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

• Author: Yosra Gafsi,Yosra Mnif Sellami
• Published date: 01 April 2018
• DOI: http://doi.org/10.1002/jcaf.22331
• Date: 01 April 2018

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© 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

Perspective

Yosra Mnif Sellami and Yosra Gafsi

INTRODUCTION

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

GAAP.

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