Over recent years, there has been an ongoing debate about the influence of International Financial Reporting Standards (IFRS) on the accounting regimes of non-public interest entities in European Member States, and to some extent globally. Within the context of Europe, the accounting rules for non-public interest entities are set by the European Accounting Directive supplemented by Member States’ Generally Accepted Accounting Principles (GAAP). However, the Directive is silent on a number of matters, particularly with regard to measurement and recognition issues, and it is in these circumstances that local GAAP may follow IFRS.
Up until two very recent publications there has, however, been very little hard evidence to fuel this debate. The European Federation of Accountants and Auditors (EFAA) published The Trickle Down Effect—IFRS and Accounting by SMEs, which examines the accounting treatment in five EU Member States. The paper was also the subject of a lively EFAA Roundtable in Brussels on March 28. Additionally, the journal Accounting in Europe is about to publish a Special Issue, “The Role and Current Status of IFRS in the Completion of National Accounting Rules” This latter publication has a much wider coverage of EU Member States and to a great extent supports the findings of Trickle Down research.
The issue surrounding this debate is that currently the International Accounting Standards Board, national standard setters, and the European Financial Reporting Advisory Group in terms of endorsement of standards, apparently do not take any or very little account of the impact of accounting standards on non-public interest entities. These entities include small- and medium-sized enterprises, which make a significant contribution to most economies.
Trickle Down paints a very interesting picture of the impact of IFRS trickling down into the accounting regimes for non-public interest entities in the five countries examined (Germany, the Netherlands, Portugal, Spain, and the UK). The impact was significant. In Germany and the Netherlands, 57% of SME accounting treatments are converged with IFRS (either they are already established practice or due to trickle down). In Spain and Portugal, the figure is 67% and in the UK 72%. In all five countries, trickle down was a major factor, rather than the use of IFRS being an established practice, in producing convergence ranging from 33% in the Netherlands to 59% in Portugal. In the UK, the research indicates that more than half of SME accounting treatments were the result of trickle down. In general, significantly greater impact of IFRS was identified in medium-sized entities as compared to small- and micro-sized entities.
Two interesting related question stemming from the research are: what was the motive for the five European national standard setters to adopt IFRS accounting treatments for non-publicly interested entities and what influenced them to not adopt IFRS accounting treatments? This subject generated much debate by participants at the EFAA Brussels Roundtable. The argument that there is a consensus that IFRS accounting embodies high levels of the important characteristics of understandability, relevance, reliability, and comparability for users of financial reports as compared to other accounting regimes is a compelling argument. Additionally, the popularity of IFRS accounting treatments is clearly enhanced by it being the main source of education and training for accountants and other interested parties. In contrast, the reason why IFRS accounting treatments were not adopted seems to rest with conflicts with national taxation rules and complexity of IFRS from some transactions that may be suitable for large listed companies as compared to SMEs.
The EFAA research, given that medium–sized entities are most effected by trickle down, examined this group in more depth. It is clear that national GAAP of the five countries tended to use IFRS more where the Directive was silent. This was due to the nature of transactions and issues that this size of entity experiences (for example, over statements of prior years, pensions, and deferred tax). Less trickle down takes place in relation to the more complex matters, such as financial instruments. It was found that there are significant country differences, for example, Germany avoids implementing fair value principles.
These two studies demonstrate that if financial reports of SMEs are to meet the needs of their users, it is critical that there should be an impact assessment in the standard-setting process—and the endorsement process, in the case of EFRAG, that takes account of the impact on SMEs. Additionally, the standard-setting and endorsement processes would surely benefit from the participation of SME stakeholders, such SMPs. Finally, the case for consideration of IFRS and its impact on SMEs would be greatly enhanced if similar research was extended globally.