How is the IFRS for SME accepted in the European context? An analysis of the homogeneity among European countries, users and preparers in the European commission questionnaire

Advances in Accounting, incorporating Advances in International Accounting 28 (2012) 147–156

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Advances in Accounting, incorporating Advances in International Accounting journal homepage: www.elsevier.com/locate/adiac

How is the IFRS for SME accepted in the European context? An analysis of the homogeneity among European countries, users and preparers in the European commission questionnaire Alberto Quagli a,⁎, Paola Paoloni b a b

Faculty of Economics, University of Genoa, Via Vivaldi, 2, 16126 Genoa, Italy Faculty of Economics, Università Telematica Scienze Umane, Via Casalmonferrato 2, 00182 Roma, Italy

a r t i c l e

i n f o

Keywords: IFRS for SMEs European accounting system International Accounting Accounting standard - setting process

a b s t r a c t In this paper we analyze the answers to the “Questionnaire on the public consultation of the IFRS for SMEs”, promoted by the European Commission. Our aim is to evaluate the homogeneity among respondents, according to the different perspectives of analysis between both users, preparers and also in European Countries. Results show a substantial diversity among respondents. In particular, preparers demonstrate a strong opposition to the IFRS for SMEs, while users are more favorable. Concerning Country classification, German-speaking Countries and Latin Countries show much less appreciation for that standard with respect to Anglo − Nordic Countries. Relevant consequences for European public policy issues and for accounting studies on differential reporting arise from this result, concerning respectively the role of European accounting system and the acceptance of “user primacy” principle. © 2012 Elsevier Ltd. All rights reserved.

1. Introduction Financial reporting for small and medium companies is a relevant topic for accounting studies because there is a wide debate on the application in smaller contexts of framework and rules derived from the larger companies or the necessity to develop new rules specific to smaller-sized companies (the so-called “differential reporting”). The need of specific accounting standards for small and medium companies has been matched by the IASB with a new standard, the IFRS for SMEs issued in July 2009. While some countries (such as South Africa and Brazil) have already endorsed the IFRS for SMEs, the European Commission is currently examining this standard and a final official position by the EU about its endorsement is expected in 2011. In this paper the IFRS for SME is analyzed from the perspective of both external users and preparers, based on the answers given by respondents to the official Questionnaire from the European Commission. We analyze the answers segmenting respondents based on their category (users/preparers) and on Country in order to understand if there is significant difference between users and preparers and the different European Countries. From a theoretical perspective this paper will offer arguments for the differential reporting debate, relevant topic not only for the EU context but also worldwide, considering the needs emerging from both users and preparers. Many authors deem the direct analysis of those ⁎ Corresponding author. E-mail addresses: [email protected] (A. Quagli), [email protected] (P. Paoloni). 0882-6110/$ – see front matter © 2012 Elsevier Ltd. All rights reserved. doi:10.1016/j.adiac.2012.03.003

needs as a relevant gap for accounting standard process (Di Pietra et al., 2008). From a public policy point of view, this analysis will be useful to test the homogeneity of the approach among the different subjects involved in the EU accounting system. Our results will be particularly interesting for the current debate developed around the EU accounting legal framework and its future change due to the substantial modification of accounting European Directives. As far as we know, this paper is the first study on the results of the Questionnaire on the public consultation of the IFRS for SMEs, promoted by the European Commission. Our results show that there is a strong difference between users and preparers and also between Countries as well, regarding the position toward the IFRS for the SMEs. This issue will represent a strong challenge for the European policy on accounting matters because it will force the European Regulator to choose a solution in conditions of substantial diversity of desired preferences among stakeholders. For accounting studies the result will be interesting in the light of the easy acceptance of the initial approach of users and where preparers demonstrate needs different from the users. First of all, it is important to take into consideration that in the European Context two opposite forces exert their influence around the debate of differential reporting. From one side, even if the IFRS for SME is designed for a worldwide application (mainly for Countries where national accounting systems are lacking), in the EU context the publication of IFRS for SME arrives when the European Union has planned a strong reduction of administrative burden for companies (European Commission, 2005). As demonstrated in a large survey (Gallup, 2007) for the EU context, a large part of firms feel an excessive

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burden in applying the system of rules developed by the European Commission. In this way, the IFRS for SME could find a good acceptance because they resemble a simplification of the full IFRS. On the other hand, the EU has for a longtime adopted some Directives to harmonize financial statements among the Member States. After the endorsement of full IFRS for publicly listed companies in 2002 and continuously updated Directives for national harmonized regulations, the adoption also of a third option, the IFRS for SME could generate excessive confusion at a macro-level of the whole accounting system for European companies. Having taken into account the above two premises, the evaluation about the standard that emerged from the Questionnaire is not unidirectional, depending on the starting point of comparison. If the operators judge the IFRS for SMEs using the lens of the full IFRS, a strong simplification is acknowledged. For those operators who express their opinions considering the current EU accounting system based on the IV and the VII Directives, the evaluation is quite different: the IFRS for SME seems still too complex and for the majority, unnecessary. 2. Technical features of IFRS for SMEs and structure of the EU Questionnaire In July 2009, the IASB published its IFRS for SME after a long consultation process that began in June 2004 with a Discussion Paper. This standard aims at giving an international complete set of accounting rules to companies that (a) do not have public accountability and (b) publish general-purpose financial statements for external users. The premise for this issue consists in the fact that the IFRS (here after “full” IFRS) are mainly addressed to satisfy the informative needs of sophisticated external users who operate in financial markets such as investors in equity and financial analysts. The full IFRS rules could be too complex for private companies characterized by a weaker financial information demand rising from external subjects. The simplification adopted in the standard for SME if compared to full IFRS is several and very relevant at different levels. First of all, some topics included in full IFRS are omitted, “because they are not relevant for typical SMEs”, such as segment reporting or interim reporting. Secondly, various accounting options allowed by full IFRS are not in the IFRS for SMEs such as revaluation model (IAS 16, IAS 38) for property, plant and equipment, intangible assets, and the possibility to choose cost model for investment property if a fair value exists. Apart from this, IASB intended to simplify some recognition and measurement topics. For example: 1. for goodwill and other intangibles with indefinite-life, the impairment process described in IAS 36 is not allowed, while a classic amortization is established (in a maximum of ten years if useful life cannot be estimated reliably); 2. borrowing costs must be recognized as expenses without increasing the cost of the linked asset (the opposite of the rule in the new IAS 23); 3. R&D costs must be recognized as expenses, differently from IAS 38 which allows the recognition of development costs as an asset under specified circumstances; 4. financial instruments are measured at amortized cost or at fair value through profit and loss instead of establishing the four different classes included in IAS 39; 5. the annual review of residual value, useful life and depreciation method of tangible and intangibles assets is not required; 6. there are many simplifications concerning the disclosure. In general, the IASB decided to eliminate from the IFRS for SMEs any reference to the full IFRS in such a way to make the standard as a “stand-alone standard”. It is important to underline also the IASB's commitment in avoiding for the IFRS for SMEs the frequent changes characterizing full IFRS and avoiding the use of IFRS for SMEs as anticipation of possible future changes in full IFRS.

