in many developed countries the potential adoption “has been associated with certain distrust” (Quagli & Paoloni, 2012: 42), many emerging economies embrace the IFRS for SMEs with high expectations in terms of improving the quality of financial reporting and of attracting foreign capital (United Nations, 2011; Bohusova & Blaskova, 2012; Quagli & Paoloni, 2012). Therefore, much of the existing literature on the IFRS for SMEs is placed in the context of emerging economies (Nerudova & Bohusova, 2008; Albu et al., 2010; Pasekova et al., 2010;
Siam & Rahahleh, 2010; Strouhal, 2011; Bunea et al., 2012; Albu et al., 2013a;
Uyar & Güngörmüş, 2013).
Albu et al. (2013a) investigates the suitability of the IFRS for SMEs for emerging economies, the implementation approach and the scope of the standard. Prior literature also inventories the difficulties associated with international standards implementation in general, including the lack of competencies, the reduced level of compliance, the lack of local institutions to support IFRS implementation (Albu et al., 2011; Bohusova & Blaskova, 2012; Uyar & Güngörmüş, 2013). These findings suggest that the cost-benefit approach in analyzing the potential implementation of the IFRS for SMEs is more complex and subjective in emerging economies. Costs might be higher than in developed economies, and the lack of competencies of local professions represent an important factor; however, benefits in terms of improving the reporting system, at entity, industry or national level are also critical for these countries. Criteria used to set the scope of the standard are also important, affecting the cost-benefit relationship.
This research is motivated by the increasing number of emerging economies embracing the IFRS for SMEs and by the importance of the cost-benefit analysis in deciding the scope of the standard. Size is used in many jurisdictions as a criterion to set financial reporting obligations, but it is questioned if it affects the suitability of the standard for various types of SMEs (Eierle & Haller, 2009). The aim of this paper is to empirically investigate the applicability and consequences of using various criteria to set the scope of IFRS for SMEs, and to discuss the implications of using size instead of other criteria. I administer a questionnaire-based survey to accountants in Romanian SMEs. A total of 194 usable answers were received.
Therefore, responses take into consideration professional accountants’ perceptions
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I relate in this paper the various criteria to be used to set the scope of IFRS for SMEs to the cost – benefit analysis and to SMEs stakeholders. More precisely, I find that the choice between size and other criteria is related to placing greater emphasis on preparers or users, or on costs versus benefits. Also, findings suggest that while size is correlated with users-based criteria, the level of agreement between various criteria in setting the scope of the standard is medium (of approx.
60-70%). Also, the level of agreement between the decision based on size or on user-based criteria does not significantly differ if different size thresholds are established (larger SMEs versus all SMEs except for micro-entities). These findings are useful for future research in order to further investigate the suitability of the IFRS for SMEs for various settings and types of entities. Also, they might be of interest for preparers, users, and regulators when investigating and making decisions about accounting standards and their suitability.
The rest of the paper is structured as follows: after a literature review in Section 1, I present the research methodology in Section 2. This is followed by the research results in Section 3. The last section completes the paper, presenting its main conclusion, findings and research limitations.
1. LITERATURE REVIEW
IFRS for SMEs development has been based on user needs, costs and SMEs capabilities (IFRS Foundation, 2012). The adoption decision has to take into consideration the implications on the same levels. Consequently, the cost – benefit relationship and the analysis of all stakeholders become very important in the context of SMEs when analyzing the suitability of the IFRS for SMEs. Research in this area is rather fragmented, both in terms of issues analyzed and geographical coverage. Litjens et al. (2012) find that preparers consider costs and benefits of IFRS for SMEs separately, not concurrently. While the cost-benefit relationship is important when judging the reporting requirements, it becomes apparent that costs are more obvious and easier to be assessed than expected benefits. In this regard, Albu et al. (2013a) suggest that a significant emphasis on costs when analyzing the suitability of the IFRS for SMEs moves the emphasis in the financial reporting process from users to preparers.
426 Vol. 12, No. 3 How relevant is size for setting the scope of the IFRS for SMEs Users and preparers are the most investigated categories of SMEs stakeholders.
Quagli and Paoloni (2012) investigate users’ and preparers’ answers to the “Questionnaire on the public consultation of the IFRS for SMEs” at the European Union (EU) level. They find that preparers manifest stronger opposition to the IFRS for SMEs, while users are more favorable. However, the respondents come from developed countries and the emerging economies of the EU are not represented1. Using interviews, Albu et al. (2013a) find that in four emerging countries all stakeholders manifest a medium support for IFRS for SMEs’ possible implementation, variations concerning mainly the implementation approach (mandatory adoption, voluntary adoption or convergence). On the other hand, Uyar and Güngörmüş (2013) find evidence regarding the lack of training as a major obstacle to the implementation in Turkey, a country in which the adoption decision has been made.
