International accounting – Lectures 10, 11, 12 & 13

Chapter 3. Financial reporting of SMEs: economic context, implications for accounting,

accounting models

3.1. The economic and accounting environment of SMEs

- in Europe, there are app. 7,000 listed companies (using full IFRSs) and more than 23,000,000
unlisted small and medium-sized entities (SMEs) (mostly follow national standards);
- “Micro, small and medium-sized enterprises (SMEs) are the engine of the European economy.
They are an essential source of jobs, create entrepreneurial spirit and innovation in the EU and are
thus crucial for fostering competitiveness and employment.”1
- these entities frequently have difficulties in obtaining capital or credit, and they have restricted
resources (may reduce innovation);
- EU’s definition: Enterprises qualify as micro, small and medium-sized enterprises (SMEs) if
they fulfill the criteria laid down in the Recommendation which are summarized in the table
below. In addition to the staff headcount ceiling, an enterprise qualifies as an SME if it meets
either the turnover ceiling or the balance sheet ceiling, but not necessarily both.

Enterprise category Headcount Turnover Balance sheet total

medium-sized < 250 < 50 mil. EUR < 43 mil. EUR
small < 50 < 10 mil. EUR < 10 mil. EUR
micro < 10 < 2 mil. EUR < 2 mil. EUR

- in the USA, the term predominantly used is SMB – small and medium-sized businesses - when
small business is defined by the number of employees, it often refers to those with fewer than 100
employees, while medium-sized business often refers to those with fewer than 500 employees.

Q1. Which are the characteristics of SMEs?

Findings from previous studies regarding the users of accounting information for SMEs:
Sucher and Jindrichovska (2004: 136) state that the main users of Czech financial statements are
the tax inspectorates. Vellam (2004: 146) notes that in Poland it is an obvious lack of user
orientation and an excessive adherence to the fiscal legislation. Veneziani and Teodori (2008)
conducted a study in Italy and find: the legal function (compliance) (84%) and tax compilations
(74%). The main users are lenders (71%), suppliers (47%), shareholders (43%), customers (32%)
and the local press (32%).2 For Romania Romania (study on 126 SMEs):
USERS YES (%)
Tax authority 84.9
Creditors 59.5
Customers 40.5
Suppliers 50.8
Analysts 20.0
Managers 93.7
Owners 94.4
Competitors 27.0
Employees 18.3
Press 19.0
Public 30.2
Others 10.3

1
European Commission (2005) – The new SME definition – user guide and model declaration.
2
Source: empirical studies on the SMEs - Sucher and Jindrichovska (2004) – Czech Republic, Vellam
(2004) – Poland, Veneziani şi Teodori (2008) – Italy.

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 International accounting – Lectures 10, 11, 12 & 13
Q2. Which are the users of SMEs financial statements and what are their needs?

Other characteristics of SMEs (Romanian data):

Clusters by the users of financial statements information

Class Sequence number
1 Obs1
2 Obs45
Central objects
Users No. of observations
Tax authority, managers, owners 66
Tax authority, creditors, customers, suppliers, 60
managers, owners, competitors, public

Clusters by funding
Central objects:
Class Sequence number Users No. of
observations
1 Obs1 Bank loans, own funding, commercial credit, leasing 64
2 Obs4 Own funding 62

Q3. Can we consider that SMEs form a homogeneous class of entities?

Q4. Should all SMEs use the same accounting system?

3.2 Accounting issues and accounting models

- various users of the accounting information, but not necessarily with the aim to make decisions;
- the main users are tax authorities, owners/managers (rarely separated) which have access to
accounting information – a reduced need for publicly available information;
- SMEs are related more to the local environment – national accounting system;
- at the EU level – the European Directives cover accounting for SMEs (however, some argue
that there are now 55 different SME GAAPs systems in the EU); at the international level – IASB
issued in 2009 the IFRS for SMEs.
- The European Commission held a consultation in 2010 in order to understand the view of
European stakeholders on the IFRS for SMEs (EC, 2010), and the European Financial Reporting
Advisory Group (EFRAG) conducted a compatibility analysis (EFRAG, 2010). More than 200
answers were received, with mainly much less than 10 per country (except for Germany, which
provided 56 answers) (EC, 2010 summary report). The results indicated divergent opinions
between countries, and between categories of respondents within the same country. The
responding preparers generally manifested an opposition to the IFRS for SMEs, while users were
favorable to the standard. The inclusion of the IFRS for SMEs in the European Directives, the
modernization and simplifications of Directives were indicated by respondents as envisageable
solutions. The European Commission decided to reject requiring the adoption of the IFRS for
SMEs at the level of the European Union as a whole. However, the Commission has proposed
that individual member states could adopt the IFRS for SMEs as their national reporting standards
for some or all unlisted companies provided that the conflicts with the European Directives are
removed (World Bank). Some countries in the region such as Bosnia and Herzegovina and
Macedonia implemented the standard (idem), and other countries developed national regulations
based on the IFRS for SMEs (UK and Ireland). Also, although the specifics have not been
finalized, Turkey has determined that SMEs will use IFRS for SMEs (as translated and
incorporated into the national regulations) starting in 2012. Overall, about 80 jurisdictions around
the world require or accept the IFRS for SMEs.