The European Commission Questionnaire on the public consultation of the IFRS for SMEs took place between 17 November 2009 and 12 March 2010. The objective of this consultation was to gather the view of EU stakeholders of the IFRS for SMEs. It is made up of 12 Questions structured in three groups: (I) Initial reaction to the standard (from Q1 to Q4) with questions addressed to understand the overall position toward the new standard and the perceived benefits by users and preparers; (II) the possible use in Europe (from Q5 to Q9), with questions concerning the way through which EU should adopt the standard and the possibility to leave an option to the Member States; (III) the role and content of the Directives (from Q10 to Q12)1, in order to ask for possibilities to include some elements of the standard in the revised Directives.1 The responses are commented on by the EC in the “Summary Report of the Responses Received to the Commission's Consultation on the International Financial Reporting Standard for Small and Medium-Sized Entities”, hereafter, simply referred to as the “Summary”, (European Commission, 2010). The Summary is mainly based on the distinction between Member States in order to understand where the majority of responses from each Country are oriented and between lobbyists and EU wide organizations, which is a classification not relevant for our purposes. The classification using the categories of respondents (preparers, users, accountants and auditors, and public authorities) is included only in the annexes, with a further detail by Country even though it is not commented in the Summary. 3. Research questions and literature review We are interested to analyze in detail the responses to the Questionnaire trying to understand if the IFRS for SMEs is appreciated both by users and preparers. The starting hypothesis is that both the aforementioned categories should express a positive evaluation of the standard. Users are, by definition, the primary interest group acknowledged by IASB in setting standards. In this way we can presume that the IFRS for SMEs, after a long due process, satisfy their needs. Preparers should appreciate this new issue because it is promoted as a strong simplification of full IAS with less administrative and compliance costs required by its adoption. In order to achieve this, we exclude responses coming from different subjects (regulators, auditors), while the Summary doesn't separate respondents on the basis of their role. The second research question is to understand whether the Countries where the respondents operate influence the IFRS for SMEs evaluation. We analyze the answers grouping them by class of Country with a classification based on international accounting theory (Nobes, 1983). The evident disproportion of responses classified by Country (on a total of 15 Countries to which respondents belong), Germany alone is over 50% of the responses and from 10 States (there are only 3 or less responses), imposes to classify responses on a different basis than that one used by the Summary. The basic hypothesis is that a positive evaluation on the IFRS for SMEs will regard most of all the Anglo−Nordic respondents who are presumed favorable to the standard, due to their cultural tradition of great transparency in financial statements and of prevalence of substance over form. The remaining two classes, Germanspeaking and Latin respondents, are presumed to express a general negative view toward the IFRS for SMEs for the opposite reasons. Two streams of literature are relevant for our research questions. The first stream is directly referred to the IFRS for SME and its envisagement of users and preparers. The second one concerns the current level of understanding on users' information needs of SMEs' financial statements and the use of this consciousness in the standard setting process. Regarding the first one, there are still few studies concerning IFRS for SMEs, due to its very recent publication and the consequent lack of 1 The Questionnaire can be downloaded at http://ec.europa.eu/internal_market/ consultations/2009/ifrs_for_sme_en.htm.

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data from its application. The only existing studies concern some analysis of the consultation process used by IASB to reach a general acceptance about the IFRS for SMEs. In this case two studies (Paoloni, 2006; Schiebel, 2007), developed at different stages of the process, have demonstrated as the main result the low level of effective users' participation in the consultation process. While the explicit aim of this IFRS is to satisfy external users' information needs, the larger part of comment letters received during the process come from standardsetting agencies, audit firms and public institutions. There have been few contributions of preparers and fewer from users. Even if a certain involvement of qualified users not shown by comment letters could not be denied, especially during IASB meetings and presentations around the world. These numbers induced the aforementioned authors to raise the problem of a lack of an understanding by IASB of actual information demand toward SMEs' financial statements. The scarce participation of users with respect to the one of professionals is evidenced also by Di Pietra et al. (2008). Their analysis criticizes many aspects of the IFRS for SME (at that time in form of Exposure Draft), from the absence of a deeper study of user needs, to the inadequateness of the IFRS for SMEs Framework to catch the real aspects of the SMEs, from the lack of explanations concerning the simplification of approach used by IASB, to the absence of any reference to tax and legal problems. Eierle and Haller (2009) developed a survey asking the German SMEs for opinions about the main issues of the IFRS for SME Exposure Draft. They show how size influences the perceived benefits of the IFRS, because larger size implies a more sophisticated financial reporting environment in terms of number and diversity of users and of stakeholders structure. But a large part of their respondents don't see benefits coming from the international comparability of financial statements and the weak knowledge of IFRS demonstrated by smaller companies influence the capability to understand the real costs and benefits deriving from an IFRS adoption. These results are aligned with the results of Francis, Khurana, Martin, and Pereira (2008), who demonstrated how voluntary adoption of the IFRS is explained both by firm factors (foreign ownership, export activities, expected future growth, external finance) and Country factors (location in new developed Countries with high information asymmetries). From these studies emerges the evidence that not all the SMEs could really be interested in the IFRS for SMEs, depending on their size and their specific finance and operating peculiarities. With regard to the second stream of studies, the demand side of SME financial statements, there are many studies, both from professional associations and from academics, even if fragmented in terms of specific topics addressed. In fact, certain studies deal with the concept of “private” companies, very similar to that one used by IFRS in its IFRS for SME. Other studies use as field of research the “small-sized” companies, that is, the original concept of SME; there are also some contributions addressed at micro-entities, representing a further size-specific class of the SME system. In general, from professional associations rises the general impression (AICPA, 2005; Sian & Roberts, 2008) that the information demand for financial statements of SME needs additional study because of its difference from the one typical of publicly listed firms and from the lack of specific and systematic empirical research concerning the information demand for SME financial reporting. Both quoted positions (AICPA, 2005; Sian & Roberts, 2008) suggest a green-field policy, that is, they propose the issue of specific standards for SME without any reference or derivation to other standards more designed to satisfy the needs of operators active in financial public markets. These studies are also aligned in soliciting a strong simplification in accounting rules with much less options, a rigid structure of balance sheet and profit and loss (for which comprehensive income by AICPA (2005), is judged too sophisticated), more preferable for comparisons among companies. The above papers push toward the issue of specific rules for private companies, an innovative position for the U.S.A. where the