When investigating the stakeholders’ perception about the IFRS for SMEs implementation, the implementation approach and the scope of the standard have to be taken into consideration. Existing literature suggests variations in stakeholders’ opinions, possibly caused by the differences in the economic development of a country (developed vs. emerging), the size, international exposure and other features of SMEs under discussion, the experience of respondents, and the implementation approach (Bunea et al., 2012; Quagli & Paoloni, 2012; Albu et al., 2013a). Therefore, stakeholders’ attitude should be nuanced. While the impact of the country’s origin and the implementation approach has been tentatively investigated (Quagli & Paoloni, 2012; Albu et al., 2013a), prior findings concerning how the possible scope of the standard relates to stakeholders (and especially users and preparers) are rather fragmented. Jarvis and Collis (2003) suggest that even if the banks and managers/owners are the main users of financial reporting by smaller entities, agency relationships exist between them and stewardship plays an important role. On the other hand, Eierle and Schultze (2013) underline that in smaller entities financial statements are used for decision making by managers, mainly because of the cost-benefit relationship. They suggest that standard setters should not ignore the requirements of managerial information in the process of standard setting.
The scope of the IFRS for SMEs as issued by the IASB is defined to be entities that “do not have public accountability and publish general purpose financial statements for external users” (IASC Foundation, 2009a: par. 1.2.). In IASB’s view “size is not a barrier. Any company of any size is eligible to use the IFRS for SMEs, provided it does not have public accountability” (IFRS Foundation, 2010).
However, “in deciding which entities should be required or permitted to use the IFRS for SMEs, jurisdictions may choose to prescribe quantified size criteria” (IASC Foundation, 2009b: BC70).
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Size is usually measured by the number of employees, sales and total assets. The use of quantified criteria like these ones in deciding the scope of standards creates clarity for all stakeholders (Jarvis and Collis, 2003). Quantitative criteria for differential reporting are already used in various jurisdictions (Jarvis and Collis,
2003) and seem to be the preferred approach for deciding the scope of a possible implementation of the IFRS for SMEs (Bunea et al., 2012; Quagli & Paoloni, 2012). On the other hand, size is not necessarily associated with accountability (IASC Foundation, 2009b: BC63), and the quantitative approach, even if it seems objective, may be distorted2 (Bunea et al., 2012). Additionally, little research exists on how size affects the cost-benefit ratio in differential reporting (Jarvis & Collis, 2003).
Eierle and Haller (2009) discuss based on prior literature how size is a proxy for the social and economic importance of a firm, a proxy for the number and heterogeneity of users and user needs. They suggest that larger SMEs may incur higher costs for financial reporting. When empirically investigating if the economic size has implications for accounting and regulatory issues, ambiguous results were obtained. The study reveals that international activities and IFRS knowledge are size-sensitive, but even smaller SMEs might have international exposure. Also, while cost-benefit assessment differs between different size clusters, size is not a factor determining the cost-benefit considerations.
On the other hand, Di Pietra et al. (2008) suggest that there are significant differences between user groups of smaller and larger SMEs. The authors cite Kirsch and Meth (2007) arguing that smaller SMEs might have only banks as external users, and banks not necessarily base their decision on general purpose financial statements. While there is some empirical research supporting this statement (Di Pietra et al., 2008), interviews conducted in emerging economies suggest that financial statements are useful for bankers only for credit decisions, but also for various macroeconomic statistics about the entities in an industry, region or country (Albu et al., 2013a). While in a credit decision they may receive additional data from entities, data is not available for other analysis or statistics. In terms of compliance, Aljifri and Khasharmeh (2006, cited in Litjens et al., 2012) find that the level of international standards’ adoption is positively correlated with size, while Dang (2011) documents that the association between the size of business and compliance with accounting standards is not significant.
Other authors propose to take into consideration the international exposure too, given that international standards are intended firstly to contribute to the improvement in the comparability. Paoloni (2006 cited in Di Pietra et al., 2008) argues that only entities operating in an international market would benefit from the IFRS for SMEs application. In the same vein, Eierle and Helduser (2013) investigate SMEs’ need to provide internationally comparable accounting information. They find that SMEs involved in international financial and lending
operations are more likely to report internationally comparable accounting information as compared to the entities involved in international commercial contracts.