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ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
FOR SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs): PROBLEMS AND

CHALLENGES
DINUJA PERERA
B.B.MGT (ACC) (UOK), MBA (PIM-USJP)
A thesis submitted to Macquarie University in fulfilment of the requirement for the

degree of Doctor of Philosophy in the Faculty of Business and Economics
December 2015
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TABLE OF CONTENT
Title page………………………………………………………………………………………………………………………………….i
Table of content .......................................................................................................................... iii
List of figures .............................................................................................................................. vii
List of tables .............................................................................................................................. viii
Synopsis........................................................................................................................................ x
Statement of originality .............................................................................................................. xi
Dedication .................................................................................................................................. xii
Acknowledgements ................................................................................................................... xiii
Explanation of terms and abbreviations used in this thesis ...................................................... xv
CHAPTER 1............................................................................................................................... 1
OVERVIEW OF THE THESIS .......................................................................................................... 1
1.0 Introduction ........................................................................................................................... 2
1.1 Background ............................................................................................................................ 5
1.2 Aim and objectives ................................................................................................................. 8
1.3 Contributions of the thesis................................................................................................... 13
1.4 Organization of the thesis .................................................................................................... 14
CHAPTER 2............................................................................................................................. 17
ISSUES IN THE ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
FOR SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs) ........................................................... 17
Abstract ...................................................................................................................................... 18
2.0 Introduction ......................................................................................................................... 19
2.1 Accounting regulatory framework for SMEs ........................................................................ 22
2.2 Definitions for small and medium-sized enterprises ........................................................... 23
2.3 Importance of SMEs across the globe .................................................................................. 28
2.4 IFRS for SMEs at a glance ..................................................................................................... 29
2.5 Adoption of IFRS for SMEs across the world ........................................................................ 31
2.6 Problems posed by IFRS for SMEs ........................................................................................ 32
2.6.1 Issues with the IASB’s development process of IFRS for SMEs ............................ 33
2.6.2 National legislations and enforcement issues ...................................................... 35
2.6.3 Complexity and other difficulties in implementing IFRS for SMEs ....................... 37
2.6.4 Technical difficulties inherent in IFRS for SMEs.................................................... 39
2.7 Conclusions and implications ............................................................................................... 46
References ................................................................................................................................. 49
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CHAPTER 3 ............................................................................................................................ 61
CONFIRMATION BIAS IN THE REPORTING JUDGMENTS OF ACCOUNTANTS WHEN APPLYING
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) FOR SMALL AND MEDIUM-
SIZED ENTERPRISES (SMEs) ....................................................................................................... 61
Abstract ..................................................................................................................................... 62
3.0 Introduction ......................................................................................................................... 63
3.1 Background .......................................................................................................................... 67
3.2 Literature review and hypotheses ....................................................................................... 68
3.3 Experiment .......................................................................................................................... 79
3.3.1 Participants and design ........................................................................................ 79
3.3.2 Procedures ........................................................................................................... 81
3.3.3 Pre-test ................................................................................................................. 83
3.4 Results ................................................................................................................................. 85
3.4.1 Demographic details of respondents ................................................................... 85
3.4.2 Tests of hypotheses .............................................................................................. 86
3.5 Summary and conclusions ................................................................................................... 88
References ................................................................................................................................. 92
CHAPTER 4 ............................................................................................................................ 99
THE IMPACT OF THE REDUCED GUIDANCE IN INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS) FOR SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs) ON THE
REPORTING JUDGMENTS OF ACCOUNTANTS ..................................................................... 99
Abstract ................................................................................................................................... 100
4.0 Introduction ....................................................................................................................... 101
4.1 Background ........................................................................................................................ 106
4.2 Theory and hypotheses development ............................................................................... 109
4.3 Experiment ........................................................................................................................ 122
4.3.1 Participants and design ...................................................................................... 122
4.3.2 Procedures ......................................................................................................... 123
4.3.3 Manipulation of guidance .................................................................................. 124
4.3.4 Manipulation of example ................................................................................... 125
4.3.5 Pre-test ............................................................................................................... 126
4.4 Results ............................................................................................................................... 128
4.4.1 Demographic details of respondents ................................................................. 128
4.4.2 Tests of hypotheses ............................................................................................ 128
4.5 Summary and conclusions ................................................................................................. 131
References ............................................................................................................................... 135
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CHAPTER 5........................................................................................................................... 143
USER PERCEPTIONS OF THE DECISION USEFULNESS OF FINANCIAL STATEMENTS PREPARED
IN COMPLIANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) FOR
SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs) ................................................................ 143
Abstract .................................................................................................................................... 144
5.0 Introduction ....................................................................................................................... 145
5.1 Relevant literature ............................................................................................................. 148
5.1.1 Users and their accounting information needs .................................................. 148
5.2 Theoretical framework....................................................................................................... 152
5.2.1 Decision usefulness of accounting information.................................................. 152
5.3 Research approach ............................................................................................................. 154
5.3.1 Research setting ................................................................................................. 154
5.3.2 Research method ................................................................................................ 155
5.4 Results and discussion – The survey .................................................................................. 158
5.4.1 Demographic details of the survey respondents ................................................ 158
5.4.2 Decision-making process of SME lending ........................................................... 158
5.4.3 Familiarity and attitude of bank lending officers to accounting measurement
concepts ....................................................................................................................... 160
5.4.4 Perceptions of bank lending officers on the usefulness of disclosure
requirements of IFRS for SMEs on lending decisions .................................................. 161
5.5 Results and discussion – The semi-structured interviews ................................................. 169
5.5.1 Demographic details of the interviewees ........................................................... 169
5.5.2 Perception of bank lending officers on the usefulness of simplified recognition
and measurement requirements of IFRS for SMEs on lending decisions .................... 170
5.5.3 Additional analysis .............................................................................................. 180
5.6 Summary and conclusions ................................................................................................. 186
References ............................................................................................................................... 190
CHAPTER 6........................................................................................................................... 203
SUMMARY AND CONCLUSIONS .............................................................................................. 203
6.0 Introduction ....................................................................................................................... 204
6.1 Summaries and impications of the individual studies ....................................................... 204
6.2 Overall conclusions and further implications .................................................................... 209
6.3 Limitations and suggessions for future research ............................................................... 212
Bibliography ............................................................................................................................. 215
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APPENDICES
Appendix 1: Ethics approval letters………………………………………………………………………………………233
Appendix 2: Research instrument – Paper 2…………………………………………………………………………241
Appendix 5: Participant information and consent form – Paper 4…..…………………………………..331
Appendix 6: Thematic node heirarchy – Paper 4…………………………………………………………………..337
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LIST OF FIGURES
CHAPTER 2
Figure 2.1: Application status of IFRS for SMEs in countries that have adopted the standard ..... 60
CHAPTER 3
Figure 3.1: Bias in knowledge retrieval process ............................................................................. 97
CHAPTER 5
Figure 5.1: Conceptual framework for assessing the decision-usefulness of IFRS for SMEs on
bank lending decisions ............................................................................................... 202
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LIST OF TABLES
CHAPTER 2
Table 2.1: Size threshold for SMEs worldwide .............................................................................. 56