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obligation for public financial statements is posed only for publicly listed firms. On the other hand, US academics, whose position is condensed in AAA official paper (Botosan et al., 2006), believe that market forces will naturally drive the private companies' financial statements toward the characteristics more preferred by users. In effect, there are some factors exerting influence toward the issue of public financial statements: age, size, firm growth, limited liability, level of commercial debts, and number of owners, as demonstrated in a recent study based on US companies (Allee & Lombardi Yohn, 2009). Other studies are more focused on empirical research on users' needs, such as banks, which are the main users of SME's financial statements as demonstrated in many papers (Demartini, 2005; Jarvis, 1996; Page, 1984; Paoloni & Demartini, 1997; Sinnett & de Mesa Graziano, 2006). Usually banks demand very detailed information about financial conditions of SMEs and financial statements are not enough to satisfy their needs (Paolini et al., 2003). Banks want to know the different debt maturities, require very frequent cash flow statements, actual and prospective, and the disclosure of collaterals (Paolini et al., 2003; Sinnett & de Mesa Graziano, 2006). Banks are not interested in fair value method for assets evaluation and demand a strong comparison in terms of formal structure of financial prospects and substantial homogeneity of evaluation criteria; therefore many accounting options allowed by the rules are not appreciated. The information required varies especially for different kind of users (Cole, Branson, & Breesch, 2009). Suppliers (Corsi & Garzella, 2003) are very interested in indebtedness, average payment time while competitors use financial statements for comparisons. The demand from customers is the weakest in the competitive system. In general (Cole et al., 2009) the use of many financial statements for comparison is a practice used more for private companies than for publicly listed ones.

4. Sample reconciliation with the classification by the European commission and level of participation by Country According to the Summary, the Commission Services received 208 responses from 25 EU Member States and 4 non-EU Countries. Respondents were classified as preparers, users, public authorities and national accounting standard setters, accountants and auditors. The highest number of responses came from preparers (87, 41% of the respondents), followed (in descending order) by accountants and auditors (68, 33%), public authorities and national accounting standard setters (27, 13%) and users (26, 13%). Since our interest is focused only on preparers and users, we downloaded responses from the website and we used a careful classification considering not only the answers given by respondents and the classification made by EU in the website but also comparing the response with the real role (if a user or preparer or other) played by the respondent and derived from the analysis of its activity. 2 To do that, in many cases we derived useful information from the website of the respondent. In this way, in our classification there are 85 preparers and 25 users, with a light difference from official numbers given by EU. After excluding one non-EU user we dealt with the problem represented by the double roles. In four cases we found respondents registered themselves as users and preparers at the same time. We treated this ambiguity choosing the user as prevalent role and eliminating the other one (i.e. for a company running an infomediary activity we selected the role of user instead of preparer), even if we are conscious in some cases of an excess of reductionism. Our final classification is 81 preparers and 24 users. 2 http://circa.europa.eu/Public/irc/markt/markt_consultations/library?l=/ accounting/2010_consultation&vm=detailed&sb=Title.

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The lack of the detailed classification operated by the Commission prevents any possibility of a tight comparison with our classification. The reasons of different numbers for each class could be various. For example, in the website we can see four responses coming from Universities. They are classified as users. In our opinion scholars questionnaire participation has more reference to a general and institutional interest than attributable to a simple user. Another possible reason of diversity with the official classification is represented by the fact that we found classified in the website as preparers four responses given by accounting firms (in the detail wp.net e. V., GAAP.cz, s.r.o., G&G Associates Sàrl, AC CHRISTES & PARTNER GmbH). We excluded these responses from the number of preparers because they are representative of the wide category of accountants and auditors (even they can work in close support of original preparers). In the website is included the Spanish Business Register as public authority. In our view, this entity is better classified as user, because its function consists in receiving financial statements from companies and making them available to other external users. In a more analytic way, this entity could be classified in a sub-category of users consisting of infomediaries, intended as subjects whose aim is to support external users in gathering financial information. In other words, we tried to distinguish professional users and original preparers. Total numbers seem almost the same as the ones in the Summary official classification but the subjects included are in part different. Table 1 shows the list of Member States classified according to their category (users and preparers). We can see the impressive percentage of German respondents (53% in total) and in general by German-speaking Countries (Germany plus Austria are 61% of the respondents). On one side this high level of participation to the questionnaire is a signal of strong interest in the topic by those Countries; on the other side, this weight of responses harms the possibility to compare with the other Countries whose rate of responses is much less. The Summary for each question shows the number of Countries responding yes or no based on the majority of respondents. But this classification is too general, when it puts on the same level Countries representing more than half of the body of respondents and Countries with only one answer. If we use well-known classifications of national accounting systems (for example Nobes, 1983), we can observe the very low level of participation to the questionnaire by Anglo−Nordic Countries (Table 2). Summing up the UK, Netherlands, and Scandinavian responses (Anglo− Nordic Countries), we obtain only 10% of the respondents, where Continental countries have the large majority. Latin Countries

