Etapas de la comunicación interpersonal

Costs associated with financial reporting are the costs of developing and implementing financial reporting requirements such as accounting standards, maintaining compliances, and analysing information (Litjens et al., 2012). Costs may also include adverse effects on an enterprise or its stockholders through disclosing information, and the collective time needed to understand and use the information (Schipper, 2010). Evidence suggests that the size of the enterprise has an impact on the cost of producing financial statements (Jarvis & Collis, 2003b). As SMEs are unable to spread the costs across large scale of operations, they are typically subject to proportionately higher costs than larger firms (Kitching, 2006; Stainbank & Tafuh, 2011). Keasey and Short (1990) investigated the accounting burden in a sample of 100 small firms in the UK and claim that the size of the company was a significant factor in the cost-benefit balance.

The adoption of IFRS is therefore, likely to have a large impact on firm’s financial reporting costs (George, Ferguson, & Spear, 2013; Hail, Leuz, & Wysocki, 2010; Jermakowicz & Gornik-Tomaszewski, 2006). Following the mandatory adoption of IFRS within the EU per-firm estimates of transition costs in order of 0.31 per cent of total sales for smaller firms, and up to 0.05 per cent for larger firms were calculated (Institute of Chartered Accountants in England and Wales, 2007). A survey of professional auditors at a Big Four accounting firm shows that auditors believe that certain aspects of the IFRS reporting requirements require greater

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auditor effort and expertise to ensure adequate compliance (George et al., 2013). As a result, auditors charge higher fees to compensate for their additional efforts (Charles, Glover, & Sharp, 2010; George et al., 2013; Ghosh & Pawlewicz, 2009). Similarly, Cameran and Perotti (2014) investigate how the introduction of the international financial reporting standards affects auditors’ fee determination in the banking industry in Italy. Their results indicate that higher fees are paid after the adoption of IFRS.

Compliance with accounting standards, such as the IFRS for SMEs is also perceived to be costly to SMEs. SMEs usually do not have in-house qualified accountants and thus depend on their external professional accountants to prepare financial statements (Carsberg et al., 1985; Kitching et al., 2011; Marriott & Marriott, 2000; Professional Oversight Board for Accountancy, 2006). SMEs may lack accounting skills and infrastructure to implement accounting regulations and standards (Dang- Duc, 2011). As a result, SMEs incur higher accountancy fees (Eierle & Haller, 2009; Stainbank & Tafuh, 2011). Accountants’ limited knowledge of IFRS is one of the main problems faced by developing countries when adopting IFRS (Halbouni, 2005). In Turkey, Uyar and Güngörmüş (2013) used a questionnaire survey to investigate basic knowledge and perceptions of professional accountants regarding the accounting standard IFRS for SMEs. Their findings suggest that the majority of the participants are not aware of the key differences between the IFRS and the IFRS for SMEs, and the simplifications made in the IFRS for SMEs. Further, the inadequacy of accounting personnel’s training and a lack of training programmes arranged by professional bodies are serious obstacles in implementing the standard. Another study with professional accountants in Turkey finds that SMEs are not ready to apply and implement the IFRs for SMEs (Turegun & Kaya, 2014).

SMEs have difficulties in obtaining competent persons because of their inability to offer competitive salaries and benefits (Jennings & Beaver, 1997). Compliance with accounting standards is likely to place cost burdens on the SMEs and they are not compensated adequately by the benefits that owner-managers or external users may gain from the provision of such information (Dang-Duc, 2011). Maingot and Zeghal (2006) argue that the main disadvantage of financial reporting among SMEs in Canada was the cost in monetary terms as well as in terms of time and

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inconvenience. However, they do not explicitly discuss the relationship between the costs and the benefits of financial reporting in their study.

In response to the ED: IFRS for SMEs, Di Pietra et al. (2008) note that costs are perceived to exceed benefits, and therefore, large SMEs are more favourably disposed towards the standard than the small SMEs (Di Pietra et al., 2008). They recommend modifying the disclosure, recognition or measurement principles in the standard. Further, Di Pietra et al. (2008) comment that the standard for SMEs should not be based on the concepts and principles in the IASB framework or other existing standards. Field testing with 15 German SMEs, resulted in negative views as most participating SMEs consider the proposed standards too costly to apply (Accounting Standards Committee of Germany, 2008). Also in Germany, Eierle and Haller (2009) find that higher costs were incurred by fair value accounting for plant, property and equipment. Firms may need to increase their use of outside technical advice in areas of uncertainty, such as using independent valuers of the fair value of assets (Taylor, 2009).

Chand et al. (2015) gather opinions from professional accountants in Fiji on the costs of compliance with IFRS for SMEs. Their results show 66.9 per cent of respondents strongly agree with the statement that the costs of complying with IFRS for SMEs are far greater than the corresponding benefits. Further, 69.3 per cent of respondents recognise that the information required to apply IFRS for SMEs is not available, or is available only with undue cost or effort (Chand et al., 2015). Additionally, 74.5 per cent of respondents indicate that the use of fair value accounting in IFRS for SMEs imposes significant additional costs on preparers and is not justified on cost/benefit grounds. To make implementation more cost effective for SMEs in Fiji, 66.7 per cent of the respondents hold the view that additional exemptions need to be granted in IFRS for SMEs (Chand et al., 2015).