Table 2.2: Major differences between IFRS for SMEs and full IFRS............................................... 57
Table 2.3: Examples of countries which have adopted/planned to adopt IFRS for SMEs ............ 59
Table 2.4: Proposed directive simplification – European Commission ......................................... 59
CHAPTER 3
Table 3.1: Demographic data of the respondents ......................................................................... 96
Table 3.2: Descriptive statistics and ANOVA results for confirmation bias in the reporting
judgments of accountants ............................................................................................. 96
Table 3.3: Binomial test of biased and unbiased judgments of accountants ................................ 96
Table 3.4: Descriptive statistics and ANOVA results for the effect of judgment justification on the
reporting judgments of accountants............................................................................. 97
Table 3.5: Descriptive statistics and ANOVA results for the effect of decision aid on the reporting
judgments of accountants ............................................................................................. 97
CHAPTER 4
Table 4.1: Demographic data of the respondents ....................................................................... 140
Table 4.2: Descriptive statistics and ANOVA results for effects of the reduced guidance in IFRS
for SMEs on the reporting judgments of accountants ................................................ 140
Table 4.3: Descriptive statistics and ANOVA results for effects of example types provided as
guidance on the reporting judgments of accountants ................................................ 140
Table 4.4: Correlation analysis between the example type and the judgments of accountants 141
Table 4.5: Descriptive statistics and ANOVA results for the effect of explicit guidance versus
examples on the reporting judgments of accountants ............................................... 141
Table 4.6: Descriptive statistics and ANOVA results for the effect of explicit guidance and
examples on the reporting judgments of accountants ............................................... 142
CHAPTER 5
Table 5.1: Classification of accounting information items .......................................................... 195
Table 5.2: Demographic data of the respondents ....................................................................... 195
Table 5.3: Bank lending officers’ approach for evaluating SME loan applications ...................... 195
Table 5.4: Bank lending officers’ opinion on the usefulness of information sources ................. 196
Table 5.5: Bank lending officers’ familiarity with accounting measurement concepts .............. 196
Table 5.6: Bank lending officers’ preference for accounting measurement concepts ............... 196
Table 5.7: Usefulness of accounting disclosure items in IFRS for SMEs ...................................... 197
Table 5.8: The frequency percentage of responses on usefulness of accounting disclosure items
in Balance Sheet .......................................................................................................... 201
in Balance Sheet Sub-Classifications ........................................................................... 201
in Income Statement and Comprehensive Income ..................................................... 201
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in Statement of Changes in Equity and Retained Earnings ...................................... 201
in Cash Flow Statement ............................................................................................ 202
in Notes to the Financial Statements ....................................................................... 202
Table 5.14: Profile of the interviewees ........................................................................................ 202
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SYNOPSIS
The International Accounting Standards Board (IASB) has pursued a strong agenda to
develop a simplified set of International Financial Reporting Standards (IFRS) for small
and medium-sized enterprises (SMEs). IFRS for SMEs published in 2009 was derived
from full IFRS with significantly reduced recognition and measurement principles,
guidance and disclosure requirements in order to satisfy the accounting information needs
of the users of SME financial statements.
The aim of this thesis is to undertake a comprehensive examination of the conceptual and
practical issues in the convergence of IFRS for SMEs and suggest possible ways to address
these issues. In particular, the thesis undertakes the following four research projects under
the theme of problems and challenges in implementing IFRS for SMEs: (1) critically
reviews IFRS for SMEs, including the development and implementation process of the
standards; (2) examines whether accountants are able to distinguish between the
recognition and measurement principles of full IFRS and IFRS for SMEs when they
exercise professional judgment; (3) investigates the impact of the reduced guidance in
IFRS for SMEs on the professional judgment of accountants; and (4) investigates whether
users of SME financial statements benefit from a simplified set of IFRS for SMEs.
This thesis employs exploratory and empirical research methods to examine the
controversial issues in the adoption of IFRS for SMEs. The findings of this thesis provide
evidence that IFRS for SMEs have been a challenge for non-publicly accountable entities
to adopt and there are several conceptual and practical issues with IFRS for SMEs. In
particular, the thesis provides evidence that accountants are unable to choose accounting
treatments that best reflect the economic substance of a transaction when the recognition
and measurement requirements are different across full IFRS and IFRS for SMEs and when
guidance is significantly reduced from IFRS for SMEs. This thesis also provides evidence
that users perceive disclosure of IFRS for SMEs to be decision useful but they do not regard
that the simplification significantly enhances their decision making.
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STATEMENT OF ORIGINALITY
This is to certify that the work presented in this thesis has not been submitted for a higher
degree to any other university or institution. The source of information used and the extent
to which the work of others has been utilised is acknowledged in the thesis. This thesis has
obtained the approval of the Ethics Committee at Macquarie University for the relevant
projects that have been completed [Reference Numbers: 5201300592, 5201400850, and
5201401179].
Dinuja Perera
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DEDICATION
This thesis is dedicated to the memory of my beloved husband, Chandana Kavan Fernando,
who devotedly encouraged and supported me in my career pursuit, but who unexpectedly
passed away before I commenced my doctoral studies.
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ACKNOWLEDGEMENTS
I wish to express my sincere appreciation to those who have contributed by providing

guidance, assistance and support in many ways in the completion of my thesis.
First of all, I am extremely grateful to my principal supervisor, Associate Professor Parmod

Chand and my associate supervisor Dr Rajni Mala for providing me with invaluable
guidance, comments, advice and enormous support throughout my thesis project. Their
deep insights, knowledge and expertise benefited me immensely at various stages of my
research and I am indebted to them for their generosity and encouragement throughout the
project.
My sincere gratitude is reserved for Professor Graeme Harrison at Macquarie University

for providing his invaluable comments and suggestions on the research instruments of this
thesis. I am also immensely grateful to Professor Michael White at the University of the
South Pacific (Fiji) for his contribution in developing the research instrument and in
carrying out the experiments described in Paper 3 with practising members of the Fiji
Institute of Accountants.
I am extremely appreciative to the Institute of Chartered Accountants of Sri Lanka

(ICASL) for allowing their members to participate in the experiments. Very special thanks
to Mr Upendra Wijesinghe, Head of Technical of the ICASL, for all the assistance given
in organizing the experiment described in Paper 2 with the ICASL practising members. I
also extend my heartfelt gratitude to Mr Tishan Subasinghe (Partner, BDO Sri Lanka) and
all the representatives of the Big 4 and non-Big 4 accounting firms in Sri Lanka, who
voluntarily participated in the experiments. I am also indebted to all the representatives of
the commercial banks in Sri Lanka who participated in the surveys and interviews
described in Paper 4.
I am enormously indebted to the Higher Degree Research (HDR) committee at Macquarie

University for granting me a scholarship and giving me the opportunity to carry out my
doctoral studies. I would also like to acknowledge the support of the HDR committee of
the Faculty of Business and Economics (FBE) at Macquarie University. Particularly, the
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financial support provided by FBE for attending conferences and field study is greatly
appreciated.
I would also like to extend my great appreciation to Professor Sujatha Perera (Macquarie
University), and Dr Ranjith Appuhami (Macquarie University) for providing me with kind
support and advice throughout my journey. I am also indebted to my friends, Padma and
Hiyantha for their emotional and physical support extended to me.
Finally, I am truly indebted to my little daughter Sanuki for her unrelenting understanding,
tolerance, love and support throughout the journey. I also acknowledge with great
appreciation my beloved parents, two brothers and two sisters for their constant
encouragement and support that ultimately made it possible for me to successfully
complete my thesis.
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EXPLANATION OF TERMS AND ABBREVIATIONS USED IN THIS THESIS
AASB Australian Accounting Standards Board