Table 2 Responses by Country group. Group

N

%

German-speaking Latin Anglo–Nordic Total

67 21 10 98

68.49% 21.40% 10.20% 100.00%

(France, Luxembourg, Belgium, Spain, Italy, Portugal, and Greece) represent 21% of the respondents. The analysis by category (users, preparers, and their subgroups) demonstrates the weak participation by users, even if the IFRS for SMEs like any other recent accounting standard, strongly declares the user primacy principle. Based on this principle financial statements are addressed toward users and the user decision usefulness is the leading criteria to proceed in the standard setting process. Analysts did not respond to the questionnaire, not surprising if we think of the IFRS for SME was addressed to non-listed companies. Banks represent the main user subgroups and other credit institutions (11 out of 24 users) and infomediaries included in the “other” subgroup. The participation of preparers is much larger: 81 respondents, the most of which are association representatives of national or regional category of companies. We counted 36 answers from single companies (15 small, 12 medium and 9 large). Finally, four respondents have not specified their role. If we compare these numbers of users and preparers (105) with the ones included in the Summary and referred to public institutions, standard setters and accounting and auditing firms (95), we can say that the participation to this questionnaire is a matter for consultants and regulators than operators directly involved in financial statements. 5. Results and analysis 5.1. General opinion on IFRS for SMEs The first question (Q1) concerns the general opinion about the suitability of IFRS for SMEs in the European context. There is a strong prevalence of disagreement (74 no, 27 yes) with the opportunity to adopt the IFRSs for SMEs. Comparing responses by Member State (Table 3), the Summary (Summary, 2010, p. 5) highlights that “The majority of respondents from 13 EU Member States (MS) (CY, CZ, DK, EE, EL, ES, IE, MT, NL, PL, PT, SE, UK) answered “yes” while the majority of respondents from other 8 MS (AT, BE, BG, DE, FI, FR, IT, SK) answered

Table 1 List of Respondents by Member State and by Category. Member State

No resp.

%

Germany EU Austria Spain UK Belgium Italy Luxembourg France Greece Denmark Netherlands Finland Portugal Sweden Poland Total

58 11 8 5 5 4 3 3 3 2 2 1 1 1 1 1 109

53.21% 10.09% 7.34% 4.59% 4.59% 3.67% 2.75% 2.75% 2.75% 1.83% 1.83% 0.92% 0.92% 0.92% 0.92% 0.92% 100.00%

Users

Preparers

Credit

Private

Other

Total

Small

Medium

Large

Organiz.

Other

Total

3 5 0 0 1 0 1 1 0 0 0 0 0 0 0 0 11

2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2

2 2 1 5 1 0 0 0 0 0 0 0 0 0 0 0 11

7 7 1 5 2 0 1 1 0 0 0 0 0 0 0 0 24

12 0 1 0 0 0 0 0 0 2 0 0 0 0 0 0 15

5 0 4 0 2 1 0 0 0 0 0 0 0 0 0 0 12

7 0 1 0 0 0 0 0 0 0 0 1 0 0 0 0 9

23 4 1 0 1 3 2 1 2 0 2 0 1 1 1 1 43

1 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 2

48 4 7 0 3 4 2 2 2 2 2 1 1 1 1 1 81

Not specified 3 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 4

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Table 3 General opinion of IFRS for SMEs (Q1) by Country. Do you think the IFRS for SMEs is suitable for widespread use within Europe? Member State

N

%

Yes

%

No

%

Don't know

%

No resp.

%

Germany EU Austria Spain UK Belgium Italy Luxembourg France Greece Denmark Netherlands Finland Portugal Sweden Poland Total

58 11 8 5 5 4 3 3 3 2 2 1 1 1 1 1 109

100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

7 5 1 4 1 1 0 1 0 2 2 1 0 1 1 0 27

12.1% 45.5% 12.5% 80.0% 20.0% 25.0% 0.0% 33.3% 0.0% 100.0% 100.0% 100.0% 0.0% 100.0% 100.0% 0.0%

50 5 5 1 1 3 3 2 2 0 0 0 1 0 0 1 74

86.2% 45.5% 62.5% 20.0% 20.0% 75.0% 100.0% 66.7% 66.7% 0.0% 0.0% 0.0% 100.0% 0.0% 0.0% 100.0%

1 1 1 0 2 0 0 0 0 0 0 0 0 0 0 0 5

1.7% 9.1% 12.5% 0.0% 40.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

0 0 1 0 1 0 0 0 1 0 0 0 0 0 0 0 3

0.0% 0.0% 12.5% 0.0% 20.0% 0.0% 0.0% 0.0% 33.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

“no” to this question”. But this observation could be misleading, if we see the number of responses. German-speaking Countries, with the high level of responses demonstrates a clear opposition to the IFRS for SME. Among Countries with at least 3 responses only Spain shows the majority of “yes” where almost all Spanish respondents are represented by infomediaries. Observed by category of respondents (Table 4), the orientation of user opinions (Table 4) is not clear with a light prevalence of yes (13 vs. 9 on a total of 24 responses). With reference to user subgroups, banks and other credit institutions, prevailingly against the IFRS for SME. The “other” subgroups are mainly constituted by infomediaries whose positive opinion toward the standard is clearly evident. For preparers, two thirds of respondents answer “no” to the question. In particular the same ratio (one third “yes” and the rest “no”) distinguishes small preparers. The main reason is represented by the persisting difficulty in applying the standard, which is too similar to the full IFRS, notwithstanding the recent effort to simplify the rules. It is difficult to interpret the difference between medium and large preparers. Medium companies are strongly oriented toward the standard (10 yes and 0 no) while large companies show the opposite preference (2 yes and 7 no). A possible reason may consist in the fact that large companies could see full IFRS as a real alternative. The difference between users (with a positive average valuation) and preparers (with a negative valuation) is significant at 0.05 (chi2 =6.8012, with 2 degrees of freedom). This fact in our opinion will bring the EU to a difficult choice, depending on the prevailing group of interest. Both groups have specific reasons to receive attention and their views are fundamentally different. This topic will be intensively discussed below. This result is coherent with the analysis of Anacoreta and Duarte Silva (2005) who observe how the comments sent to IASB to its Discussion Paper on SMEs Financial Reporting demonstrate a general positive agreement about the opportunity that a standard should be issued by the IASB. The comments to the Discussion Paper came essentially from users and standard-setting bodies and very few preparers. With the entrance of

