Question

For there to ever be standardisation the USA will need to adopt IFRS. Do you think it is likely that the USA will adopt IFRS? what are some of the factors that are working for and against this aim?

Answer 1

ANSWER(1)

The International Accounting Standards Board (IASB) has achieved “almost” worldwide acceptance and adoption of its precious and hard-delivered (that is, more than 30 years in the making) “baby”—International Financial Reporting Standards (IFRS), a comprehensive set of financial reporting standards. However, that “almost” is a very significant one: the US, the largest capital market in the world, is still reluctant to fully incorporate IFRS into its financial reporting system, despite the recognition of IFRS on all continents during the last ten years.

It has been announced many times on the both sides of the Atlantic that the goal of the key standard setters is to achieve a single set of globally accepted standards. Therefore, I find it really strange that after at least 13 years of hard work (even if only counting from the formal 2002 IASB/FASB Norwalk Memorandum), by the world’s best accounting minds, there is still no sign as to when (if ever) the IFRS-US Generally Accepted Accounting Principles (GAAP) convergence will take place. Yet, there is no lack of public statements by the US Securities and Exchange Commission (SEC) and its staff expressing the view that a single set of international accounting standards should be developed and accepted by everybody. Most recently, the SEC’s Strategic Plan for Fiscal Years 2014–2018 stressed that “the SEC will continue to promote the establishment of high-quality accounting standards in order to meet the needs of investors. Due to the increasingly global nature of capital markets, the agency will work to promote higher quality financial reporting worldwide and will consider, among other things, whether a single set of high-quality global accounting standards is achievable.” But the reality today—though all the joint IASB/US Financial Accounting Standards Board (FASB) projects are complete or nearing their completion—is that the convergence of IFRS and US GAAP has not been achieved.

Is it time for us to admit that the “single set” objective is not practical or achievable in the foreseeable future? Unfortunately, the most likely answer seems to be “yes.” In this opinion article, I will describe and analyze what I regard as the three major factors that seem to be preventing IFRS from becoming a financial reporting framework for US domestic issuers.

FACTORS:-

Since the International Financial Reporting Standards (IFRS) for small and medium entities (SMEs) was issued in 2009 for SMEs that do not require public accountability, by the International Accounting Standards Board (IASB), 85 countries have required or permitted its use for SMEs’ financial reporting. However, several countries have not adopted or have rejected its adoption (IASB, 2009a, IASB, 2016, IASB, 2017). As well as the effects of the adoption of IFRS for SMEs on the quality of financial reporting, it is important to know the institutional characteristics of countries that adopt the standard. Since IFRS for SMEs is not mandatory, the contribution of countries’ institutional characteristics to its adoption becomes an important issue.

SMEs represent more than 95 percent of companies worldwide and account for more than 65 percent of employment (IASB, 2009a, IFAC, 2010). SMEs make a great contribution to job creation, technological innovation and economic output both for developed and developing countries (Chen, 2006). For instance, in Europe, SMEs accounted for 67% of total employment in 2010 and in the period 2002–2010 SMEs created 85% of the new jobs in the European Union (EU) (European Commission, 2012). Besides, SMEs represent 99.8% of non-financial companies and generate 57.4% of value added (European Commission, 2016). In the case of Asia-Pacific Economic Cooperation (APEC) countries, SMEs are the main businesses, the largest employers and their contribution to economic output is significant (APEC, 2009).

In view of the importance of SMEs and the use of IFRS for SMEs in so many countries, the main objective of this study is to analyze whether there is a relationship between institutional factors and the adoption of IFRS for SMEs. This may help answer the question of why a country has adopted IFRS for SMEs.

Before the IASB issued IFRS for SMEs, countries adopted either their own national financial accounting standards or full IFRS for SMEs. The IASB believes that adopting IFRS for SMEs enhances SMEs’ access to international finance through harmonized and high quality financial information (IASB, 2009a). IFRS for SMEs is based on full IFRS with modifications reflecting the needs of those using SMEs’ financial statements and cost-benefit considerations (IASB, 2015). IFRS for SMEs is a stand-alone document with 5 sections, with a significantly reduced number of disclosures of around 300, compared to the full IFRS of 3000 disclosures and with reduced guidance (Perera & Chand, 2015). However, the IASB does not have any member with a SMEs background and the major comments about the new standard did not come from users. This is an issue since it may not fulfil the needs of users, and access to international funds is a very remote possibility, especially for micro, small and medium-sized enterprises (Perera & Chand, 2015). The main perception of users is that IFRS for SMEs is too similar to the full IFRS (Quagli & Paoloni, 2012), but full IFRS are a set of complex, onerous and costly standards for SMEs (Perera & Chand, 2015).