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 International accounting – Lectures 10, 11, 12 & 13
3.3. IFRS for SMEs

The context of the IFRS for SMEs3

- full-IFRSs are written with one type of accounting in mind – consolidated statements of large
listed companies;
- in some countries (Australia, Cyprus, New Zealand, South Africa etc.) IFRSs were adopted for
all purposes and an issue in the cost-benefit relation appeared;
- IASB began the project of an IFRS for SMEs in 2003 (against the wishes of some of its board
members, but with the support of the European Commission); the idea of a standard for SMEs
was on the agenda of its predecessor (IASC).

Project history4
- in September 2003, the IASB hosted a meeting of 40 of the world’s national accounting
standard-setters; with near unanimity, standard setters said that the IASB should develop global
standards for non-publicly accountable entities;
- 2004 – Discussion Paper (focus on the Board’s approach to the project);
- 2005 – questionnaire on recognition and measurement (101 responses) and round-table with
preparers and users (43 groups);
- 2007 – Exposure Draft (162 comment letters received);
- field tests were demanded (116 SMEs from over 20 countries);

“1) Field testing – Mazars - survey in France, Germany, Italy, the Netherlands, Spain and
The United Kingdom; 293 companies surveyed in France – “85% of French SMEs declare
themselves to be in favor of increased harmonization of national accounting principles with
international standards.” Questioned as to the possibility of adoption of a common set of
accounting standards in the European Union, French SMEs go further as they are 93%
favorable. 40% of them consider that application of these standards should be mandatory
(“A clear and emphatic ‘yes’”);

2) Field testing – Conseil National de la Comptabilité -10.000 companies (678 answers)

- only 3.7% of the companies questioned say they are asked to provide accounting
information comparable at an international level;
- 80% of the companies questioned have no or only weak knowledge of IFRS;
- the standard suggested is unsuited to their environment and that France has a reference
frame which has already proved reliable;
- the results of the investigation highlight the absence of identified needs by SMEs;
- an analysis of the accounting environment of SMEs shows that financial statements are
initially used for tax purposes and are mainly prepared by external accountants. If the
company produces financial statements for needs other than taxation, the principles used
remain identical.”
Required: comment the (contradicting) results.

- 2009 – the IFRS for SMEs was issued.

- 2012 – 2014 – comprehensive review of the standard to assess the SMEs’ experience with it;
new amendments are considered (especially in line with IFRSs issued after 2009). IASB issued
an amended version in 2015.
- many changes during the project:
- title – SMEs, private entities, non-publicly accountable entities, finally again SMEs;

3
Nobes and Parker (2008: 290)
4
www.iasb.org; IASB (2009) – IFRS for SMEs – project summary

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 International accounting – Lectures 10, 11, 12 & 13
- initially, cross-references to IFRSs were made: fair value for investment property,
revaluation model for PPE, indirect method for reporting operating cash flows, capitalization of
borrowing costs;
- simplifications considered but not adopted: drop the cash flow statement, all leases
treated as operating leases, completed contract method for all long-term contracts, fewer
provisions, non-recognition of deferred taxes, no consolidation

Motivation/general presentation
- objective – to develop a self-contained standard to meet the needs and capabilities of SMEs (230
pages vs. more than 2,000 pages of full-IFRSs; significantly fewer disclosures are required - 300
versus 3,000);
- for IASB, Small and medium-sized entities for the scope of the standard are entities that: do
not have public accountability5, and publish general purpose financial statements for external
users (par. 3);
- IFRS for SMEs was developed for a typical entity with about 50 employees (but the size test is
not intended) – each jurisdiction will determine which entities should apply the standard;
- IFRS for SMEs is a stand-alone document, organized by topic, without cross-references to full-
IFRSs (with one exception – financial instruments).

Q5. Which are the advantages and the limitations of a global reporting standard for SMEs?