the preparers in the EU Questionnaire, probably due to the perceived sensation of potential EU endorsement, general impression changed from positive to negative. With regard to Country groups (Table 5), we observe a significant difference at 0.01 (chi2 = 23.721 with 4 degrees of freedom) between Latin Countries and German-speaking Countries (opposite to suitability of the standard) and Anglo–Nordic Countries. The reasons are that both bring accounting and political diversity in the three contexts: the Latin and German Countries are more oriented toward an active role of EU and the maintenance of a “legal” value of financial statements while the Anglo–Nordic are more diffident toward EU and traditionally oriented to a strong informative role of financial statements. It is interesting to remark favorable respondents say “yes” always adding some comments and reservations in terms of persisting complexity, administrative burden, problems of linkage with tax accounting. In general, we can observe in many cases there are in substance limitations of a favorable evaluation only for large SMEs. On the contrary, the opponents are more committed to demonstrate severe limitations of the IFRS for SMEs. We can distinguish criticisms to the general IFRS for SMEs project and other “tactical” claims referred to more specific topics. As general oppositions, many respondents criticize the top–down approach used by IASB, as the idea of a simplification of full IFRS instead of promoting a new framework specific to non listed-companies. As one respondent affirms: “the main goal and need for this Standard was not to develop an SME standard but to offer a simplified set of rules to smaller companies being otherwise by law required to apply IFRS in full (often countries using the former IAS as their national set of accounting rules)”. These respondents affirm that in SMEs the user information needs are quite different from investors in listed companies. Other criticisms to the whole project concern the weak work of testing (only 116 companies tested worldwide) and the inevitable linkage always existing with the full IFRS (in terms of topic not addressed by the IFRS

Table 4 General opinion of IFRS for SMEs by category. Q1

Yes No Don't know No response Total

Users

Preparers

Credit

Private

Other

Total

Small

Medium

Large

Organiz.

Other

Total

5 5 0 1 11

0 2 0 0 2

8 2 0 1 11

12 10 0 2 24

5 10 0 0 15

10 0 2 0 12

2 7 0 0 9

7 33 3 0 43

0 2 0 0 2

24 52 5 0 81

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Table 5 General opinion on IFRS for SMEs (by Country group).

Table 7 Benefits of account comparability in running business?

Q1

German-speaking

Anglo–Nordic

Latin

Total

Yes No Don't know Total

8 53 2 63

5 2 2 9

9 11 0 20

22 66 4 92

for SMEs and future expected changes in correspondence with changes in full IFRS). Tactical criticisms mainly concern: 1. the excessive complexity for the small sized companies (both for preparation and for understanding), the problems with tax accounting, dividend policies and the lack of the capital maintenance concept, with a consequent negation of the “Think small first” and the “Only once information” principles; 2. the very limited utility of this standard only for companies engaged in international trade and activity; 3. the limited increase of comparability, or, for certain aspects, the decreasing of comparability. In many cases, opponents call for a direct commitment of the EU in developing a specific framework for SMEs, coherent with the European Small Business Act. The second part of Q1 requires specifying the size of companies more suitable for the adoption of IFRS for SMEs. The questionnaire returned only 26 answers (Table 6), showing, that in general opinion, this standard is more convenient for medium-large companies for the aforementioned reason of its deemed complexity. 5.2. Benefits for preparers and users A specific question addressed to preparers concerning benefits derivable from the increase of comparability (assumed implicitly as a consequence of the IFRS for SMEs adoption) is posed with the second part of Q2. Answers are not encouraging (Table 7). In fact, only 3 preparers (two small companies and one organization) agree with the affirmation of the questionnaire. The larger part (55) didn't answer while 21 respondents don't agree mainly with the justification that they operate at a local level in such a way as not to perceive real advantages of an improved financial reporting comparability. Many respondents affirm that comparability already exists under the European Directives and with the IFRS for SMEs comparability is damaged by the many accounting options. Apart from this, banks as typical users of SMEs financial statements don't appreciate the new standard. In respect to this presumed advantage, complexity and consequent adoption costs are the main disadvantages. Co-operative banks, which criticize the impossibility to adopt the standard because they are equalized to other banks, show specific oppositions; even their size and their operating scale should permit their envisagement as an SME. Users are requested in Q3 and in Q4 to evaluate, respectively, the utility of the IFRS for SMEs information compared to that one obtained Table 6 Size class indicated for more suitable adoption.

Yes No Don't know No response Total

Preparers Small

Medium

Large

Organiz.

Other

Total

2 3 1 9 15

0 5 1 6 12

0 6 0 3 9

1 5 0 37 43

0 2 0 0 2

3 21 2 55 81

Table 8 Utility of IFRS for SMEs compared to National GAAP. Q3

Yes No Don't know No response Total

Users

Total

Credit

Private

Other

1 7 1 2 11

0 0 0 2 2

3 3 0 5 11

4 10 1 9 24

by national GAAP and whether increased international comparability of accounts prepared under the IFRS for SMEs (assumed implicitly as output of the standard adoption) will benefit users. The results are shown in Tables 8 and 9. Concerning the utility, only four users agree while the majority (especially banks) demonstrates an opposite view. The question about comparability shows an unclear orientation: the “yes” and the “no” are similar. Taking into account these answers as a whole, responding users demonstrate no particular benefit expected form the IFRS for SMEs adoption, even if the declared aim of the standard is to satisfy their information needs. Many users affirm to be already able to analyze SMEs financial statements, even without the IFRS for SMEs. Two infomediaries comment the risk to reduce information in financial statements with the IFRS for SMEs, maybe in the light of the flexibility of balance sheet and income statement schemes. Toward the generality of stakeholders, some respondents criticize the impossibility to understand a too complex standard for non-specialists.

