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

Abstract

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.

Keywords:

• IFRS for SMEs
• financial reporting
• private firms
• standard setting
• financial transparency

JEL Classification:

• M41
• G18

Acknowledgements

The idea for this study originated from an invitation to present at the 2016 ICAEW Information for Better Markets Conference. I thank the team of ICAEW for their feedback and their support. The study would not have been possible without the help of a large audit firm allowing me access to their network of national accounting experts. I thank all representatives of that firm and all interviewees for their time and interest in my project. Finally, helpful feedback from an anonymous reviewer, Catalin Albu, Nadia Albu, Martin Bierey, Ulf Brüggemann, Nader Hemaidan, Darrel Scott (discussant at the Information for Better Markets Conference), Brian Singleton-Green, a seminar audience at Humboldt-Universität zu Berlin, and the audience of the 2016 Information for Better Markets Conference as well as excellent research assistance by Marcus Goossens are also gratefully acknowledged.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. I acknowledge that one of my sample’s jurisdictions, Hong Kong, is a jurisdiction and not a country. However, for editorial ease, I will use the terms ‘jurisdiction’ and ‘country’ interchangeably throughout this paper.

2. The IFRS for SMEs adoption strategies not only vary across countries but also across sets of firms within countries and across their respective reporting entities (single entity or group level) (Nobes 2010). In principle, I am interested in understaning the IFRS adoption strategy for the most inclusive reporting entity of larger private firms in my sample jurisdictions, but I have to caution the reader that there is some fuzziness around this definition.

3. This finding is reminiscent of the general tendency of EU member states to refer to IFRS when transforming recent EU directives in national accounting rules. See the upcoming special issue of Accounting in Europe for exploring this in further detail.

4. Throughout the paper, when presenting quotes, while trying to keep them as close to the spoken word as possible, I apply some mild editing to increase readability where needed.

5. As an interesting side note that was brought up by Darrel Scott in his discussion at the conference: The term ‘small’ in ‘small and medium-sized entities’ seems to have an unfavorable connotation in some African cultures.

Additional information

Funding

This research was supported by the Institute of Chartered Accountants in England and Wales (ICAEW).