Pacter (2007, pp. 360-362) outlines some salient concerns associated with the application of fair value accounting in developing countries, which includes: inactive market in developing countries; cost of applying recognition and measurement principles; shortage of skilled valuers; government controlled markets; weak regulatory environment; and lack of valuation standards and

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guidance. Based on a survey of 156 practising auditors in Sri Lanka, Kumarasiri and Fisher (2011) examine the issues and challenges of fair value information. Specific challenges of concern to Sri Lankan auditors include: lack of auditor knowledge, the prevalence of inactive markets, difficulties associated with the variation in techniques used to ascertain fair values across different industries, general complexities in ascertaining fair values, and the incorporation of future events and conditions into valuations (Kumarasiri & Fisher, 2011).

Albu et al. (2013) investigate the perceptions of stakeholders involved in financial reporting in four emerging economies (the Czech Republic, Hungary, Romania, and Turkey) about costs, benefits, and strategy of implementing the IFRS for SMEs. Albu et al. (2013) find the main costs of the application of IFRS for SMEs are related to training accountants and the possible emergence of separate reporting systems for financial accounting and taxation. Other perceived costs relate to upgrading information technology systems and paying external experts and auditors.

A study conducted by Devi and Samujh (2014) on the suitability of IFRS for SMEs to the ASEAN countries ascertain several countries are not ready to adopt or implement the IFRS for SMEs. ASEAN countries do not have the necessary resources or infrastructure to support implementation. Further, the IFRS for SMEs does not reflect the culture of accounting and business practices existing in those countries and capital markets assumption does not sit well with the SMEs (Devi & Samujh, 2014, p. 3). On these grounds Devi and Samujh (2014) argue that the IFRS for SMEs would be more of a burden than a benefit to ASEAN members.

Using a multiple case study approach, Laing (2012) assesses the relevance of IFRS for SMEs in Australia. The key finding is that SME’s are strongly influenced by the prevailing taxation regulations rather than by any form of accounting standard requirements. The cost of meeting the financial reporting requirements is a burden SME’s are ill prepared to bear and such costs are not justified by any claim of being useful to the owners or other possible stakeholders.

The extant literature on IFRS for SMEs is sparse and mostly conducted through questionnaire surveys. Comprehensive evidence is missing regarding the accounting topics that are relevant to SMEs and there is a lack of empirical evidence

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on the costs and benefits of the IFRS for SMEs. This thesis fills this gap by adopting both quantitative and qualitative methods to examine the need of internationally comparable financial information for SMEs in Sri Lanka, focusing specific costs and benefits and the relevance of the content of IFRS for SMEs.

4.4 Summary

It was evident from the analysis of the IASB project that developing countries were not sufficiently involved in developing the accounting standard IFRS for SMEs. The IASB’s consultative documents (Discussion Paper; staff questionnaire on recognition and measurement; and drafted), did not contain any questions about developing countries. Furthermore, in analysing the responses to these documents, the perspectives of developing countries were not considered by the IASB (Singh & Newberry, 2009). Di Pietra et al. (2008, p. 43) ask “if the IFRS for SMEs is of greatest relevance to developing economies, are these economies’ needs and circumstances considered”? Therefore, it is unlikely that the concerns of SMEs in developing countries are adequately addressed. Further, it is claimed the IASB gave less consideration to users’ participation in the consultation process during the development of the standard because the major commentators were represented by auditors, accountants and standard setters (Schiebel, 2008). If the IFRS for SMEs does not reflect the information needs of SME users, the perceived benefits of financial information for SME users become uncertain.

Additionally, other aspects of the IFRS for SMEs are also criticised. For example, the IASB’s framework for developing the IFRS for SMEs; the need for an international accounting standard for SMEs; the applicability to micro entities; and the cost-benefit considerations, and implementation issues. Analysis of the literature after the issuance of the accounting standard IFRS for SMEs, shows that though IFRS for SMEs is a simplified version of the full IFRS, the application of the standard seems to be burdensome for SMEs in many jurisdictions. Further, adopting the IFRS for SMEs is challenging, with several practical difficulties in implementation. As a result, it can be argued that the IFRS for SMEs is not suitable for all entities in the SME spectrum, and the necessity of enforced international reporting standards for smaller entities is debatable. Owing to the lack of empirical

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research and grounded studies on the IFRS for SMEs in developing and Asian countries, further research is needed to examine the effect of its adoption in these countries. The decision by Sri Lanka to adopt the IFRS for SMEs without any modification, cannot be said to decide the issue of whether the standard is appropriate to Sri Lankan SMEs. The answer to this question will depend on empirical research, such as this thesis, to contribute to understanding and knowledge within the context of Sri Lanka.

The following chapter outlines the theoretical perspective used to analyse the findings.

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CHAPTER FIVE

THEORETICAL FRAMEWORK

5.1 Introduction

This chapter presents the theoretical framework used to guide this thesis and to analyse the findings. A theoretical framework can be defined as a set of interrelated constructs, concepts, definitions, or propositions that present a systematic view of phenomena which could be used to guide a particular research project (Collis & Hussey, 2009; Creswell, 2003; Gaffikin, 2008). In order to generate findings that are of interest to the wider accounting research community, the researcher must be able to make linkages between theory and findings from the field. Prior theories have the potential to provide deeper insights into accounting practices being investigated as well as legitimising the research findings. Llewelyn (2003) claims theorisation is the “value-added” of qualitative academic research and it offers a greater understanding of the empirical issues under discussion. This thesis adopts institutional theory, particularly New Institutional Sociology (NIS), as its theoretical lens.

This chapter is structured as follows: Sections 5.2 outlines and discusses the institutional theory framework and the sub-theories that are used in accounting. Section 5.3 outlines the NIS perspective, examines types of institutional isomorphism. Section 5.4 presents the theoretical framework used in this thesis to examine the adoption of IFRS for SMEs in Sri Lanka. Finally, section 5.5 summarises applications of NIS to accounting research. Section 5.6 concludes the chapter.