5.3. Relationships with legal European accounting framework The questions from Q5 to Q9 concern the possible relationship between the IFRS for SMEs and the European accounting framework. The matter is relevant with both substantial and formal issues. From the substantial point of view, there is a potential incompatibility between the standard and the Directives to be assessed. Even if the content of the IFRS for SMEs could be endorsed, in formal terms, many possible alternatives for the adoption rise such as: an inclusion of the standard directly in Directives, a freedom of choice given to the Member States, a modification of Directives to guarantee a substantial homogeneity with the IFRS for SMEs, a specification of a company size as threshold for an adoption.

Table 9 Does increased international comparability benefit users?

Size class indicated for benefits Small Small–medium Medium Medium–large Large All Other Total

Q2/2° part

1 2 2 6 5 2 8 26

Q4

Yes No Don't know No response Total

Users

Total

Credit

Private

Other

5 5 0 1 11

0 0 0 2 2

3 4 0 4 11

8 9 0 7 24

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153

Table 10 Adoption should be provided for within EU legal framework? By category. Q5

Yes No Don't know No response Total

Users

Preparers

Credit

Private

Other

Total

Small

Medium

Large

Organiz.

Other

Total

7 3 1 0 11

2 0 0 0 2

7 1 1 2 11

16 4 2 1 24

4 11 0 0 15

4 7 0 1 12

3 5 1 0 9

5 33 4 1 43

0 2 0 0 2

16 58 5 2 81

We only remark the large prevalence of respondents among Germanspeaking Countries who appreciate the Member State-level option, whereas in the other Countries there is a stronger demand of continental homogeneity. The favorable ones demonstrate in their comments that a Member State option could exist only for certain companies and only if there are specifications on how it should be implemented. Some people think that a voluntary selection by each Member State of the company class able to adopt the standard is necessary. Even though the option is judged useful for the application of IFRS for SMEs in Europe, some respondents affirm the definition of potential IFRS for SMEs adopters should be left to the discretion of national regulators who base their decisions on their company law and on economic policy. As an opposite argument, the Member State option makes the market less attractive for investors, forced to diversify their assessments. The option is contrary to harmonization and fragmentation of the internal market. Concerning opinions about other views on the possible adoption of the IFRS for SMEs within the EU accounting framework, required by the Questionnaire in Q7 only 2 users and 10 preparers answered. While some respondents want to attribute to the IFRS for SMEs the role to eliminate any difference among national States, others affirm the Member States should be able to integrate the IFRS for SMEs in their national accounting system but do not support mandatory use of IFRS for SMEs throughout the EU (and possibly only for large firms). Another possible way to adopt the IFRS for SMEs is to give companies, at EU level, an option to adopt the IFRS for SMEs, eventually with a specification for certain size classes. The topic is requested by Q8. Results show a strong difference between users and preparers (at 0.01 level, with a chi 2 = 10.69 and 2 degrees of freedom). Users oppose this option maybe because they request a high comparability and consequent homogeneity among various States while preparers are in general favorable (see Table 14). Considering Country groups (Table 15), we note an ever significant difference between Country groups (at 0.05 level, with a chi2 = 12.84 and 4 degrees of freedom), where German-speaking Countries are more favorable to this option than other groups. The motivations for the acceptance or the refusal of the companylevel option are the same but given from different perspectives: the favorable ones call for a bigger comparability having the starting point of different national regulations; the opponents think that the IFRS for SMEs applied only by some companies will reduce comparability inside the same Member State.

In general, the answers by respondents show all companies should stay within the scope of the Directives and all efforts toward further harmonization of the 4th and the 7th Directive should continue. Specifically regarding Question 5 on the adoption of the IFRS for SMEs within the EU accounting legal framework (see Table 10) there is a clear difference, significant at 0.001 (chi2 = 23.7) between users and preparers. The former ones are more oriented toward an affirmative answer (16 for and 4 against) while the other ones show a strong opposition (16 for and 58 against). The same significant difference (at 0.001 level, with a chi2 =24.93 and 4 degrees of freedom) is found by Country group with a strong opposition by German-speaking countries, a favorable opinion by Anglo– Nordic Countries and a mixed result for Latin Countries (see Table 11). Considering the comments, the respondents favorably agree because the adoption would only improve the comparability and thus facilitate trade within Europe. Moreover the adoption could reduce the accounting requirements for SMEs. The unfavorable responses, on the other hand, insist on topics such as the fact that the IFRS may only be adopted optionally and that the standard is too complicated for SMEs. In general, in the opinion of the respondents, further investigation on the real needs of the user is required because the IFRS for SMEs was carried out with a top–down approach. The ones in favor have no doubt the Directives contribute to the harmonization and there is no need for other regulations. Q6 concerns the opinion inherent in the opportunity to give to the single Member States the option of adopting the IFRs for SMEs, subordinated to a favorable answer to the previous question (Q5). There is a predominance of people who did not respond (53 out of 105), while the respondents are divided equally between favorable and opposite both for preparers and for users. In Tables 12 and 13, we synthesize results by category and by Country group. The scarce number of respondents inhibits any possibility to test for significant difference.

Table 11 Inclusion of adoption in EU legal framework? By Country group. Q5

German–speaking

Anglo–Nordic

Latin

Total

Yes No Don't know No response Only comment Total

8 50 4 1 1 64

7 1 1 1 0 10

9 9 0 2 0 20

24 60 6 3 1 94

Table 12 IFRS for SMEs option given to Member States (by category). Q6

Yes No Don't know No response Total

Users

Preparers

Credit

Private

Other

Total

Small

Medium

Large

Organiz.