Q6. Which standard (IFRS for SMEs or full IFRSs) should each of the following entities apply?
- a listed company with 100 employees?
- a non-listed entity with 600 employees?
- micro-entities?

Accounting principles and policies

- topics omitted: earnings per share; interim financial reporting, segment reporting; held-for sale
assets; topics addressed: consolidation; deferred taxation; financial instruments; impairment tests;
- accounting treatments not allowed in the IFRS for SMEs: proportionate consolidation;
capitalization for borrowing costs or development costs;
- simplifications: a cost-depreciation model for investment property unless fair value is readily
available without undue cost or effort; goodwill is amortized over its useful life which is
presumed to be 10 years if it cannot be determined reliably; goodwill is only tested for
impairment only when there is an indication that it may be impaired (mandatory test under IAS
36);
- a complete set of financial statements of an entity shall include all of the following: a statement
of financial position (current/non-current); either a single statement of comprehensive income or
a separate income statement and a separate statement of comprehensive income (by nature or by
function); a statement of changes in equity; a statement of cash flows (direct or indirect method);
notes, comprising a summary of significant accounting policies and other explanatory
information.

Exercises

1. Discuss the advantages and limitations linked to the decision of adopting IFRS for SMEs based
on entity-size criterion.

5
An entity has public accountability if its debt or equity instruments are traded in a public market or it is in
the process of issuing such instruments for trading in a public market a domestic or foreign stock exchange
or an over-the-counter market, including local and regional markets), or it holds assets in a fiduciary
capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks,
credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.

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 International accounting – Lectures 10, 11, 12 & 13

Chapter 4. The evolution of national accounting systems in an IFRS context

4.1. Various strategies of “accepting” IFRS

It is claimed that over 140 national jurisdictions use (or, in some cases, adopted) IFRSs and/or
IFRS for SMEs. Deloitte’s website (www.iasplus.com6) presents summaries of the current use of
IFRS under the labels: IFRS not permitted, IFRSs permitted, IFRSs required for some, IFRSs
required for all. However, there are significant differences between countries, in terms of the
manner in which they refer to IFRSs.

BUT:
“All such ‘adoptions’ tend to be included in vague and incautious statements such as ‘the global
rollout of International Financial Reporting Standards is gaining momentum, with more than 100
countries now using IFRS and all of the world’s major countries anticipated to be on board within
the next few years’ (BDO 2012). Of course, the most obvious limitation to the scope of
mandatory use of IFRS is that the phrase ‘all the major countries’ does not include the world’s
three largest economies: the US, China and Japan.”7

The main mechanisms of accepting IFRSs in local jurisdictions are the following8:

1) Adopting the process – the regulator adopts the process of standard setting and automatically
adopts the standards that are produced by the process.
Example: In South Africa, for listed companies the Johannesburg Stock Exchange requires the
use of IFRS as issued by the IASB.

6
http://www.iasplus.com/en/resources/use-of-ifrs
7
Nobes, C.W, Zeff, S.A. (2016) Have Canada, Japan and Switzerland ‘adopted’ IFRS?, Australian
Accounting Review, 26(3): 284-290.
8
Zeff, S.A., Nobes, C.W. (2010) Commentary: Has Australia (or any other jurisdiction) ‘adopted’ IFRS?,
Australian Accounting Review, 20(2): 178-184.

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 International accounting – Lectures 10, 11, 12 & 13
“IFRS Foundation (2015b: 16) reports that the approach is now used by 65 countries, which is
half of the countries recordedas adoptingIFRS. It is particularly widespread in Africa (e.g.,
Nigeria), the Caribbean (e.g., Jamaica) and the Arab world (e.g., Bahrain).”9

Q1: Why do you think that these countries employed this strategy?