ABN Australian Business Number
ABS Australian Bureau of Statistics
ACA Associate Chartered Accountant
ACCA Association of Chartered Certified Accountants
AcSB Accounting Standards Board in Canada
ADB Asian Development Bank
AICPA American Institute of Certified Public Accountants
ANOVA Analysis of Variance
APEC Asia Pacific Economic Corporation
ASC Singapore Accounting Standards Council
ASPE Accounting Standards for Private Enterprises
CIMA Certified Institute of Management Accountants
CPA Certified Public Accountants
DGRV German Cooperative and Raiffeisen Confederation
DIISR Department of Innovation Industry, Science and Research
EC European Commission
ED Exposure Draft
EFRAG European Financial Reporting Advisory Group
EIU Economist Intelligent Unit
FCA Fellow Chartered Accountant
FRF Financial Reporting Framework
FRS Financial Reporting Standard
GAAP Generally Accepted Accounting Principles
GDP Gross Domestic Production
GPFI Global Partnership for Financial Institutions
GPFS General Purpose Financial Statements
HKAS Hong Kong Accounting Standards
HKFRS Hong Kong Financial Reporting Standards
HKICPA Hong Kong Institute of Certified Public Accountants
IAS International Accounting Standard
IASB International Accounting Standards Board
IASC International Accounting Standards Committee
IBSL Institute of Bankers of Sri Lanka
ICAA Institute of Chartered Accountants Australia
ICAEW Institute of Chartered Accountants of England and Wales
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ICAS Institute of Chartered Accountants of Scotland
ICASL Institute of Chartered Accountants of Sri Lanka
IFC International Finance Corporation
IFRIC International Financial Reporting Interpretation Committee
IFRS International Financial Reporting Standards
LCB Licensed Commercial Banks
MBA Master of Business Administration
MED Ministry of Economic Development
METI Ministry of Economy, Trade and Industry
MFR Currency of Maldives - Maldivian Rufiyaa
MOI Ministry of Industries
MSME Micro, Small and Medium-sized Enterprises
NAICS North American Industry Classification System
NU Currency of Bhutan - Ngultrum
OECD Organization for Economic Co-operation and Development
PPE Property, Plant and Equipment
PWC PriceWaterhouseCoopers
PWGSC Public Works and Government Services of Canada
RDR Reduced Disclosure Regime
SAC Statement of Accounting Concepts
SAICA South African Institute of Chartered Accountants
SBA Small Business Administration
SBC Small Business Corporation
SEC Securities Exchange Commission
SFRS Singapore Financial Reporting Standards
SLFRS Sri Lanka Financial Reporting Standards
SMEIG Small and Medium-sized Enterprises Implementation Group
SMEs Small and Medium-sized Enterprises
UAE United Arab Emirates
UK United Kingdom
UNCTAD United Nations Conference on Trade and Development
US United States of America
USD US Dollar
USTR United States Trade Representative
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CHAPTER 1
Overview of the Thesis
1
1.0 INTRODUCTION
The International Accounting Standards Board (IASB) has pursued a strong agenda in
recent years to develop a simplified set of International Financial Reporting Standards
(IFRS) for small and medium-sized enterprises (SMEs), particularly for non-publicly
accountable entities. IFRS for SMEs published in 2009 was derived from full IFRS with
significantly reduced recognition and measurement principles, guidance and disclosure
requirements in order to satisfy the accounting information needs of the users of SME
financial statements (IASB, 2009a). In the history of the accounting standard setting
process of the IASB, IFRS for SMEs was the first set of standards that was formulated for
SMEs. As such, IFRS for SMEs has been receiving great attention and the accounting
regulatory bodies, including the IASB, are continuously monitoring its adoption and the
successful implementation of the standard across the globe.
Small and medium-sized enterprises (SMEs) play a vital role in economic and social
development in developed and developing economies. It has been recognized that the SME
sector is the largest employment provider in many countries, particularly in terms of new
job creation. Furthermore, the contribution of SMEs to the economic output, technology
and innovation has also been widely identified (Chen, 2006; OECD, 2005; Reddy, 2007).
The IASB believes that the adoption of IFRS for SMEs will enhance SMEs’ access to
international finance through harmonised and high quality financial information (IASB,
2009a). Therefore, this changeover is expected to be a major breakthrough for SMEs if the
perceived benefits are appropriately recognised by countries and they adopt IFRS for
SMEs.
So far, seventy plus countries have adopted or expressed interest in adopting IFRS for
SMEs for all their non-publicly accountable entities (IFRS Foundation, 2015a). However,
countries opposing the adoption of IFRS for SMEs, in particular, major developed
countries raise concerns that the implementation of a differential reporting framework
appears to be controversial and problematic for SMEs in many jurisdictions. The excessive
departure from accounting policies and requirements in full IFRS is regarded as a
significant barrier for the adoption of IFRS for SMEs (Australian Accounting Standards
Board (AASB), 2010a; European Commission (EC) Explanatory Memorandum, 2011).
2
Importantly, the degree to which IFRS for SMEs have been accepted or rejected by
countries creates several arguments.
Significant attention has been received in the international accounting literature on the
controversies and challenges that endangered the convergence of international accounting
standards (see Alp & Ustundag, 2009; Chand, Patel, & Patel, 2010; Doupnik & Richter,
2003; Wong, 2004; Wustemann & Wustemann, 2010). Irrespective of the complex or
simplified status of the standard, prior studies in general reveal that the implementation of
IFRS by individual jurisdictions appears to be complex and challenging. Therefore, it is
timely and essential to examine the financial reporting transformations of non-publicly
accountable entities and SMEs when applying IFRS for SMEs (Evans et al., 2005). More
specifically, the possible transition issues that may arise when moving from local
GAAP/full IFRS to IFRS for SMEs, such as arguments against “differential reporting”,
cost-benefit considerations in adopting IFRS for SMEs, and technical issues inherent in
the recognition and measurement principles of the standard, have been regarded as
challenging issues which have not been addressed in depth so far in the literature (AASB,
2010a; Evans et al., 2005; Miihkinen, 2014; van Mourik & Walton, 2013).
This thesis undertakes a comprehensive examination of the conceptual and practical issues
in the implementation of IFRS for SMEs. The first paper critically reviews IFRS for SMEs,
including the development and implementation process of the standards. While many
countries have adopted IFRS for SMEs, with or without modifications, there are still a
number of prominent countries who have yet to adopt this set of standards. This study will
provide evidence as to why IFRS for SMEs has presented a challenge for non-publicly
accountable entities; and identifies conceptual and practical issues in the implementation
of IFRS for SMEs. The analyses and insights provided by this study will have implications
for the revision of IFRS for SMEs and will assist in addressing future complications in the
SME convergence process.
While the changeover to international accounting standards by SMEs continues to

progress, limited research has been conducted to empirically test the impact of principles-
based IFRS for SMEs on the judgment and decision making process of accountants. There
is an extensive use of professional judgment in a principles-based approach to IFRS
(Hodgdon, Hughes, & Street, 2011; Larson & Street, 2011), and professional judgment is
3
therefore regarded as a vital yet controversial issue in its current context (Alp and
Ustundag, 2009; Chand et al., 2010; Chand, Patel, & White, 2015). Motivated by the
current gap in extant SME accounting literature and its great importance to accounting
regulators and practitioners, the second and third papers of this thesis empirically examine
the challenges posed by IFRS for SMEs when accountants exercise professional judgment.
The second paper provides empirical evidence on how well accountants are able to
distinguish between the recognition and measurement principles for full IFRS and IFRS
for SMEs, independent of their prior understanding of full IFRS when they interpret and
apply IFRS for SMEs. The major prediction of the prior belief effect is the likelihood that
prior beliefs in interpreting and applying the full set of IFRS influence the professional
judgment of accountants when they apply IFRS for SMEs. The intent is to identify
accountants’ subsequent decision bias (confirmation or disconfirmation) with respect to
their prior beliefs on full IFRS. The findings of this study will be of paramount
significance, because decision bias often results in increased cost (particularly the cost of
inaccurate financial information), thus the findings will be helpful in assisting accountants
to avoid such costs yet better represent high quality and unbiased financial information.
The ambiguity associated with less guidance in IFRS for SMEs compared to full IFRS,
and the latitude inherent in IFRS for SMEs, may pose challenges when accountants
exercise professional judgment. This will have great impact on the consistent interpretation
and application of the standard. The third paper examines the relationship between the
availability of guidance in the standard and accountants’ ability to draw reasonable
judgments relating to an accounting issue. The empirical evidence of this study will assist
in explaining whether the reduced guidance has a significant impact on the judgment of
accountants when they interpret and apply IFRS for SMEs, and will provide evidence as
to whether there is consistent interpretation and application of IFRS for SMEs. The
findings of this study will provide important insights to accounting regulators while
adopting IFRS for SMEs and when making amendments to the standards.
There is an increasing demand for more empirical evidence on the decision usefulness of
financial reporting information of SMEs, because the little extant literature that exists on
the decision usefulness of SME financial information is contradictory (Allen & Cote, 2005;
Dang-Duc, 2011; Kitindi, Magembe, & Sethibe, 2007; Kwok, 2002; Son, Marriott, &
4
Marriott, 2006). The fourth paper examines how users perceive the decision usefulness of
the financial reports prepared under IFRS for SMEs. This study aims to fill the gap in
existing accounting literature and to add new insights on the decision usefulness of the
measurement concepts of IFRS for SMEs. This research will centre on the rationale behind
the differential reporting framework introduced by the IASB. The findings of this study
will be of great interest to standard setters, accounting regulators and users of SME
financial reports.
This thesis contributes to the international accounting literature, highlighting both the
inherent complexities in the adoption of IFRS for SMEs and the problems in interpreting
and applying these standards in a consistent manner. The findings of this thesis will have
implications for revising IFRS for SMEs and will assist in addressing future complications
in the adoption of IFRS for SMEs.
This chapter is organised as follows. Section 1.1 presents the background of the thesis.
Section 1.2 outlines the aim and objectives, followed by an overview of all four research
projects carried out in this thesis. Section 1.3 broadly describes the contributions of this
thesis. The final section provides an overview of how the remainder of the thesis is
organised.
1.1 BACKGROUND
The concept of international convergence of accounting standards dates back to 1950s

where the economic integration and cross-border trading began to thrive post-World War
II (Financial Accounting Standards Board (FASB), 2013). The world-wide
interconnectedness in businesses has grown immensely in the twentieth century, with
globalization steering a rapid increase in international trade, international investments and
capital flows across borders (Carlson, 1997; FASB, 2013). A gradual increase in cross-
border activities has created more complex business transactions and businesses continue
to seek for reliable, consistent and comparable business information (Purvis, Gernon, &
Diamond, 1991). The International Accounting Standards Committee (IASC),
subsequently reorganized into the International Accounting Standards Board (IASB) in
2001, was proceeding towards developing a unified set of high quality international
5
accounting standards that would satisfy accounting information needs of global economies
(Carlson, 1997; FASB, 2013; Rodrigues & Craig, 2007). Since then, the International
Financial Reporting Standards (often called ‘full IFRS’) came into effect and many
prominent countries commenced their accounting convergence process with IFRS.
There was a growing concern that IFRS had created financial reporting standards which
were overly complex, especially for SMEs (Association of Chartered Certified
Accountants (ACCA), 2009). The IASB has been working on designing a simplified
version of the full set of IFRS which satisfies the financial reporting requirements of SMEs.
The Exposure Draft of IFRS for SMEs was issued for public comment in October 2007
and after extensive consultation and field testing, the final set of IFRS for SMEs came into
effect in July 2009, entitled to be applied by entities that do not have public accountability,
but prepare general purpose financial statements for external users (IASB, 2009a). IFRS
for SMEs was an important step in the convergence process of international accounting
standards.
Unveiling a simplified set of international accounting standards for SMEs has been
acknowledged as a major breakthrough for SMEs. Many regarded the issuance of IFRS for
SMEs as timely and essential. SMEs have an eminent position in the global economy and
represent approximately 95% of businesses around the world (IFRS Foundation, 2012a).
More specifically, SMEs are regarded as the key drivers of employment creation, economic
output and economic development in many developed and developing economies (Chen,
2006; Organization for Economic Co-operation and Development (OECD), 2005; Reddy,
2007).
Many countries are gradually adopting IFRS for SMEs and it is reasonable to accept that
IFRS for SMEs is a response to strong international demand for a simplified global set of
financial reporting standards for SMEs. However, there are several controversial issues
pertaining to the implementation of IFRS for SMEs, as reported by prominent accounting
regulatory bodies at individual jurisdiction levels. In particular, the divergence between
full IFRS and IFRS for SMEs (i.e. the differential reporting framework) may pose
significant challenges in implementation, interpretation and application across various
jurisdictions. Moreover, several arguments have been made against differential reporting
that the differences between IFRS for SMEs and full IFRS should be allowed, mainly with
6
regard to disclosure requirements rather than with recognition and measurement principles
(Evans et al., 2005). For this reason, major developed countries such as Australia, Canada
and New Zealand still favour the reduced disclosure approach for their SMEs, keeping the
recognition and measurement principles identical to full IFRS.
The ultimate success of IFRS for SMEs will depend on the extent to which users, preparers,
and auditors believe that the standard meets their needs (Epstein & Jermakowicz, 2008, p.
44). Despite the debate over the differential reporting framework introduced by the IASB,
to date there has been limited empirical evidence to demonstrate preparers’ and users’
acceptance of the stand-alone set of IFRS for SMEs. IFRS in general use a more principles-
based approach that provides accountants with a conceptual basis to use in exercising
judgment. Particularly, the knowledge and understanding about judgment and decision
making behaviour of accountants under these circumstances is lacking. Moreover, there is
extensive literature on auditor judgments (see Ashton, 1992; Budescu, Peecher, &
Solomon, 2012; Fukukawa & Mock, 2011; Nelson & Tan, 2005; Ng & Shankar, 2010),
however, very little is known about financial statements preparers’ judgments who are
consistently involved in various judgmental tasks that significantly influence financial
reporting. Scholars have also emphasised the need for more studies on preparer judgments
(see Psaros & Trotman, 2004; Psaros, 2007 for a review).
To fill this void, the behavioural accounting research approach is used in this thesis to
provide evidence on preparers’ and users’ readiness to accept IFRS for SMEs as a stand-
alone set of standard. As explained by Godfrey, Hodgson, Tarca, Hamilton, & Holmes
(2010), behavioural accounting originated from other disciplines; namely sociology,
psychology, and organisational theory and often asks the question: “how do people actually
use and process accounting information?” (p. 446). A behavioural accounting research
approach is therefore vital in the current context to present a factual response to the
question of how accountants perceive IFRS for SMEs and how effectively they apply IFRS
for SMEs to process accounting information in ways that are beneficial for the decision
usefulness of users.
One of the major challenges of IFRS for SMEs on practising accountants is the substantial
deviations in accounting policies, principles and accounting treatments of full IFRS. In
such circumstances, the application of judgments are susceptible to bias towards
7
accounting policies and principles that have traditionally been applied in full IFRS. This
thesis uses the concept of confirmation bias which originated from psychology to analyse
this issue. Confirmation bias has been extensively tested in tax and audit engagements and
the literature consistently implies its existence (Cloyd & Spilker, 1999, 2000; Hatfield,
2000, 2001; Wheeler & Arunachalam, 2008). However, evidence on the presence of
confirmation bias in preparers’ reporting judgments is lacking.
Another major challenge for practising accountants is the significantly reduced guidance
in IFRS for SMEs and the requirements pertaining to the fallback to full IFRS in the
absence of guidance under IFRS for SMEs. Critics contend that the reduced guidance may
have a significant impact on impairing judgment accuracy and consistency (Ahmed, Neel,
& Wang, 2013). In the principles-based approach to IFRS, the availability of guidance on
improving reporting judgments has been widely discussed however, it has been generally
overlooked in literature. Limited literature stresses the importance of decision aids such as
implementation guidance in improving the judgment and decision making behaviour of
accountants (see Mala & Chand, 2014 for a review).
The decision usefulness of SME financial information for users has been a long-standing
matter in the accounting literature (Dang-Duc, 2011; Son et al., 2006) and has prompted
more discussions when IFRS for SMEs came into effect. In developing IFRS for SMEs,
the IASB has been working on the assumption that users of SME financial statements have
similar information needs. However, it is argued that no special efforts have been
undertaken to ensure user participation in the due process of IFRS for SMEs. The
successful implementation of IFRS for SMEs and the need for improvement cannot be
envisaged if the users’ perceptions of the decision usefulness of IFRS for SMEs is not well
understood. As such, understanding the preparers’ and users’ response to the simplified
IFRS for SMEs is imperative, as many countries are gradually moving towards its adoption
and the IASB is continuing to monitor the success of its implementation.
1.2 AIM AND OBJECTIVES
The aim of this thesis is to undertake a comprehensive examination of the conceptual and
practical issues in the convergence of IFRS for SMEs and to suggest possible ways to
address these issues. The thesis has the following objectives:
8
 To critically review IFRS for SMEs, including the development and
implementation process of the standard and to provide extensive insights into the
adoption of IFRS for SMEs.
 To examine whether accountants are able to distinguish between the recognition