The issue of a set of macroeconomic factors influencing accounting standards and practices in a country has already been studied (Anghel, 2013, Elliot and Elliot, 2013, Gray and Radebaugh, 2002, Nobes and Parker, 2000, Nobes, 1998). Several studies analyze the macroeconomic factors influencing their adoption for the consolidated financial statements of listed companies (Archambault and Archambault, 2009, Clements et al., 2010, Hope et al., 2006, Lasmin, 2011, Ramanna and Sletten, 2014, Ritsumeikan, 2011, Shima and Yang, 2012, Zeghal and Mhedhbi, 2006, Zehri and Chouaibi, 2013). However, as far as we know, only Kaya and Koch (2015) study IFRS for SMEs by analysing the relation of macroeconomic factors with adoption at a country level. Most studies on IFRS for SMEs are about stakeholders’ perception of the costs and benefits of adoption (Albu et al., 2013, Kılıç et al., 2014, Litjens and Bissessur, 2012, Uyar and Güngörmüş, 2013). Kaya and Koch (2015) study countries that have adopted IFRS for SMEs in 2013 and concluded that countries most likely to adopt IFRS for SMEs are those not capable of issuing their own set of financial accounting standards, those where full IFRS are applied for non-listed companies and those with a relatively low quality of governance institutions.

One important motivation is the lack of studies on adoption of IFRS for SMEs. It is important to study adoption of IFRS for SMEs for private companies that issue individual financial statements. Another motivation is to highlight the factors that could influence the adoption of IFRS for SMEs at a country level and not just at a microeconomic level. Besides, since IFRS for SMEs is not mandatory according to any supranational organization, the contribution of countries’ institutional characteristics to their adoption becomes an important issue to study.

Our sample includes 84 countries that have and have not adopted IFRS for SMEs at the end of 2015. We use a logit regression to examine whether institutional factors influence a country's decision to adopt IFRS for SMEs. We obtain information on the adoption status of each country from the IASB profile webpage (for instance, if the country has or has not adopted IFRS for SMEs and which set of accounting standards are in use). We study the following institutional factors: education, the availability of a national set of financial accounting standards for SMEs, familiarity with IFRS, legal system, foreign aid, quality of the national financial accounting standards and the relationship between accounting standards and tax rules. We could add more institutional factors, but as pointed out by Isidro, Nanda, and Wysocki (2016), adding more factors adds little incremental explanatory power. We expected that countries are more likely to adopt IFRS for SMEs if they have a higher education level, have no national set of financial accounting standards for SMEs, are more familiar with the application of IASB standards, have a common law legal system, are subject to a foreign aid programme, have a lower quality of national financial accounting standards and have a weak relationship between accounting and taxation. We also perform several robustness tests, for instance, measuring differently some of the independent variables.

The main results indicate that a country is more likely to adopt IFRS for SMEs if it has no specific set of national financial accounting standards, if the legal system is common law and if it has more experience and familiarity with using IFRS. However, there is no evidence that the education level, foreign aid, quality of the national financial accounting standards and the relationship between accounting and taxation is related with the decision to adopt IFRS for SMEs. Because the European Union (EU) has not adopted IFRS for SMEs, unlike adoption of full IFRS, we study the influence of a country being a member of the EU. We find that those countries are less likely to adopt IFRS for SMEs, mainly because it would be necessary to make major changes in IFRS for SMEs to comply with the accounting directive (Kaya & Koch, 2015).

This study makes several contributions. One contribution is that we show that macroeconomic factors can influence the adoption of IFRS by SMEs. Another contribution is that we extend the results of Kaya and Koch (2015), regarding the year of study and the variables used. Moreover, the study includes many developed and developing countries, with many similarities, compared to studying full IFRS, due to the type of companies (small ones, preparing mainly individual financial statements, without complex transactions and organizational structures and non-listed). Understanding whether institutional factors are associated with the adoption of IFRS for SMEs is useful not only for researchers but also for accounting standards setters, governments, financial market regulators, investors, preparers, and most importantly, for the IASB, which can use our findings to promote more effectively the adoption of IFRS for SMEs, or even change the standard.

The remainder of the paper is organized as follows. Section two presents a literature review and hypotheses. The third section presents the sample and the regression model. The fourth section discusses the results. The fifth section presents the conclusions and the limitations of the study.