2) Rubber stamping in the private sector – a method whereby all the IASB’s output is quickly
and almost automatically inserted into law without change.
Example: Canada
Background:
- the developments in accounting after 1900s paralleled those in the USA;
- in 1936 the Canadian Institute of Chartered Accountants (CICA) was created and was involved
in a greater uniformity in the use of accounting principles;
- as in the USA, the Canadian standard-setting environment is governed by a private-sector
system (AcSB - Accounting Standards Board), with the involvement of the profession (CICA
publishes the Handbook with all the standards applicable in English and French);
- in 2006 the AsSB decided to adopt IFRSs, and IFRSs replaced local GAAP for all publicly
accountable entities (more types of entities than in the EU) – “AcSB adopted IFRS as Canadian
GAAP for all publicly accountable entities for fiscal years beginning on or after January 1,
2011”10 because “IFRS provide more opportunities by eliminating the need for multiple GAAP
reconciliations, increasing access to international capital markets, and potentially reducing the
cost of capital”;
- AcSB has a policy to adopt IFRS in full and without modification, reasoning that “to do
otherwise would result in multiple and possibly conflicting versions of IFRSs globally, if enough
other national standard-setters did the same.”11
- to be adopted in Canada, a Standard must be officially sanctioned by the AcSB—although the
IASB’s due process is considered sufficient assurance that a new or amended Standard is suitable
for adoption, the AcSB takes the additional step of identifying whether there is any reason the
Standard would not be suitable for application in Canada. However, “since the AcSB’s policy is
to adopt IFRSs as they are issued by the IASB and not to modify them, it would be a significant
decision not to approve a final IFRS after it has been issued by the IASB.”12
- for public companies, the securities regulators of the provinces and territories require IFRS, with
exceptions. For 2014 reports, approximately 128 Canadian companies used US GAAP. Of the
Canadian companies currently using US GAAP, 53 are listed on the Toronto Stock Exchange
(TSX), of which 12 are major companies that form part of the S&P/TSX 60 index, the large-cap
segment of the Canadian equity market. 13

Q2: Discuss the strategy used and the accounting practices in Canada.

3) Standard-by-standard endorsement by public authorities – standards are gradually

endorsed and all subsequent amendments need to be endorsed. No words are changed/added in
the English version, the title and numbering of standards are not changed, but there is a difference
in the implementation dates and parts of IFRS can be deleted.
Example: the endorsement process of the European Union; EU companies adopt “IFRS as
adopted by the EU”. The conceptual framework is not included in the IFRS as adopted by the EU.

Q3: Discuss a few problems for practitioners in the countries members of the EU.

9
Nobes and Zeff (2016), p. 285.
10
http://www.cica.ca/applying-the-standards/ifrs/index.aspx.
11
CICA Handbook, cited in the 2012 Report to the trustees of the IFRS Foundation.
12
2012 Report to the trustees of the IFRS Foundation.
13
Nobes and Zeff (2016), p. 286.

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 International accounting – Lectures 10, 11, 12 & 13

4) Full convergence – involve some initial differences such as changing the title and numbering
of standards, parts are added or deleted, but later these differences are removed.
Example: Australia

Background:
- the parliament has delegated the task of proposing standards to the Australian Accounting
Standards Board (AASB);
- AASB is overseen by the Financial Reporting Council (FRC), a government agency;
- the need to harmonize domestic standards with IASs was recognized in Australia in the mid-
1970s14, but the movement towards international standards was made with small steps. In 1996
AASB published a policy note on International Harmonization, and with funding from the
Australian Securities Exchange commenced a review of its standards and a comparison with
IASs, but the funding was withdrawn in 1999;
- in June 2002 FRC announced that from January 2005 Australia would accept IFRSs – this
decision paralleled that of the EU, but was criticized for the absence of the due process. The
decision of the FRC was motivated by the idea that adopting IFRS would “greatly facilitate cross
border comparisons, reduce the cost of capital, and assist Australian companies wishing to raise
capital or list overseas”;
- AASB issued Australian standards based on IAS/IFRSs (initially called AIFRS or Australian
equivalents to IFRSs, now IFRSs or Australian Accounting Standards), with changes in their
numbering, with additional paragraphs (prefaced by “Aus”). An additional standard was issued,
requiring entities to disclose starting 2004 reports of how transition to AIFRS is being managed,
the level of preparedness, and what the likely impact will be;
- initially some Australian features were kept under the new standards, by removing some options
(those that were not previously in national standards) (for comparability), but in 2007 AASB
decided on full convergence, in order to avoid confusion about the compliance with IFRSs.

Q4: Discuss the strategy followed by Australia. How is this different from the one employed by
Canada?

5) Partial convergence - some standards are close to IFRSs, while others are not.
Example: China
Background:
General context15: China moved from a planned socialist model to a social market economic
system after the Cultural Revolution in the late 1970s. Chinese accounting was adapted to the
needs of the economy, initially being based on the Soviet system of uniform accounting. But the
political and economic reforms demanded reforms in accounting, in order to attract foreign
investments.
Accounting reforms:
- in 1992 the Ministry of Finance issued several accounting regulations, including a chart of
accounts, basic rules, but also a form of conceptual framework (of US and IASC influence). The
concepts of business entity, equity and profit were recognized.
- after 1992, the World Bank provided funding in order to help the Ministry’s reform the
accounting model, with the main consulting being Deloitte. 30 exposure drafts were issued
between 1994 and 1996, in line with many IASs. In 1997 China joined the IASC, and an IASC
board meeting was held in Beijing. However, the Ministry officially announced a plan to
converge with IFRS only in 2005 (Peng and van der Laan Smith, 2010).
- in 1998 an Accounting Standards Committee (CASC) was founded within the Ministry of
Finance (including academics, government experts, members of accounting firms). Another