Other

Total

6 3 1 1 11

0 0 0 2 2

2 6 0 3 11

8 9 1 6 24

1 3 0 11 15

5 2 0 5 12

3 1 0 5 9

7 9 2 25 43

0 1 0 1 2

16 16 2 47 81

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Table 13 IFRS for SMEs option given to Member States by Country group. Q6

German-speaking

Yes No Don't know No response Only comment Total

16 6 1 40 1 64

Anglo–Nordic

Table 15 IFRS for SMEs option given to companies. Latin

Total

3 6 0 1

1 10 0 9

10

20

20 22 1 50 1 94

Q8

Country group

Yes No Don't know No response Total

In relation to specific size categories in which to allow the company-level option, the answers show that the small–medium sized class is deemed as the more suitable (Table 16). When the Questionnaire asks what should be done if there is incompatibility between the Directives and IFRS, many respondents don't give any answer (47 out of 105 total, see Table 17). According to the larger part of respondents, there is a definite incompatibility between the existing Directives and the IFRS for SME in the area of disclosure requirements, while in the area of accounting and valuation requirements the incompatibility appears much less dramatic. Some respondents are much harder in their evaluation, rejecting any further adjustment of the EU Directives. They advocate the following reasons:

Total

German-speaking

Anglo–Nordic

Latin

36 22 2 4 64

8 1 0 1 10

5 14 0 1 20

49 37 2 6 94

Table 16 Size class indicated for company-level option.

1. there could be damage of the accounting harmonization pursued by the EU; 2. the increasing diversity and “ambiguity” of accounting methods, which are all in accordance with EU Directives, makes the Directives useless for the interpretation of specific accounting issues and the development of new methods; 3. subsequent revisions of the “IFRS for SMEs” will surely result in further conflicts and will cause a constant need for adaptation of EU Directives. It is to refuse the adoption of amendments for “IFRS for SMEs” into EU accounting laws for SMEs.

Q8a

Total

Small Small–medium Medium Medium–large Large All Other Only comments No response Total

7 19 1 4 4 6 13 15 36 105

the European accounting system. We can presume that the European Commission is interested in knowing if its role could be reduced to establish some general principles and leave to professional standard setters the task of defining detailed rules. Secondly, the European Commission asks for specific elements to be included in the next Directive revision. Question 10 concerns the need for “rules-based” Accounting Directives in the future light of the publication of the IFRS for SMEs. The answers given show a strong difference between users and preparers (Table 18). Preparers want a rule-based approach instead of users who seem to prefer a principle-based approach. The difference is significant at 0.05 level (chi2 with 2 degree of freedom = 13.68). Difference based on Country group (Table 19) is significant too (at 0.01 level chi 2 with 2 degree of freedom = 25.67). German-speaking Countries and Latin Countries seem to prefer a rule-based approach, diversely from Anglo–Nordic Countries, more oriented toward a principle approach. This result could be influenced by the accounting tradition: the Code law Countries are used to rule-based approach, applying rigid schemes for financial statements with evaluation criteria well defined. Anglo–Nordic Countries are more oriented toward a principle-based approach, with a lighter role of formal rules. The size preferred in order to apply the rules based approach is the larger one, as shown in Table 20. Considering comments on the question about the rule or principleapproach of the Directives, we were impressed by the divergence of opinion regarding the starting point itself. In the opinion of some respondents, European Directive is currently rule-based (see example comments of Suma, Confederation of Danish Industry); according to other respondents (e.g. Unizo, Rudolph Fuchs), they are principle-based.

As general recommendation, respondents support a further development of the EU Directives that makes them an accounting framework, which is applicable, independently from IFRS and the “IFRS for SMEs”. We remember the EU Commission Services are still working with EFRAG and other experts to analyze whether there are material differences between the Accounting Directives and the IFRS for SMEs, which could result in companies being precluded from adopting the Standard. In the EU, companies could nevertheless prepare their accounts according to IFRS for SMEs on a voluntary basis in addition to statutory accounts prepared in accordance with the Directives. 5.4. The role and content of the Directives The last part of the Questionnaire doesn't regard the IFRS for SMEs but the Directives, object of a near future revision. First of all the European Commission wants to know whether to maintain the same general approach (rule-based, instead of principlebased) in the Directives. The question is justified by the increasing acceptance of rules developed by the IASB and gradually endorsed in

Table 14 IFRS for SMEs option given to companies by category. Q8

Yes No Don't know No response Total

Users

Preparers

Credit

Private

Other

Total

Small

3 7 1 0 11

1 0 0 1 2

2 7 0 2 11

6 14 1 3 24

14 0 0 1 15

Medium 9 3 0 12

Large

Organiz.

Other

Total

4 2 2 1 9

18 13 1 1 43

1 1 0 0 2

46 19 3 3 81

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155

Table 17 Proposals in case of incompatibility between Directives and IFRS for SMEs by category. Q9

Users

Responded No response Total

Preparers

Credit

Private

Other

Total

Small

Medium

Large

Organiz.

Other

Total

7 4 11

1 1 2

7 4 11

15 9 24

3 12 15

4 8 12

4 5 9

29 14 43

2 0 2

42 39 81

Table 18 Need for “rules-based” accounting Directives in future by category. Q10/1° part

Preparers

Users

Total

Yes No Don't know No response Total

44 20 8 9 81

5 14 1 4 24

49 34 9 13 105

It obviously depends on specific perspectives: people who want more flexibility interpret the Directives as rules-based; the others as principlebased. Taken together the responses to Q10 and Q11, in general an appreciation of the role until now played by Directives in European accounting harmonization emerges and there is consensus in nondeepening of the rules in the Directives. Many respondents would like the Directives as a corpus of principles, leaving to single Member States the detailed rules and the possibility to adopt in national legislation the IFRS for SMEs. No respondent calls for the direct inclusion of the IFRS for SMEs rules in the Directives; at the maximum, Directives should include only specific principles for SME. Another interesting and hot topic is the need of a European Framework as the main worldwide standard setters are already made. According to the respondents who evaluate the current state of Directives as a “patchwork” stratified in many interventions since the Seventies, a framework is the right answer for the need of a logical order. Regarding Q12, there is a lot of specific suggestions for the content of Directives, many of which are driven by particular interest (e.g., distinction between equity and liability for cooperatives, need to maintain good information detail for infomediaries, and so on). There are also political invitations to reduce the influence of the IASB's role in conditioning European accounting rules, trying to empower the role of EFRAG or the constitution of a specific organism dedicated to the SME accounting problems (similar to the US Private Company Financial Reporting). 5.5. General opinion toward IFRS for SMEs The analysis clearly demonstrates some important results: 1. there are strong and significant differences between users and preparers. Users are more favorable to the IFRS for SMEs and they would like to include this standard in the EU accounting legal system, without options given to single companies. They prefer a principle-based approach for the Directives. Preparers demonstrate a bigger participation to the Questionnaire, evaluation is not