Literature review and development of hypotheses

Because of the growing internationalization of economic trade and globalization of businesses and financial markets, national financial accounting standards could no longer satisfy the needs of users (Barth, 2008, Judge et al., 2010Kılıç et al., 2014, Zeghal and Mhedhbi, 2006). The importance of having a harmonized set of accounting standards not only for listed companies but also for non-listed ones has grown, and therefore the IASB developed, besides full IFRS, the IFRS for SMEs. The project began in 2003 and IFRS for SMEs was published on 9 July 2009. IASB thinks that as IFRS for SMEs harmonizes and enhances the quality of financial statements, this will facilitate access to international finance (IASB, 2009a).

Francis, Khurana, Martin, and Pereira (2008) find evidence that microeconomic and macroeconomic factors influence the company's voluntary adoption. They show that microeconomic factors are more important than macroeconomic ones in developed countries and the opposite occurs in developing countries. This conclusion can reduce the strength of the influence of institutional factors on adoption of IFRS for SMEs (or full IFRS) when the study includes both developed and developing countries, but only when that option is available. However, the adoption of IFRS for SMEs could be used as a mechanism to reduce conflicts of interest between tax authorities and creditors and SMEs management (Kolsi & Zehri, 2013). Coercive isomorphism as a mechanism to support institutional isomorphism can help to explain adoption of IFRS for SMEs, by the formal or informal pressure to adopt by some organizations (Judge et al., 2010, Kossentini and Othman, 2014). Another form of isomorphism is normative isomorphism, which refers to collective values that standardize thoughts within institutional environments, and this could lead accounting professionals to put pressure in favour of adopting IFRS for SMEs (Judge et al., 2010, Kossentini and Othman, 2014).

Macroeconomic factors affect and explain accounting practices, and these include the history of a colonial country, the stage of its economic development, financial system, political system, legal system, educational system and culture, among other factors (Anghel, 2013, Elliot and Elliot, 2013, Gray and Radebaugh, 2002, Nobes and Parker, 2000, Nobes, 1998). For Alhashim and Arpan (1992), the most important factors influencing accounting are economic, social, the legal system, culture and political system. Here, several studies focus on the microeconomic factors related to firm characteristics that affect adoption of IFRS (Affes and Callimaci, 2007, Francis et al., 2008, Leuz and Verrecchia, 2000, Murphy, 1999), while others focus on macroeconomic factors that could be determinants of IFRS adoption (Archambault and Archambault, 2009, Clements et al., 2010, Hope et al., 2006, Lasmin, 2011, Ramanna and Sletten, 2014, Shima and Yang, 2012, Zeghal and Mhedhbi, 2006, Zehri and Chouaibi, 2013).

Based on previous studies about the determinant factors of IFRS adoption and on the specificities of IFRS for SMEs, the factors chosen are education level, the availability of a national set of financial accounting standards for SMEs, familiarity with IFRS, the legal system, foreign aid, the quality of national financial accounting standards and the relationship between accounting standards and tax rules (Archambault and Archambault, 2009, Delcoure and Huff, 2015, Felski, 2015, Johnson, 2011, Judge et al., 2010, Kaya and Koch, 2015, Kolsi and Zehri, 2013, Kossentini and Othman, 2014, Lasmin, 2011, Ramanna and Sletten, 2009, Shima and Yang, 2012, Zeghal and Mhedhbi, 2006, Zehri and Chouaibi, 2013).

Education level

Germon, Meek and Mueller (1987) found a positive relationship between education level and the competence of accountants, and Radebaugh (1975) and Mueller (1968) revealed the influence of education level on accounting practices. Financial accounting standards are less developed when accountants have little experience and knowledge of complex accounting issues, and if the professional body is developed and strong it is more likely to develop a sophisticated and rigorous set of financial accounting standards (Ding, Hope, Jeanjean & Stolowy, 2007). Indeed, accountants’ lack of training in applying IFRS for SMEs is one of the main obstacles to implementing the standard (Albu et al., 2013, Albu et al., 2014Kılıç et al., 2014, Perera and Chand, 2015, Roberts and Sian, 2006, Uyar and Güngörmüş, 2013). Besides, the preparers of European countries say that IFRS for SMEs is not suitable in a European context because of the difficulty in applying the standard, since it is too similar to the full IFRS despite efforts to simplify it (Quagli & Paolini, 2012). Full IFRS are very complex and require deep knowledge not only of accounting but also of finance (Zehri & Chouaibi, 2013). Education level could be used as a proxy for normative isomorphism, this being a mechanism that supports institutional isomorphism (Judge et al., 2010, Kossentini and Othman, 2014).

Although there is no specific measure of accountants’ level of knowledge (Judge et al., 2010), Carus (2002) and Choi and Meek (2008) showed a relationship between education level and accountants’ expertise, and this is used by Archambault and Archambault (2009), Shima and Yang (2012) and Zeghal and Mhedhbi (2006) in their studies of the influence of macroeconomic factors on adoption of full IFRS.