14
Birt, J., Lu, W., Shao, L. (2011) IFRS harmonization in Australia, Japan and China: An historical
perspective, AFAANZ 2011 Conference
15
Nobes and Parker (2008), pp. 272-278

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 International accounting – Lectures 10, 11, 12 & 13
World Bank loan was received and Deloitte was again consultant for the following reform. Many
of the standards issued were applied by listed entities.
- in 1999 the Accounting Law including issues such as corporate governance, internal control was
amended to enhance protection of investors.
- for smaller and/or unlisted entities a different system was envisaged after 2000, lately in line
with IFRSs.
- several studies (Peng et al., 2008; Peng and van der Laan Smith, 2010; Qu and Zhang, 2010)
indicate that China had a successful gradual convergence of Chinese GAAP towards IFRSs (from
1992 to 2006). Peng and van der Laan Smith (2010) identify the factors that helped the increase
in the convergence16 with IFRSs from 20% in 1992 to 77% in 2006: the first standards adopted
were those containing issues more common with Chinese GAAP, while the others were
introduced through progressive change.
- IASB’s Chairman17 declared in 2011: “In accounting, China had made tremendous progress by
building an accounting profession and setting in place a process of continuous convergence with
IFRSs. If China eliminated differences with IFRSs this would be a small step for China, but a
huge step for the accounting world.”

Q5: How this process may impact accounting practices?

Example: USA
- US was one of the founding members of IASC in 1973 (represented by the professional body,
AICPA) and continuously had members in the IASB (currently 3 members);
- since the 1990s, SEC allowed foreign registrants to use IASs, but also to disclose reconciliations
with US GAAP;
- in 2000 IOSCO announced its endorsement for IASs, yet SEC declined to act, but after
pressures (also from EU representatives) in 2005 SEC proposed a ‘roadmap’, and in 2007 it
released the rule to waive the reconciliation requirement, with immediate effect (with many US
contrary opinions, but with EU pressures that a reconciliation with IFRSs will be required in
Europe and that many non-US entities will delist)18;
- a long convergence process between IFRS and US GAAP;
- AICPA recognized in 2008 the activity of IASB, and this decision led to the inclusion of IFRSs
in its curricula and to the option for private entities to use the IFRS for SMEs19;
- the SEC continues to explore possible approaches to incorporation of IFRS in the US reporting
system and to adhere to its Commission’s fixation on convergence and ‘how the U.S. should
continue its participation in the development of global accounting standards’;
- reports prepared for SEC claim that only a few jurisdictions are adopting IFRSs as issued by
IASB, that there are variations in practice, and that IASB is not an independent standard-setter;
- SEC (2011)20 refers to the following possible approaches: full adoption of IFRS on a specified
date (without endorsement), full adoption of IFRS following transition, optional adoption for
certain issuers, and retain US GAAP with convergence and/or endorsement (a model called
‘condorsement’).
- after the 2012 elections a new SEC Chairman was appointed, Elise Walter, which on October 23
declared: “While I continue to believe that converged standards are important to serving the
interests of investors in the increasingly global capital markets, we cannot incorporate IFRS
unless and until we are confident that it will serve U.S. investors well. For IFRS, I continue to

16
The convergence is measured based on key items included in the national GAAP compared to IFRS; that
is a measure of de jure convergence.
17
World Accounting Report (2011) – “Hoogervorst on China”, October
18
Zeff, S. (2008) IFRS developments in the USA and EU, and some implications for Australia, Australian
Accounting Review, 18(4): 275-282.
19
Street, D.L. (2012) IFRS in the United States: If, when and how, Australian Accounting Review, 22(3):
257-274.
20
Street (2012) (Idem).

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 International accounting – Lectures 10, 11, 12 & 13
think that we will get there eventually, but the timeframe is uncertain.”21; new appointments after
2013 continued the same prudent attitude (http://ifrsusa.wordpress.com/).
- many multinational corporations based in the US make pressures for the acceptance of IFRS by
the SEC (at least as an option) (“In summary, we believe that it is imperative that the SEC
announce a date certain at which IFRS compliant filings will be accepted” (Ford’s letter to SEC
in 2011).