suitable for the IFRS for SMEs, and they don't want an inclusion of this Standard in the EU directives, even if they appreciate, at least, the company-level option given by the EU. 2. there are strong and significant differences between Country groups. German speaking and Latin Countries are generally against the IFRS for SMEs and its inclusion in the EU accounting framework. At least, if a European endorsement has to be done, they are favorable to a non-mandatory way (option to adopt IFRS for SMEs at Country and company level). These Countries generally prefer a rule-based approach for the Directives in line with the Code law tradition. The participation of German speaking Countries to the Questionnaire is dominant on the other Countries, demonstrating a strong need to oppose this standard. 3. taken the respondents as a whole, the problems induced by the standard clearly overcome the benefits: the complexity for smallmedium sized companies is deemed excessive, as a simplification of full IFRS, still too close to investors than to banks and other typical SMEs stakeholders. Problems with tax and dividend rules are felt by a large number of participants. Also a better comparability is not foregone: the existence of some accounting options and the risk of allowing the IFRS for SMEs on a voluntary basis (for a Country or for single companies) could reduce comparability at a system level. Another point concerns the behavior of the European Commission, as we can observe it in the Questionnaire and in the Summary of responses. The Summary does not deal directly with the expression of the general preference toward the IFRS for SME. It limits the analysis in showing percentages of “yes” and “no”. The only distinctions used concern the difference between lobbying respondents and EU wide organizations and the number of Countries with prevalence of “yes” and “no”. We think these classifications are useless. The first is a technical matter concerning the relationships with European Commission, while the second is quite wrong if we take a look at the strong difference in number of respondents by Country, and the “weight” (economic, political, etc.) of the specific Country as well. We don't know if this way of analyzing the answers is instrumental to a specific aim. Some doubts exist, especially if we look at the general prevalence of respondents' opposition to IFRS for SMEs not appearing represented in the Summary, where the first data show that 13 Member States vs. 11 are favorable to the standard. 6. Limitations and implications for further research The limitations of this study concern some methodological issues. First, in an open questionnaire there is a risk of self-selection bias of Table 20 Size class indicated for rules-based approach.

Table 19 Need for “rules-based” Directives. Q10/1°

Yes No Don't know Total

Country category

Total

German-speaking

Anglo–Nordic

Latin

43 6 8 57

1 6 0 7

10 8 0 18

54 20 8 82

Size class

Responses

Small Small–medium Medium Medium–large Large All No response Total

2 2 0 4 26 9 43 105

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the respondents (e.g. opposite people are the most likely participants to the questionnaire). Second, numbers of respondents are not so high (we use 24 users and 81 preparers) and we attribute the same weight to association representing a large numbers of respondents and single entities. Concerning theoretical implications, our study confirms some impressions contained in SME financial reporting literature. There is a confirmation of weak participation of the users as noted at the first stages of the IFRS for SMEs setting process (Paoloni, 2006; Schiebel, 2007), even though they are the stakeholders whose needs are addressed by the standard itself. Moreover, the above analysis of comments given by users demonstrates that the IFRS for SMEs has not until now succeeded in satisfying the user needs, enforcing doubts cast by some scholars on the real understanding of the user world (Durocher & Gendron, 2011; Young, 2006), especially if referred to SMEs' financial reporting (Di Pietra et al., 2008). Respondents call for a SME financial reporting framework, as solicited by several scholars and practitioners (AICPA, 2005; Di Pietra et al., 2008; Sinnett & de Mesa Graziano, 2006). The differences among Countries theorized by international accounting literature (Nobes, 1983) are confirmed as well by our analysis: accounting culture and economic environment seem very relevant in differentiating the answers with German-speaking and Latin Countries from one side and Anglo–Nordic from the other side. As an element of progress, our study poses to theory the relevant challenge originated by different views between preparers and users. According to the “user primacy” principle, no match should exist and user perspective should be preferred in standard setting process and its consequent endorsement. The case of SMEs financial reporting is an environment too particular for the aseptic use of the classic “user primacy” perspective. First, in practical terms, the main users of a SME financial statement are banks which have a great power to acquire any other detailed information they want from the SME, even if not included in the registered financial reports. Second, SMEs accounting standard, such as the IFRS for SMEs, rise with the declared goal to reduce the administrative charges for the preparers, so it is implicit the search of an equilibrium between user need satisfaction and preparers real capabilities to develop a suitable financial reporting. This equilibrium seems far from being found. Accounting theory, in our opinion, has to produce more efforts to develop an accounting framework more comprehensive, where preparers and not only users, are taken in account to define the objectives of financial reporting. This last point concerns also public policy issues. EU Commission will have to decide in a few months the endorsement of the IFRS for SMEs and a subtle equilibrium between user need satisfaction and preparer perspective have to be searched for. This is the most relevant public policy issue that emerged in our study. There are other challenges to EU Commission posed by the respondents. First, we have demonstrated a strong fracture between different groups of EU Countries concerning the appreciation of the IFRS for SMEs, reflecting a more general problem of intra-EU alignment, very evident also in other, non accounting, domains. Finally, many respondents call for a new accounting strategy, 30 years after the first harmonization. There is a strong need of an European accounting framework, not conditioned by other “private” frameworks, considering the specifics of both public and non public companies, and careful to the peculiarities of the company size. In this

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