We expect that countries with more education are more likely to adopt IFRS for SMEs, because preparers of financial statements and stakeholders will be able to read, understand and apply IFRS for SMEs. This is shown for full IFRS adoption by Archambault and Archambault (2009), Judge et al. (2010) and Shima and Yang (2012) and in the case of developing countries by Kolsi and Zehri (2013), Zeghal and Mhedhbi (2006) and Zehri and Chouaibi (2013). However, in the only study of IFRS for SMEs, no relationship is found between education level and the likelihood of adopting IFRS for SMEs (Kaya & Koch, 2015). Thus, the first hypothesis is:

H1

Countries with higher education levels are more likely to adopt IFRS for SMEs.

National set of financial accounting standards for SMEs

Issuing IFRS for SMEs was the IASB's answer to countries that were looking for a simplified version of the full IFRS (Jermakowicz & Epstein, 2010), mainly countries which did not have an accounting system for those companies and therefore could adopt that financial accounting standard without incurring costs in developing their own standards (Chua and Taylor, 2008, Irvine, 2008, Pacter, 2009) and considering full IFRS adoption too complex for SMEs (Dang-Duc, 2011, IASB, 2009a, Quagli and Paoloni, 2012, Tyrrall et al., 2007). In EU countries, companies have to prepare at least individual financial statements in accordance with the accounting directives (the fourth and seventh ones), IFRS for SMEs being optional. Moreover, IFRS for SMEs does not serve the objective of reducing the administrative burden and it is incompatible with the accounting directives. Besides, in some countries financial accounting is used for tax purposes and dividends (Quagli & Paolini, 2012). For example, countries such as Lebanon, Slovakia, Austria and Russia think that SMEs should prepare financial statements for tax purposes (Perera & Chand, 2015). All these could imply changing the law or even changing IFRS for SMEs.

Thus, we expect that countries without their own set of financial accounting standards for SMEs are more likely to adopt IFRS for SMEs. Chamisa (2000) found that countries are less likely to adopt the financial accounting standards of another country, and countries with their own national financial accounting standards would be less likely to adopt another set of standards because they may lose their power in establishing standards (Johnson, 2011, Kaya and Koch, 2015). Therefore, the following hypothesis is:

H2

Countries without a national set of financial accounting standards for SMEs are more likely to adopt IFRS for SMEs.

Familiarity with IFRS

Both full IFRS and IFRS for SMEs are principles based, IFRS for SMEs being a simplified version of the full IFRS. Even if IFRS for SMEs is less complex than full IFRS, it is still too complex for SMEs (Perera & Chand, 2015***). Therefore, we can conclude that countries that have adopted full IFRS are more experienced and familiar with implementing IFRS for SMEs. For instance Hong Kong, Malaysia, Chile and Uruguay have adopted IFRS for SMEs, but with a few modifications, and they also use full IFRS for listed companies. On the other hand, Bolivia, China, Egypt, Indonesia, India and Japan have adopted neither full IFRS nor IFRS for SMEs. This could lead us to expect that countries that do not have any familiarity with full IFRS will be less likely to adopt IFRS for SMEs. It is the first time this factor has been studied, and the third hypothesis is:

H3

Countries more familiar with applying IASB standards are more likely to adopt IFRS for SMEs.

Legal system

Being part of a certain group of countries is a factor that can influence an accounting system (Nobes, 1998). Legal systems are divided in common law and code law and this is a factor influencing countries’ accounting standards (Doupnik and Slater, 1995, Nobes, 1983). The common law system is based on English law and is shaped by precedents from judicial decisions (including the United Kingdom (UK) and its former colonies such as the United States (US), Canada, Australia, and India). The main governance model is the financial market, the main users of financial accounting data are investors and creditors and the State is not a privileged user. The code law system originated in Roman law, using statutes and comprehensive codes (including France, Germany, Belgium, Luxembourg, Portugal, Spain, Netherlands, Italy; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1998). The main users of financial accounting figures are creditors and the State is greatly involved in the process of setting standards. In particular, banks are the main creditors. The IFRS are the result of the common law legal system (Botzem & Quack, 2009), and this could influence IFRS adoption, as corroborated by the findings of Felski (2015), Kolsi and Zehri (2013) Kossentini and Othman (2014), Shima and Yang (2012) and Zehri and Chouaibi (2013). However, Hope et al. (2006) did not find any influence of the legal system on IFRS adoption. Kaya and Koch (2015) find the same influence of the legal system on adoption of IFRS for SMEs. Hence, our fourth hypothesis is:

H4

Countries with a common law legal system are more likely to adopt IFRS for SMEs.