6) Voluntary adoption –a choice is allowed for companies between several GAAPs

Examples: Switzerland and Japan

Japan22: Most companies can choose between Japanese GAAP, IFRS and JMIS; and some
companies are still allowed to use US GAAP.
From 2010, certain Japanese companies have been allowed to use IFRS for their consolidated
reporting. The original conditions set out by the FSA’s Business Accounting Council in 2009
were that the company: (1) was listed in Japan; (2) had staff skilled in IFRS; and (3) was subject
to foreign securities regulation or had a large foreign subsidiary (capital of at least ¥2 billion).
However, the scope was expanded in 2010 to include the consolidated statements of a Japanese
subsidiary whose parent meets the above criteria. Then, in 2013, the first and last conditions
above were removed, leaving only the rather vague second condition (BAC 2013). Companies
were fairly slow to take up the permission to use IFRS- 75 companies by March 2015, as reported
by the FSA (2015), amounting to 18.5% of Japanese market capitalisation. The number of
adoptions has increased even since then.
In 2015, the Accounting Standards Board of Japan (ASBJ) issued the first two ‘Modified
International Standards’ (JMIS), which adjust IFRS for two matters on which the Japanese think
that IFRS is wrong: failure to amortise goodwill and failure to re-classify all elements of other
comprehensive income eventually into profit or loss. These modified standards are available from
2016 onwards. At present all other parts of JMIS are the same as IFRS as issued by the IASB.

Q6: Why countries use various approaches to IFRS instead of a full adoption of the standards?
Discuss the benefits and the potential issues of a full adoption.

The IASB position is to encourage IFRS implementation, with the goal of a full adoption23:
“While there are similarities in both the challenges and the benefits that adopting IFRSs brings,
every jurisdiction is different and will therefore follow its own path towards achieving the
objective. We work with any jurisdiction that asks for our help.
Many jurisdictions have cultural, legal, or political obstacles to an immediate full adoption of
IFRSs. In the light of those obstacles, some countries decide on strategies of continuous
convergence with IFRSs. Put differently, they have decided to bring their national standards to a
point where the amounts reported in the financial statements are the same as in IFRS financial
statements. We respect the reasons why those jurisdictions reach that decision, and work with
them to support their convergence process. However, in doing so, it is our ultimate objective to
make full adoption of IFRSs possible because we believe that only then will a country be able to
fully benefit from the advantages of using IFRSs. Only recently, in January this year and as a
result of the second Constitution Review, the Trustees of our organisation emphasised, through an
amendment to the Constitution, that convergence is not an objective in itself but is a means to
achieve the adoption of IFRSs.
While convergence may be the necessary preparation for some countries to adopt IFRSs, the
simplest, least costly and most straightforward approach is to adopt the complete body of IFRSs
in a single step rather than opting for long-term convergence. Certainly, this is a significant
change, but the alternatives may be more difficult and may be of less benefit to a country in the

21
http://www.wilmerhale.com/auditcommitteesaccountingandlawblog/blog.aspx?entry=4459
22
Nobes and Zeff (2016).
23
http://www.ifrs.org/news/features/Pages/adopt-adapt-converge.aspx

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 International accounting – Lectures 10, 11, 12 & 13
long run. Hence, while convergence is good, adoption is necessary to be truly able to harvest the
benefits of the change.”

Q7: Synthesize the arguments pro and against the direct adoption of IFRS and the interests of
various stakeholders.

Q8: What are the implications for the accounting profession (accountants, accounting firms,
professional associations) of the various strategies in the IFRS adoption?

4.2. Factors influencing the decision and strategy of “accepting” IFRSs

The decision is taken at the level of:

- The country
- The firm

The motivation resides in the economic, political consequences and influences.

Example
Case 1: Canada “IFRS provide more opportunities by eliminating the need for multiple GAAP
reconciliations, increasing access to international capital markets, and potentially reducing the
cost of capital.” (CICA)
Case 2: Romania “The Minister of Finance thus became aware that the World Bank, the IMF and
the EU were all supportive of IAS and, indeed, that failure to adopt the type of strategy put
forward by the project team could jeopardize Romania’s ability to access the loan facilities
necessary to stimulate the economy.” (King et al., 2001)

Q9: What is the nature of the motivation for each country to adopt IFRS?

The results of previous studies suggest that factors impacting on the decision of “accepting”
IFRSs are24:
- the economic benefits (the expected reduction in the cost of capital, FDI);
- the net political value of IFRS (legitimacy);
- governance systems, ties with other countries, level of education

Expectations:
- countries with moderate governance are more inclined to adopt IFRSs, while those best
governed or powerful are less likely to adopt;
- countries in regions or partners accepting IFRS are more likely to adopt IFRS;
- developing countries with high literacy rates, with developed capital markets, and with an
Anglo-American culture are more likely to adopt IFRSs.

The institutional environment (national and international) has a strong influence on accounting
practices:

24
Ramanna, K., Sletten, E. (2009) Why do countries adopt IFRS?, working paper, Harvard
Business School; Zeghal, D., Mhedhbi, K. (2006) An analysis of the factors affecting the
adoption of international accounting standards by developing countries, The International Journal
of Accounting, vol. 41: 373-386
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 International accounting – Lectures 10, 11, 12 & 13

Q10: Discuss the importance for various groups of stakeholders of the understanding of the
factors influencing the IFRS adoption.

The investigation of the factors associated with the IFRS adoption is usually performed as floows:
- Select a group of countries
- Measure the level of acceptance (e.g. use www.iasplus.com to check the position of each
country and assign grades (0 = not accepted; 1 = permitted; 2 = required))
- Identify factors and determine their value (e.g. economic development, type of law, size
of the country)
- Statistical analysis of the association.

Example: Kossentini & Othman (2014) analyze the factors associated with IFRS adoption in
emerging economies
Sample: 50 countries (Africa, Asia, Latin America)
Measurement of adoption: from 1 (rejected) to 7 (adoption for listed companies)
Hypotheses:

Measurement: influence of the WB (if a ROSC report exists or not), foreign aid

Measurement: foreign investment, Big 4 presence

Measurement: development of the profession

Control variables: presence in networks, economic development, legal system, size of the capital
market, tax-accounting relation, education, enforcement
Results: H1 and H2 are validated, negative significant association for H3, other significant
factors: presence in networks

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 International accounting – Lectures 10, 11, 12 & 13
4.3. IFRS influence over regulations and practices

The impact of IFRSs can be analyzed:

- at the level of regulations – de jure implementation or convergence – measured using various

methodologies (Euclidian distances, Jaccard’s coefficient and Spearman’s coefficient). Ding et al.
(2007) measure the differences between IAS and domestic accounting standards using two
indexes: absence (a particular item is covered only by IAS) and divergence (a particular item is
covered by IAS and national standard, but the treatment is different). Peng and van der Laan
Smith (2010) calculated on Chinese data a standardized convergence score assessing a list of
items for full convergence, substantial convergence or non-convergence with IFRS.

Q11: Discuss the impact for various groups of stakeholders of the level of convergence of
national regulations with IFRS.

Example 1 – measuring the convergence between Romanian national regulations (OMFP

3055) and IFRS for SMEs for inventories25
The following situations are investigated:
I. Complete convergence – the same provisions are included in the IFRS for SMEs and the
national regulations;
II. Absence - differences in the provisions exist, with different implications for convergence
and divergence, as follows:
II.1 Incomplete – the provisions of the standard are not included in the national
regulations;
II. 2 Over detailed leading to convergence – the national regulations provide more
details, but the end-result is in line with the IFRS for SMEs;
II. 3 Over detailed leading to divergence – the national regulations provide more
details, but with the result of being in divergence with the Standard;
II.4 Over detailed with no implications for convergence or divergence - the national
regulations provide more details, but they do not impede or contribute to the
convergence;
III. Divergence - there are conflicting provisions in the IFRS for SMEs and the national
regulations.
Inventories items and comparison OMFP – IFRS for SMEs
Type I Type II.1 Type II.2 Type II.3 Type II.4 Type III
Definition 1
General scope 0.5 0.25 0.25
Exclusion of the measurement 1
scope (fair value measurement)
Recognition 1
Management of inventories 1
Measurement (general principle) 1
Cost – general principle 1
Cost of purchase – details 0.5 0.25 0.25
Cost of production – general 1
principles
Joint products and by-products 1
Cost of work in process 1
Borrowing costs 0.5 0.5
Costs excluded 1

25Albu, C.N., Gîrbină, M.M., Cuzdriorean, D.V. How close are Romanian regulations and the IFRS for
SMEs? An in-depth analysis for inventories, Global Review of Accounting and Finance, vol. 3, no. 2: 32-
41, 2012

Prof. Nadia Albu 12

 International accounting – Lectures 10, 11, 12 & 13
Costs of inventories of a service 1
provider
Techniques for measuring cost 0.5 0.5
Cost formulas 0.66 0.33
Inventory systems 1
Impairment 0.5 0.5
Derecognition 0.5 0.5
Disclosure 0.5 0.5
Total 9.66 3.75 2 0.25 3 1.33

The convergence index for inventories is 0.51 (types I and II.2), while the divergence index is
0.35. Some of the provisions of the national regulations (type II.4, value 0.14) do not influence
the convergence or divergence with the IFRS for SMEs (what we call the guidance index). Some
might argue that the implementation of the IFRSs show follow the standard as issued by the
IASB. However, previous studies indicated the need for details in accounting standards and
regulations in the context of emerging economies, which is measured by the guidance index.

