Implementing IFRS for SMEs: Challenges for Developing Economies

Abstract

In their efforts to assist accountability for small and medium-sized enterprises globally, the International Accounting Standards Board issued the Exposure Draft: International Financial Reporting Standards for Small and Medium sized Enterprises (IFRS for SMEs) in 2007. Three countries from the Association of South East Asian Nations (ASEAN) are amongst the 66 jurisdictions to state they would adopt the IFRS for SMEs. This paper critically examines the forces driving adoption, participation of stakeholders in the processes of development of the IFRS for SMEs, implementation issues and possible dysfunctional consequences for entrepreneurs in developing countries. We question the suitability of the IFRS for SMEs for adoption, particularly by the developing economies within ASEAN. We find the one-size-fits-all-standard for SMEs, with a capital markets orientation, does not accommodate well the differing cultures, ways of doing business, regulatory frameworks, underlying philosophies, or needs of users of financial reports from SMEs. We conclude that adoption without modifications or exemptions would provide few benefits for SMEs in emerging economies; rather it would be burdensome to entrepreneurs and inappropriate for achieving national economic growth targets. Imposition of the IFRS for SMEs may inadvertently result in reduced entrepreneurship activity in response to onerous financial reporting requirements. We suggest that investment in the business infrastructure is a priority. Further, in-depth research should be undertaken, in each jurisdiction before adoption of the IFRS for SMEs, on the challenges that are likely to be faced in implementing the standard. Our paper contributes to the discussion on the adoption and implementation of the internationalization of accounting standards. We synthesize the current literature on challenges experienced in implementing the IFRS for SMEs, with a focus on developing economies, in particular ASEAN members. Additionally, we signal the possibility of discouraging entrepreneurship activities that may result in a reduction numbers of registered entrepreneurial entities and reduction in national growth aspirations.