Foreign aid

The World Bank and the International Monetary Fund (IMF) help developing countries with financing difficulties by lending money, and providing technical and training support in applying the best practices in several areas, namely in financial reporting (Irvine, 2008, Neu and Gomez, 2006, Neu and Ocampo, 2007). The World Bank emphasises the importance of financial reporting in its development strategy for better financial markets and accountability (Kaya & Koch, 2015). One of the long-term benefits of adopting IFRS for SMEs is better lending conditions from the IMF and the World Bank (Gordon, Loeb, & Zhu, 2012). As IASB financial accounting standards are known worldwide, countries subject to a foreign aid programme have an incentive to adopt them (Mir & Rahaman, 2005). Romania, Jordan, Egypt, Kazakhstan, Pakistan and Zimbabwe are just a few examples of countries that the World Bank, the IMF, the Organisation for Economic Co-operation and Development (OECD) or the Asian Development Bank (ADB) demanded IFRS adoption for lending money (Al-Akra et al., 2009, Albu et al., 2011, Ashraf and Ghani, 2005, Chamisa, 2000, Hassan, 2008, Mir and Rahaman, 2005, Tyrrall et al., 2007). The World Bank Reports on the Observance of Standards and Codes (ROSC) in Bosnia and Herzegovina (2010), Mauritius (2011) and Slovenia (2014) recommend the use of IFRS for SMEs. Foreign aid can be seen as a proxy for coercive isomorphism, which is one mechanism of institutional isomorphism (Judge et al., 2010, Kossentini and Othman, 2014). Judge et al. (2010), Kossentini and Othman (2014) and Lasmin (2011) showed the positive influence of foreign aid on full IFRS adoption. However Ramanna and Sletten (2014) and Kaya and Koch (2015) did not find any evidence of that influence, and Archambault and Archambault (2009) found a negative influence of foreign aid on full IFRS adoption. These mixed results lead us to the fifth hypothesis:

H5

Countries subject to a foreign aid programme are more likely to adopt IFRS for SMEs.

Quality of national financial accounting standards

The objective of changing the set of financial accounting standards is to improve financial reporting (Daske & Gebhardt, 2006). Knowing this, Ramanna and Sletten (2009) and Kaya and Koch (2015) show that in countries where the quality of financial accounting standards is high IFRS adoption is less likely, since the cost of changing is high. Examples of countries with high quality national financial accounting standards are Australia, France, Germany, Canada and the US, and these have not so far adopted IFRS for SMEs (Perera & Chand, 2015). Since the main users of SMEs’ financial reporting are the government and banks, managers do not like to allocate resources to the accounting system, and the latter are not satisfied with the quality of financial reporting. Albu et al. (2013) find evidence for the Czech Republic, Hungary, Romania and Turkey, and Kılıç et al. (2014) for Turkey, that adoption of IFRS for SMEs would improve the transparency and quality of accounting information. Thus the sixth hypothesis is:

H6

Countries with high quality national financial accounting standards are less likely to adopt IFRS for SMEs.

Relationship between accounting standards and tax rules

In several countries the main user of SMEs’ financial reporting is considered to be the tax authority (Al-Akra et al., 2009, Albu et al., 2013, Albu et al., 2014, Albu et al., 2011, Jermakowicz and Gornik-Tomaszewski, 2006, Perera and Chand, 2015). Nevertheless, the main purpose of IFRS for SMEs is not to satisfy tax authority needs (IASB, 2009b, IASB, 2015). In some countries, SMEs have to comply with some tax rules in their financial reporting and full IFRS adoption would be an administrative burden (Albu et al., 2013, Bohušová and Blašková, 2012). When standard setters are dependent on the government and taxes rules are accounting based, the focus of accounting standards is on taxation and compliance (Felski, 2015). The control and legitimacy of the standard setter in financial reporting in Romania prevents IFRS adoption (Albu et al., 2014). The main reason for IFRS adoption in Brazil in 2007 was the reduction of the tax authority's influence on financial reporting (Rodrigues, Schmidt & Dos Santos, 2012). Phuong and Nguyen (2012) point out that the strict link between taxation and accounting in Vietnam may limit the success of IFRS adoption. This is also one of the main obstacles to IFRS adoption in Tunisia (Trabelsi, 2010). Felski (2015), Kossentini and Othman (2014), Shima and Yang (2012) and Kaya and Koch (2015) found evidence that the importance of tax rules negatively influences IFRS adoption. This leads to our seventh hypothesis: