What Drives Developing and Transitional Countries to Adopt the IFRS for SMEs? An Institutional Perspective

AuthorYosra Gafsi,Yosra Mnif Sellami
Published date01 April 2018
Date01 April 2018
© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22331
What Drives Developing and
Transitional Countries to Adopt
the IFRS for SMEs? An Institutional
Yosra Mnif Sellami and Yosra Gafsi
The economic
globalization and the
development of inter-
national trade have
increasingly empha-
sized the need for a
common set of finan-
cial standards. In this
regard, the Interna-
tional Accounting
Standards Board
(IASB) has played
a crucial role in the
field of international
accounting harmo-
nization which is no
longer the preserve
of listed companies.
It has expanded to
cover non-publicly
accountable entities
that are mostly small-
and medium-sized
enterprises (SMEs).
The IASB defines
SMEs as entities that
do not have public
accountability and
publish general
purpose financial
statements for exter-
nal users (Perera &
Chand, 2015).
In several devel-
oping and transi-
tional countries,
SMEs sector is
increasingly growing
and is becoming
more and more
important through
its effective contribu-
tion to the economic
development and its
ability to bring inno-
vation to face poten-
tial changes (Perera
& Chand, 2015). In
Bosnia and Herze-
govina, for example,
SMEs provide about
66% of total employ-
ment and more than
62% of GDP (EIB,
With the awareness of the socioeconomic importance
of small- and medium-sized enterprises (SMEs) and
the growing demand for a high-quality accounting
framework for these businesses, the International
Accounting Standards Board issued on July 9, 2009
a simplified version of financial reporting standards
(IFRS for SMEs) to meet the specific needs of such
entities. Recently, there is an increasing widespread
acceptance of this standard around the world. While
considerable effort has been made to explain the
worldwide diffusion of full IFRS, still little empirical
evidence on the factors influencing the IFRS for
SMEs adoption has been undertaken. This study
seeks to examine the institutional factors associ-
ated with the adoption of the IFRS for SMEs spe-
cifically in the context of developing and transitional
economies. Based on a sample of 70 countries,
the research results show that SMEs’ importance,
country’s reliance on external funding, and external
openness degree positively affect the IFRS for SMEs
adoption. They reveal a negative effect of tax system
and governance quality on this decision. However,
education level and prior adoption of full IFRS are
nonsignificant factors. These results are relevant to
practitioners, SMEs’ potential investors, standard
setters, regulators, CPA firms, SMEs’ managers, and
policy-makers. © 2018 Wiley Periodicals, Inc.
Refereed (Double-Blind
Peer Reviewed)
The Journal of Corporate Accounting & Finance / April 2018 35
© 2018 Wiley Periodicals, Inc. DOI 10.1002/jcaf
2016). In the African context,
SMEs account for 92% of total
enterprises. They contribute
about 70% to GDP and more
than 80% to employment
in Ghana. In South Africa,
SMEs’ contribution to GDP
is between 51% and 57%.
They represent about 91% of
the formal business entities
and create about 60% of total
employment (Abor & Quartey,
2010). In Latin America, SMEs
account for over 90% of total
businesses. There is a grow-
ing contribution of SMEs to
employment about more than
40% in Argentina and Brazil
and nearly 30% in Ecuador
and El Salvador (ECLAC,
2012). In the Asian context,
SMEs contribute about 52%
to GDP and account for 20%
of total exports in Sri Lanka.
They provide about 60% and
61% of total employment and
account for 19% and 20% share
of total exports in Malaysia
and Philippines, respectively
(IMF, 2015). This importance
of SMEs in developing and
transitional countries can be
further strengthened by the
improvement of the qual-
ity and transparency of these
entities’ financial reporting in
order to enable such nations to
benefit from increased influx of
foreign private capital as there
is a growing foreign investors’
demand for high-quality finan-
cial statements, especially those
based on financial reporting
standards (FRS).
In this regard, the IASB
issued on July 9, 2009, the
International Financial Report-
ing Standard (IFRS) for Small-
and Medium-sized Entities
(SMEs) to simplify accounting
treatment for these businesses,
improve the quality and com-
parability of their financial
accounts, and avoid high costs
of adopting full IFRS (e.g. full
IFRS implementation generates
higher auditing and retraining
costs as these standards are
more complex and voluminous
than IFRS for SMEs). Since
it was developed to meet the
needs of users of SMEs’ finan-
cial statements, IFRS for SMEs
could attract SMEs’ funding
sources. Furthermore, it could
be a useful tool for good man-
agement and effective corporate
governance. Proponents argue
that this simplified standalone
standard could be beneficial
for these businesses compared
to other standards. Exhibit 1
summarizes the main differ-
ences between IFRS for SMEs,
full IFRS, and domestic-based
Several developing and
transitional countries have
actually adopted IFRS for
SMEs; others have plans to
adopt it while still others con-
tinue to resist the adoption of
this standard. Prior researchers
have focused on the analysis of
factors influencing the adop-
tion of full IFRS. However,
there is a lack of evidence on
the factors associated with
countries’ decision to adopt
IFRS for SMEs. Some stud-
ies are limited to the analysis
of perceived challenges, costs
and benefits of IFRS for SMEs
implementation in one or some
countries (Albu et al., 2013;
Chand, Patel, & White, 2015;
Hussain, Chand, & Rani, 2012;
Samujh & Devi, 2015). To our
knowledge, Kaya and Koch
(2015) is the unique study that
examined the factors affecting
IFRS for SMEs adoption in
different countries. But there is
no empirical research specifi-
cally focusing on developing
and transitional countries.
Since countries’ institutional
features have been analyzed as
additional and nonsignificant
variables in the Kaya and Koch
(2015) study, we emphasize in
this research the importance
level of these factors in affect-
ing developing countries’ deci-
sion to adopt IFRS for SMEs.
Unlike previous studies, we also
include a new specific factor
“importance of SMEs” to bet-
ter investigate this topic.
The purpose of this
research is to examine the envi-
ronmental factors associated
with IFRS for SMEs adoption
in developing and transitional
countries. This study is based
on institutional theory that
analyzes the impact of insti-
tutional isomorphic pressures
(coercive, mimetic, and norma-
tive) on organizations’ practices
as well as countries’ strategic
decisions. The research results
reveal that SMEs’ importance,
country’s reliance on external
funding (coercive pressure),
and external openness degree
(mimetic pressure) positively
affect countries’ decision to
adopt IFRS for SMEs. They
show a negative effect of tax
system and governance qual-
ity on this decision. However,
education level (normative
pressure) and prior adoption
of full IFRS are nonsignificant
factors. To our knowledge, this
study is the first to focus on the
institutional factors affecting
the IFRS for SMEs adoption
decision in the context of devel-
oping and transitional coun-
tries. This research is the first to
highlight the impact of SMEs’
importance on this decision.
The research results are
potentially relevant to several
parties. They provide practi-
tioners and researchers with a
comprehensive framework for

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