and measurement principles of full IFRS and IFRS for SMEs when they exercise
professional judgment.
 To examine the impact of the reduced guidance in IFRS for SMEs on the
professional judgment of accountants.
 To investigate user perceptions of the decision usefulness of financial statements

prepared in compliance with IFRS for SMEs.
Four research projects are undertaken to achieve the aforementioned objectives of the
study. They are described in detail below.
Paper 1: Issues in the adoption of International Financial Reporting Standards (IFRS) for
Small and Medium-Sized Enterprises (SMEs)
This study addresses the first objective of the thesis. The objective of this paper is to
critically review IFRS for SMEs, including the development and implementation processes
of the standard. It begins by providing a brief background to the accounting regulatory
framework for SMEs and then appraises the importance of SMEs. The study applies the
framework of decision usefulness theory and the pecking order theory to evaluate issues
pertaining to the development and implementation process of IFRS for SMEs.
This exploratory study identifies several issues involved in the due process and explains
how these issues hinder the achievement of the objectives of IFRS for SMEs. The study
also provides evidence of various complications and contentious issues related to the
implementation process of the standard. In particular, the study draws attention to the
barriers and inconsistencies in national legislations and reporting frameworks, the
technical difficulties inherent in IFRS for SMEs and controversies over the differential
reporting framework for SMEs.
9
The analyses and insights provided by this study will assist in addressing the complications
in the adoption of IFRS for SMEs and will have implications for amending IFRS for SMEs.
The study also provides important insights for prospective countries that are planning to
adopt IFRS for SMEs in the future.
This paper was published in 2015 in the Advances in Accounting, incorporating Advances
in International Accounting, Vol.31, Issue 1, pp. 165-178. An earlier version of the paper
was presented at the Accounting and Finance Association of Australia and New Zealand
(AFAANZ) Conference, Perth, Australia, 7th – 9th July, 2013.
Paper 2: Confirmation Bias in the Reporting Judgments of Accountants when Applying

International Financial Reporting Standards (IFRS) for Small and Medium-
Sized Enterprises (SMEs)
This study addresses the second objective of the thesis. This study argues that when the
recognition and measurement requirements are different across full IFRS and IFRS for
SMEs, the subsequent reporting judgments of accountants on IFRS for SMEs may be
biased towards full IFRS if accountants hold strong prior knowledge about full IFRS.
Particularly, the study examines the likelihood that prior knowledge and beliefs about full
IFRS (confirmation bias) influence the reporting judgments of accountants when applying
IFRS for SMEs. This study also examines the likelihood that judgment justification
requirements and the availability of decision aids assist in mitigating the confirmation bias
that arises from prior knowledge and beliefs on full IFRS.
This study tests the relevant hypotheses using an experiment administered to 92 qualified
members of the Institute of Chartered Accountants of Sri Lanka, representing both Big 4
and non-Big 4 accounting firms in Sri Lanka. The results obtained were then statistically
analysed (primarily using SPSS univariate analysis).
The findings of the study support the notion that the tendency to confirm prior knowledge
and beliefs about full IFRS impairs the reporting judgments of accountants when they
interpret and apply IFRS for SMEs. The study further suggests that confirmation bias in
judgments can be mitigated by increasing accountants’ awareness of justification
requirements and by using appropriately designed decision aids which contrast the
10
differences in the recognition and measurement criteria between full IFRS and IFRS for
SMEs. The results of this study provide important implications for countries that have
adopted IFRS for SMEs, indicating that they need to provide appropriate training and
guidelines for their accountants.
An earlier version of the paper was presented at the 50th British Accounting and Finance
Association (BAFA) Conference, London School of Economics, London, 14th – 16th
April, 2014. This paper is currently under review in a prominent accounting journal.
Paper 3: The Impact of the Reduced Guidance in International Financial Reporting

Standards (IFRS) for Small and Medium-Sized Enterprises (SMEs) on the
Reporting Judgments of Accountants
This study addresses the third objective of the thesis. Given that implementation guidance
is significantly reduced when compared to full IFRS, this study argues that the elimination
of guidance may create interpretation difficulties and inconsistency in reporting judgments
when accountants apply IFRS for SMEs. The study further argues that, in the absence of
explicit guidance, the users of the standards may over rely on information contained in the
examples, thus, the accuracy of the judgments may be impaired. Based on the arguments
developed, the primary focus of this study is to empirically examine the effects of the
reduced guidance in IFRS for SMEs on the reporting judgments of accountants. The study
is also interested in examining the likelihood that the examples provided as guidance bias
the reporting judgments of accountants towards the similarities presented in the examples.
The relative effectiveness of explicit guidance and examples provided in accounting
standards are also examined in this study.
This study tests the relevant hypotheses using an experiment administered to 148 qualified
members of the Fiji Institute of Accountants, representing both Big 4 and non-Big 4
accounting firms in Fiji. The results obtained were then statistically analysed (primarily
using SPSS univariate analysis).
The findings of the study support the notion that the reduced guidance in IFRS for SMEs
is likely to impair the reporting judgments of accountants. Particularly, the findings
indicate that accountants are unable to choose the accounting treatment that best reflects
11
the economic substance of a transaction when there is limited explicit guidance available.
The study further reveals that the examples provided as guidance are susceptible to
judgmental biases. The findings of this study will be of interest to the IASB and other
national accounting regulators as they continue to monitor the implementation issues and
the need for any amendments to IFRS for SMEs.
Paper 4: User Perceptions of the Decision Usefulness of Financial Statements prepared