Example 2 - measuring the convergence between Romanian national regulations and IFRS
(IAS 16, IAS 17 and IAS 41)26

- at the level of practices – de facto implementation or convergence usually called compliance –

compliance lists are developed based on IFRSs and financial statements are analyzed based on
that list.

Q12: Discuss the impact for various groups of stakeholders of the level of compliance of financial
statements with IFRS.

Example – disclosure practices regarding financial transparency for emerging markets (10
leading companies were analyzed in each country)27:

26 Albu, N., Pălărie, I. (2016) Convergence of Romanian accounting regulations with IFRS. A longitudinal
analysis, Audit Financiar, no. 6: 634-641
27
ISAR (2008) 2008 Review of the implementation status of corporate governance disclosures, UNCTAD
secretariat.

Prof. Nadia Albu 13

 International accounting – Lectures 10, 11, 12 & 13
Disclosure item Brazil China India South Africa Russian Federation Israel
Financial and operating results 10 10 10 10 10 10
Critical accounting estimates 8 9 9 8 9 10
Related-party transactions 9 9 10 10 9 9

Example – compliance with IFRS 8 Segment reporting in Romania28

Level of compliance
Total lack of compliance
Low level of compliance
Medium level of compliance
High level of compliance
Total
Number of companies %
2 13,33%
5 33,34%
2 13,33%
6 40%
15 100%

Factors Level of compliance

Size -0,457
Type of auditor 1,436*
Sales growth 0,370
Ownership -1,728**
concentration
Institutional 1,021*
investors
Leverage -0,430
Profitability -1,107
F-value 4,034**
Adjusted R2 0,603

28 Albu, N., Albu, C.N., Mateescu, R. (2013) Analiza practicilor de raportare pe segmente - cazul
societăţilor cotate la BVB, Audit Financiar, no. 10: 32-38

Prof. Nadia Albu 14

 International accounting – Lectures 10, 11, 12 & 13
Exam - Sample questions

Multiple-choice questions
1. Which of the following factors does not generate cross-countries differences in the IFRSs
application:
a) the national model used before IFRSs;
b) big accountancy firms and their “advices”;
c) IFRSs are principles-based and not rules-based;
d) the existence of options in IFRSs.

2. The accounting system in China is not characterized by:

a) full implementation of IFRSs;
b) the use of a chart of accounts;
c) the State has a significant role in accounting standard setting;
d) the application of national (Chinese) accounting standards.

3. According to Gray’s classification, the French accounting model is characterized by:

a) high level of professionalism;
b) high level of flexibility;
c) strong relationship between taxation and accounting;
d) high level of uniformity.

4. Which of the following is not true regarding the application of the IFRSs in practice in various
countries:
a) there is a continuation of national patterns;
b) countries with similar characteristics reacted in the same manner to IFRSs implementation;
c) auditors are sometimes involved in IFRSs implementation, especially in non-Anglo-Saxon
countries;
d) different countries have different expected benefits from the IFRSs adoption.

5. Which of the following is not true regarding the IFRS implementation in the EU:
a) IFRSs led to improvements in comparability;
b) there are differences between countries regarding how IFRSs are applied in practice;
c) there are differences between countries regarding the level of compliance;
d) the IFRS adoption was realized through a private standard setting process.

6. European continental countries are characterized by:

a) uniform application of IFRSs in practice;
b) IFRSs are applied by listed entities;
c) strong relationship between accounting and taxation which may hinder IFRSs implementation;
d) common enforcement mechanisms.

Open-ended questions
1. Present in a few lines the rational for the difference in the use of LIFO in US GAAP and
IFRSs. What do you think about allowing/forbidding LIFO in Romanian regulations?
2. You work in the Accounting department of a multinational intending to invest in China. The
group is using IFRSs. Write a short note (10-15 lines) about this investment.
3. You work in the Accounting department of a French firm intending to have subsidiaries in
various EU countries, especially in Eastern Europe. Discuss the impact of a potential adoption of
IFRSs (costs and benefits).

Prof. Nadia Albu 15