How Do Preparers Perceive Costs and Benefits of IFRS for SMEs? Empirical Evidence from the Netherlands

Abstract

This paper examines how preparers perceive the association between costs and benefits of International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). Extant research on costs and benefits associated with IFRS for SMEs is inconclusive. Our results suggest that preparers consider costs and benefits of IFRS for SMEs separately, not concurrently, and evaluate them in relative terms. Taken together, the results indicate that a voluntary adoption decision depends on the preparers' context for the cost–benefit analysis, which appears to be a nonlinear process. Specifically, our findings could contribute to the discussion by the European Financial Reporting Advisory Group on taking the effects of accounting standards into account whilst developing standards.

Acknowledgement

The authors thank Roland Speklé, Ferdy van Beest, and two anonymous reviewers for their helpful comments.

Notes

The IASB (2004) considered IFRS suitable for all entities, but also recognised the different user needs and cost considerations of small and medium-sized enterprises (pp. 14–15). In practice, differential reporting requirements for SMEs exist in many jurisdictions (Di Pietra et al., 2008, p. 27).

The Fourth and Seventh Directives are the basis for financial reporting by limited companies in the EU. Based on quantitative size criteria (total assets, revenue, and number of employees), these Directives contain permissions to exempt medium-sized and small companies from certain aspects of presentation and disclosures and on top of that to exempt small companies from consolidation and from statutory audit.

The European Commission (2009a) began consultation on revising the Fourth and Seventh Directives on company law, to simplify them for small companies. The Commission published a draft amendment to the Fourth Directive that proposed allowing member states to exempt most private companies (micro-entities) from the Directive and therefore from the requirement for financial reporting. This would make it easier for such companies to adopt IFRS for SMEs (Nobes, 2010, p. 213).

Under the assumption that the voluntarily adopted standard requires more and/or enhanced information and/or disclosures.

Control mechanisms aim to reduce the agency cost arising from the separation between ownership and management: they are employed to ensure that managers act in the interest of the owners (Jensen and Meckling, 1976). There can be both internal and external mechanisms: the former control and orient managers' behaviour (e.g. corporate governance structures or compensation packages); the latter provide information about managers' actions to external stakeholders (e.g. financial statements and voluntary disclosure). This paper focuses on external mechanisms only.

Such cost–benefit analysis can be complicated by the presence of deadweight losses, distributional effects, and behavioural effects (Schipper, 2010, p. 312).

Accounting standards typically address four types of accounting issues: recognition (the incorporation of transactions in the primary overviews), measurement (determining the monetary amounts of elements in the primary overviews), presentation (where to present elements in the primary overviews), and disclosure.

EFRAG (2010) evaluated the compatibility of IFRS for SMEs and the EU Accounting Directives. EFRAG identified some incompatibilities of IFRS for SMEs requirements with the EU Accounting Directives, for example, recognition of negative goodwill in the profit and loss, various subsequent measurement options for associated companies, and prohibition of goodwill impairment reversals. Most of the incompatibilities between IFRS for SMEs and the EU Accounting Directives have not been explicitly adopted as specific requirements in the Dutch Civil Code (Burgerlijk Wetboek). This results in limited incompatibilities between IFRS for SMEs and the Dutch Civil Code.

The authors are aware of at least two Dutch private companies that have adopted IFRS for SMEs.

Formally, from an internally focused cost–benefit analysis, an accounting standards choice (ASC) of firm j at time t is a summation of (potential) changes in accounting policy choices (APC). So by definition:

whereby the probability of adopting a different set of accounting standards is determined by outweighing the cumulative perceived beneficial APC and the adverse APC:

An XBRL taxonomy is a representation of the reportable elements and their mutual hierarchy for a specific set of accounting standards and includes elements for disclosure requirements. Reporting requirements under a specific set of accounting standards are broken down into unique elements of data and generally include a direct reference to the respective paragraph in the set of accounting standards. Both DAS and IFRS for SMEs have an official XBRL taxonomy. A comparison based on the respective XBRL taxonomies shows that the disclosure requirements are similar (Litjens, 2010). Publications that assess the difference in disclosure requirements (de jure differences) between DAS and IFRS for SMEs also conclude that the disclosure requirements are similar (BDO, 2009).

The measures by Basu et al. (1998) for international variation in accounting measurement rules also received criticism (O'Brien 1998). Our measure eliminates subjectivity since we identify the differences in recognition/measurement between DAS and IFRS for SMEs.

Differences in rules (de jure differences) are mixed with those relating to practices (de facto differences) (Nobes 2009). Research in the Netherlands on the implementation of full IFRS (Vergoossen, 1999; Den Ouden, 2005; Vergoossen, 2006) shows that the identified areas of differences are consistent with de facto differences.

There is limited cross-sectional variation in the equity structure of SMEs in our sample; equity ownership is concentrated.

In December 2011, the EU finally adopted the following thresholds for micro-entities: balance sheet total €0.35M, net turnover €0.7M, and average number of employees 10 (Council of European Union, 2011, p. 6). A proposal of the European Commission earlier in 2011 had even lower thresholds for micro-entities: balance sheet total €0.25M, net turnover €0.5M, and average number of employees 10 (European Commission, 2011).

In the Netherlands, a company is small if it does not exceed two of the following three thresholds for two consecutive years: total assets €4.4 million, turnover €8.8 million, and employees 50.

Based on our criteria, the Orbis database contains data on 28,053 private companies in the Netherlands that potentially can adopt IFRS for SMEs. Of these, we had contact details for 3373 firms.

Not tabulated results show that the differences in results between roles (owner/manager and manager) are not significant.