in compliance with International Financial Reporting Standards (IFRS) for
This study addresses the final objective of the thesis. The study aims to provide empirical
evidence of the decision usefulness of IFRS for SMEs from one of the main user groups
of SME financial statements, namely, the banks. Considering two aspects of the
simplification in IFRS for SMEs, this study examines the decision usefulness of the
reduced disclosure requirements and simplified recognition and measurement
requirements of IFRS for SMEs.
A questionnaire survey was conducted with 43 bank lending officers to understand the
perception of bank lending officers about the decision usefulness of the reduced disclosure
requirements of IFRS for SMEs on SME lending decisions. Follow-up interviews were
also conducted with 19 senior bank lending officers to gain in-depth insights into the
appropriateness and economic consequences of the simplification of recognition and
measurement requirements of IFRS for SMEs on bank lending decisions.
The results of the study show that most of the disclosure requirements of IFRS for SMEs
are found to be useful for bank lending decisions. However, the study further reveals that
bank lending officers do not consider all the disclosure requirements to be equally
important for their lending decisions. With regard to the simplification of recognition and
measurement requirements, the findings indicate that bank lending officers have no major
issues with the simplification of recognition and measurement principles, but they do not
consider that such simplification significantly improves their lending decisions. The
findings of this study will be of interest to the accounting regulators, including the IASB,
for evaluating the decision usefulness of IFRS for SMEs.
12
1.3 CONTRIBUTIONS OF THE THESIS
This thesis contributes to the areas of international accounting literature and judgment and
decision making literature in accounting in numerous ways.
This thesis adds to the international accounting literature by increasing the understanding
of international accounting and reporting practices by means of providing evidence on
current issues confronting the adoption of IFRS for SMEs. More specifically, the first
paper of this thesis reveals the challenges that non–publicly accountable entities have to
face when adopting IFRS for SMEs. The study also provides great insights on the issues
associated with the IASB’s due process of IFRS for SMEs and numerous implementation
issues underlined by countries that have adopted or opposed the adoption of IFRS for
SMEs. These outcomes help to broaden the understanding of international accounting
convergence and the reporting practices.
This thesis also provides an important contribution to the judgment and decision making
research in accounting. Even though the adoption of IFRS for SMEs has received great
attention over the past few years, relatively little attention has been received so far in the
accounting literature to demonstrate preparers’ and users’ readiness to accept IFRS for
SMEs as a stand-alone set of standards. Having an understanding of preparers’ judgments
is also important to the accounting standard setters, including the IASB. Such
understanding further provides important insights on how the judgment and decision
making process of the accountants can be improved, which is eventually beneficial for
numerous stakeholders.
One of the key findings of the second paper of this thesis is that the presence of
confirmation bias in reporting judgments significantly impairs the judgment quality and
consistency in light of the differential reporting framework introduced by the IASB. The
findings further suggest that the justification requirements and decision aids can be usefully
exploited to eliminate such biases. Thus, the findings of this study provide an incremental
contribution to the knowledge of implications of differential reporting frameworks on the
professional judgments of accountants. Overall, the findings of this study broaden the
scope of the judgment and decision making literature in accounting.
13
The findings of the third paper provide a novel contribution to the role that implementation
guidance accompanied in accounting standards can play in improving the judgment and
decision making process of the accountants. This understanding is important to the
accounting standard setters when evaluating the successful implementation of the standard
and when shaping the optimal format for accounting standards. The findings of this thesis
also provide important insights for the development of the teaching, learning and training
process for accounting practitioners. A better understanding of the effects of IFRS for
SMEs on the judgment of accountants is useful for designing appropriate decision aids and
supportive training materials.
The fourth paper of this thesis provides vital evidence on the decision usefulness of the
financial reports that are prepared in compliance with IFRS for SMEs. This study indicates
that the simplified disclosure requirements are useful for bank lending decisions, however,
bank lending officers prefer measurement principles to be the same across all entities
regardless of the size and listed nature of the entities. The findings of this study are
important, particularly to the accounting standard setters, because they provide a deeper
understanding of user perceptions of the decision usefulness of recognition and
measurement principles and the disclosure requirements in IFRS for SMEs.
Overall, this thesis provides important insights into the successful implementation of IFRS
for SMEs by demonstrating evidence from both the preparers and the users of SME
financial statements, particularly drawing evidence from countries that have adopted IFRS
for SMEs. The conclusions derived from this thesis have potential policy implications for
the IASB, accounting regulators at individual jurisdictions, professional accountants and
accounting educators, which will be discussed at the end of each paper and summarised in
Chapter 6 Summary and Conclusions of the thesis.
1.4 ORGANIZATION OF THE THESIS
The thesis is organised into six chapters. Chapter 1 provides an overview of the thesis.
Chapters 2 to 5 comprise the four self-contained papers. Each paper is in journal article
format and the relevant tables, figures and references are incorporated at the end of
respective chapters and the entire bibliography is provided at the end of the thesis. The
14
research instruments that were used to collect the relevant data for studies in Chapters 3, 4
and 5, and the letters of ethics approval obtained for each projects are attached as
Appendices at the end of the thesis. Chapter 6 is the concluding chapter which summarises
the findings of each of the four studies and draws appropriate conclusions and implications.
The limitations of the thesis and suggestions for future research are also discussed in
Chapter 6.
The details of the six chapters are as follows:
Chapter 1 Overview of the Thesis
Chapter 2 Paper 1: Issues in the Adoption of International Financial Reporting

Standards (IFRS) for Small and Medium-Sized Enterprises (SMEs)
Chapter 3 Paper 2: Confirmation Bias in the Reporting Judgments of Accountants

when Applying International Financial Reporting Standards (IFRS) for
Chapter 4 Paper 3: The Impact of the Reduced Guidance in International Financial

Reporting Standards (IFRS) for Small and Medium-Sized Enterprises
(SMEs) on the Reporting Judgments of Accountants
Chapter 5 Paper 4: User Perceptions of the Decision Usefulness of Financial

Statements prepared in compliance with International Financial Reporting
Standards (IFRS) for Small and Medium-Sized Enterprises (SMEs)
Chapter 6 Summary and Conclusions
15
16
CHAPTER 2
(PAPER 1)
Issues in the Adoption of International Financial Reporting Standards

(IFRS) For Small and Medium-Sized Enterprises (SMEs)
17
ABSTRACT
Small and medium-sized enterprises (SMEs) in various jurisdictions are currently

attracting enormous attention and have also stepped into the global accounting reporting
arena as a result of the introduction of International Financial Reporting Standards (IFRS)
for SMEs. This study critically reviews IFRS for SMEs, including the development and
implementation process of the standards. Furthermore, it applies the framework of decision
usefulness theory and the pecking order theory to evaluate issues pertaining to the
development and implementation of IFRS for SMEs. This study provides evidence that
IFRS for SMEs have been a challenge for non-publicly accountable entities to adopt and
there are several conceptual and practical issues with IFRS for SMEs. The analyses and
insights provided by this study will have implications for revising IFRS for SMEs and will
assist in addressing future complications in the SME convergence process.
Keywords: IFRS for SMEs, accounting convergence, non-publicly accountable entities,

SMEs, financial reporting transformation
18
2.0 INTRODUCTION
Small and medium-sized enterprises (SMEs) in various jurisdictions are currently

attracting enormous attention and have also stepped into the global accounting reporting
arena as a result of the introduction of International Financial Reporting Standards (IFRS)
for SMEs. While many countries have adopted full IFRS for publicly accountable entities,
they were reluctant to adopt this set of complex, onerous and costly standards for non-
publicly accountable entities, particularly SMEs (Dang-Duc, 2011; Fearnley & Hines,
2007; Tyrrall, Woodward, & Rakhimbekova, 2007). IFRS for SMEs was therefore an
outcome of a rigorous process pioneered by the International Accounting Standards Board
(IASB) to introduce a simplified version of full IFRS with significantly reduced
recognition and measurement principles and disclosure requirements. IFRS for SMEs have
been issued in anticipation that they will be applied by entities that do not have public
accountability but who prepare general purpose financial statements for external users
(IASB, 2009a).
It is important to note that the majority of entities around the world are represented by
SMEs (Alp & Ustundag, 2009). Moreover, the SME sector is regarded as the backbone of
many economies in both developed and developing countries. This sector makes an
enormous contribution to employment creation, technological innovation and economic
output (see Chen, 2006; OECD, 2005; Reddy, 2007). Prior to the introduction of IFRS for
SMEs in 2009, individual jurisdictions adopted either local generally accepted accounting
principles (GAAP) or full IFRS for the financial reporting purposes of non-publicly
accountable entities and SMEs around the world (Alp & Ustundag, 2009; Tyrrall et al.,
2007). The IASB believes that the adoption of IFRS for SMEs will possibly enhance
SMEs’ access to international finance through harmonized and high quality financial
information (IASB, 2009a).
This movement towards the convergence of IFRS for SMEs still seems to be controversial
for a number of reasons. Deloitte Touche Tohmatsu reports that “many countries are
moving towards adoption of IFRS for SMEs, although it appears these countries may not
have required IFRS accounting ‘across the board’ prior to moving to implementation”
(AASB, 2010a, p. 1). In contrast, more prominent developed countries that have adopted
19
the full set of IFRS, such as Australia, the United Kingdom, and European Union member
states, have not yet adopted IFRS for SMEs.
Many countries, including Australia, are of the view that IFRS for SMEs still appear to be
complex in recognition and measurement principles (AASB, 2010a). Moreover, the
European Commission (EC) is of the view that the objectives of simplification and the
reduction of administrative burden for SMEs has not yet been served by IFRS for SMEs
(EC Explanatory Memorandum, 2011). Such concerns raised by prominent countries or
regions highlight several issues for IFRS for SMEs and their implementation. The entities
(non-publicly accountable entities) that are envisaged as being eligible to apply IFRS for
SMEs represent more than 95 percent of all companies globally (RSM International
Association, 2009). The need to develop an appropriate regulatory framework and to
enable comparable accounting information to be provided by SMEs is considered to be
highly important. Therefore, it is vital to examine the conceptual and technical difficulties
encountered by those countries that have rushed to adopt IFRS for SMEs. This paper
attempts to provide extensive insights on the development and implementation process of
IFRS for SMEs around the world. Such analyses and insights will assist in revising IFRS
for SMEs and will minimize future complications in the SME convergence process.
Prior studies on the financial reporting transformation process with the convergence of
international standards have revealed several functional complications and persistent
issues with the full set of IFRS. Lack of expertise in the accounting and auditing
professions, and inadequate resources and infrastructure facilities for the implementation
of complex, principles-based international standards in developing and transitional
economies have been widely articulated (Alp & Ustundag, 2009; UNCTAD, 2007a). In
particular, the potential knowledge shortfall and strangeness of IFRS and their adverse
impact on the professional judgments of accountants in applying the standards are evident
(Alp & Ustundag, 2009; Chand, Patel, & Patel, 2010; Wong, 2004). Both Alp and
Ustundag (2009) and Chand et al. (2010) pointed out the need for an international
mechanism to enable the effective enforcement of IFRS in individual jurisdictions.
Inconsistencies in the regulatory frameworks and deficiencies in the legal support for
implementing international standards at national level have posed significant challenges
for implementing full IFRS (Alp & Ustundag, 2009). Moreover, Chand et al. (2010) found
that country-specific characteristics, such as existing accounting standards at national level
20
prior to the implementation of international standards, and accounting regulatory
frameworks themselves, influence the adoption of IFRS across countries.
Generally, prior studies reveal that the implementation of IFRS by individual countries
seems to be challenging, in spite of whether the standard is complex or if it is a simplified
version. Therefore, more research on the financial reporting transformation experience of
and by non-publicly accountable entities and SMEs is timely and essential (Evans et al.,
2005). More specifically, the possible transition issues that may arise when moving from
local GAAP/full IFRS to IFRS for SMEs have not been addressed in depth so far in the
literature (AASB, 2010a; Evans et al., 2005).
Importantly, the IASB’s objective of introducing IFRS for SMEs is centered on a new
paradigm of “enhancing decision usefulness” and “reducing information asymmetry” of
the financial information provided by the SMEs across the globe. In accordance with this
new paradigm, this study applies the framework of decision usefulness theory and the
pecking order theory to evaluate issues pertaining to the development and implementation
of new IFRS for SMEs. This paper provides evidence that IFRS for SMEs have been a
challenge for non-publicly accountable entities to adopt. This study identifies several
issues with IFRS for SMEs and their implementation in a variety of countries. The analyses
also provide important insights for prospective countries that are planning to adopt IFRS
for SMEs in the future.
The remainder of this paper is organized as follows. Section 2.1 reviews the accounting
regulatory framework of SMEs. Section 2.2 outlines various definitions that have been
used to define SMEs across the globe. Section 2.3 reveals the importance of SMEs. Section
2.4 provides an overview of the contents of IFRS for SMEs. Section 2.5 provides detailed
information about the adoption of IFRS for SMEs across the globe. Section 2.6 identifies
both the conceptual and technical problems posed by IFRS for SMEs during the initial
implementation process of the new set of standards. Section 2.7 concludes with a review
of the possible implications of IFRS for SMEs.
21
2.1 ACCOUNTING REGULATORY FRAMEWORK FOR SMES
It is widely accepted that explicit accounting information leads to the successful

management of a business, irrespective of its size—large or small (EC, 2012). Generally,
SMEs are exempt from statutory audit requirements and/or are subject to simplified
accounting standards (IFC, 2011).1 With the full set of IFRS applied for publicly
accountable entities, several arguments were raised by small entities about the complexity
of applying full IFRS. Therefore, the need for a simplified set of accounting standards
suitable for SMEs was extensively appealed by many jurisdictions. Consequently, the
IASB issued IFRS for SMEs in July 2009 with the intention that they would be applied by
SMEs around the globe.
It is recognized that IFRS enhance the comparability of financial information of different

entities across the globe (IASB, 2009b). Unlike publicly accountable entities whose
securities are traded in public capital markets, SMEs usually do not have the accountability
to present high quality comparable financial information for users. However, the IASB is
of the view that SMEs would benefit by being able to access competitive loans from
multinational financial lenders, if the financial statements between the countries were
comparable. The primary objective of introducing this standard is to provide financial
reporting relaxation and reduce the administrative burden of entities that do not have public
accountability but prepare general purpose financial statements (GPFSs) for external users.
The IASB believes that the simple version would reflect the needs of users of SMEs’
financial statements and the cost-benefit considerations of SMEs (IASB, 2009b).
The IASB’s objective of introducing a new accounting regulatory framework for SMEs
embraces the concept of ‘user oriented financial information’. The attention on the decision
usefulness in IFRS for SMEs is a paradigm shift from the traditional focus of financial
reporting of SMEs. The decision usefulness theory assumes that “the basic objective of
accounting is to aid the decision-making process of the relevant ‘users’ of accounting
reports by providing useful or relevant accounting data” (Godfrey, Hodgson, Tarca,
Hamilton, & Holmes, 2010, p. 24). This theory provides a logical framework from which
1
The IFC is the leading technical advisor to the G-20 Global Partnership for Financial Institutions’ (GPFI)
SME Finance sub-group and is a member of the World Bank group, which prepares the SME Finance Policy
Guide for the World Bank.
22
to derive accounting principles and practices. In the history of the financial reporting
standard setting process, decision usefulness theory has been an important yardstick in
choosing appropriate accounting treatments that fit the information needs of users (Son,
Marriott, & Marriot, 2006).
Extant literature points out that little is known about the real users and their information
needs in relation to SME financial statements (see Dang-Duc, 2011; Evans et al., 2005;
Sian & Roberts, 2008 and Son et al., 2006 for review). Even in the limited available
literature, there is an inconsistency in the findings on users and their information needs in
relation to SME financial statements and these questions remain unanswered (Son et al.,
2006). Users and their information needs are varied between publicly accountable entities
and non-publicly accountable entities. The development process of simplifying the
accounting principles and practices based on the same conceptual framework and the
extent to which these simplifications are derived from the information needs of the users
of SMEs financial information is however unclear.
Another revolutionary idea in introducing IFRS for SMEs is to enhance SMEs access to
international capital through high quality, harmonized financial statements. As suggested
by the pecking order theory, entities prioritize their sources of financing in a hierarchical
order of preference from internal sources of financing, debt financing to equity financing
(Myers, 1984). According to this theory, the information asymmetry affects the choice
between internal and external sources of financing (Myers, 1984). As far as the effective
use of financial information in accessing external sources of funds is concerned, the
IASB’s objective of reducing information asymmetry of SMEs by preparing high quality
financial statements using IFRS for SMEs needs to be evaluated using the pecking order
theory.
2.2 DEFINITIONS FOR SMALL AND MEDIUM-SIZED ENTERPRISES
It is generally claimed that there is no universally accepted definition for SMEs. In fact, it
is difficult to adopt a universal definition for SMEs due to differences in firm size, sectors,
culture and the development status of economies in which SMEs operates (Kushnir, 2010;
UNCTAD, 2007b). Gibson and Vaart (2008) propose a new quantitative formula for
23
defining SMEs that takes into account the revenue of a company and the country-specific
economic context in which the SME operates.2 The economic considerations (Gross
National Income and Purchasing Power Parity) incorporated into this formula would
ensure a consistent approach for defining SMEs in USD terms across countries and would
improve the comparability between different SMEs operating in the global market, thereby
overcoming the difficulties of adopting a one-size-fits-all approach (Gibson & Vaart,
2008). However, some definitions specific to international organizations (for example, the
European Commission, World Bank, and United Nations Development Programme) and
country-specific definitions for SMEs remain prominent and are often based on size-
thresholds such as employee headcount, annual turnover and total asset values.
The European Commission (EC) adopted the Commission Recommendation 2003/361/EC

of 6th May 2003 on the new definition of SME with effect from 1st January 2005 (EC,
2003). The EC is of the view that “it is essential that measures in favour of SMEs are based
on a common definition to improve their consistency and effectiveness, and to limit
distortions of competition” (EC, 2003, p. 6).
As shown in Table 2.1, EC has three distinct categories of SMEs. In the largest category,
medium-sized enterprises consist of enterprises that employ less than 250 employees with
an annual turnover of less than or equal to 50 million Euros and an annual balance sheet
total of less than or equal to 43 million Euros. Secondly, small enterprises are defined as
enterprises which employ less than 50 employees and whose annual turnover or annual
balance sheet total does not exceed 10 million Euros. Thirdly, micro-enterprises are
defined as enterprises which employ less than 10 employees and whose annual turnover or
annual balance sheet total does not exceed 2 million Euros. The employee headcount
threshold is compulsory; however it is not mandatory to meet both turnover and balance
sheet thresholds concurrently (EC, 2003). This ensures that SMEs engaged in different
types of economic activity are treated fairly, given that their financial information is by
nature different. In accordance with the definition, an entity needs to be an “enterprise” to
qualify as an SME, defined as any entity engaged in an economic activity, irrespective of
its legal form (EC, 2003).
2
The proposed formula is expressed as Annual Turnover between USD Minimum 10-Maximum 1000 * Mean
Per Capita Gross National Income at Purchasing Power Parity of the country in which the SME operates.
24
It is worthwhile to note that the criteria defined in the EC definition are the key conditions
for treating an enterprise as an SME. An enterprise will be treated differently depending
on whether the enterprise has any relationships, partnerships or links with other enterprises.
The EC has affirmed that the use of the definition is voluntary for its member states, though
the Commission, together with the European Investment Bank and the European
Investment Fund, urges them to apply it as widely as possible (EC, 2003).
The World Bank identifies only the maximum threshold for defining SMEs, with no
classification made between micro, small and medium enterprises to reflect the size of the
enterprise. As defined by the World Bank, the maximum threshold for the number of
employees is 300, with maximum revenue (turnover) and assets value of 15 million US
dollars each (Gibson & Vaart, 2008).
There is no common definition for SMEs in Asia Pacific Economic Corporation (APEC)
economies (see Table 2.1 for examples). In Australia, for example, the Australian Bureau
of Statistics (ABS) defines a micro-enterprise for statistical purposes as an enterprise that
has less than 4 employees. A small enterprise is defined as an actively trading business that
has less than 19 employees, and a medium enterprise as an actively trading business that
has between 20 to 199 employees (DIISR, 2011).3 Australian SME financial reporting is
based on the Reporting Entity Concept as defined by the Statement of Accounting Concepts
(SAC 1) (Public Sector Accounting Standards Board, 1990).4
In Canada, the Public Works and Government Services of Canada (PWGSC) defines SMEs
as enterprises whose employee count is less than 500. The threshold for small
manufacturing enterprises is less than 100 employees and for service enterprises are less
than 50 employees (PWGSC, 2011). In Korea, the Small Business Corporation (SBC) of
Korea defines SMEs as enterprises that have less than 300 employees with a capital worth
of $8 million or less for manufacturing enterprises. They categorize micro and small
manufacturing enterprises as those that employ 10 and 50 employees respectively (SBC,
3
Actively Trading Businesses are businesses that have an Australian Business Number (ABN).
4
A Reporting Entity is defined as follows: “an entity in respect of which it is reasonable to expect the
existence of users who rely on the entity’s general purpose financial statements for information that will be
useful to them for making and evaluating decisions about the allocation of resources. A reporting entity can
be a single entity or a group comprising of a parent and all of its subsidiaries.” (AASB, 2011, p. 10)
25
2009). Singapore adopted a new definition for SMEs with effect from 1st April 2011,
whereby an SME is defined as a company whose annual sales turnover is not more than
S$100 million or who employs not more than 200 workers (The Standards, Productivity &
Innovation Board Singapore, 2011). In Japan, the Ministry of Economy, Trade and
Industry (METI) defines SMEs in four industry categories; manufacturing, wholesale,
retail and services, and a Japanese SME is defined as an enterprise which employees 300
or less people and whose capital size is ¥ 300 million or less (EIU, 2010).
The Asian Development Bank (ADB) has not introduced a formal definition for SMEs;
however, ADB relies on a country-specific definition in its place. There is no common
definition for SMEs among South Asian countries; instead, different countries adopt
different definitions for SMEs decided by their own parameters (see Table 2.1 for South
Asian Country-Specific SME definitions).
The United States of America (US) takes a different approach to defining SMEs. The Small
Business Administration (SBA) has established “size standards” for small businesses
(SBA, 2012).5 A size standard is stated in the number of employees or average annual
receipts, and is set for each individual North American Industry Classification System
(NAICS) coded industry.6 Based on these criteria, SBA has established a standard of 500
employees for most manufacturing and mining industries and US$7 million in average
annual receipts for most non-manufacturing industries (SBA, 2012).7 The US definition
for small businesses seems complex in nature, but variations in size standards are assumed
to depict industry differences better than any other definitions discussed so far.
The IASB adopted a definition for SMEs when IFRS for SMEs came into effect in July
2009. According to the standard, SMEs are entities that:
a) do not have public accountability, and
5
The SBA is a US government agency that provides a wide range of financial and counseling support to
entrepreneurs and small businesses.
6
NAICS is the standard used by Federal statistical agencies to classify business establishments for the
purpose of collecting, analyzing and publishing statistical data related to the US business economy.
7
See http://www.sba.gov/content/summary-size-standards-industry for a summary of size standards by
industry.
26
b) publish general purpose financial statements for external users. Examples
of external users include owners who are not involved in managing the
business, existing and potential creditors, and credit rating agencies (IASB,
2009a, p. 10).
An entity has public accountability if:
a) its debt or equity instruments are traded in a public market or it is in the

process of issuing such instruments for trading in a public market (a domestic
or foreign stock exchange or an over-the-counter market, including local and
regional markets); or
b) it holds assets in a fiduciary capacity for a broad group of outsiders as one
of its primary businesses. This is typically the case for banks, credit unions,
insurance companies, securities brokers/dealers, mutual funds and
investment banks (IASB, 2009a, p. 10).8
The IASB’s definition of SMEs is more loosely defined than the typical SME definitions
adopted by various jurisdictions. The RSM International Association indicates that:
This definition avoids a quantified size test and, instead, adopts a public
accountability principle. IFRS for SMEs has been designed using a 50-employee
typical entity guideline, not as a quantified size test for defining SMEs but rather
to assist the Board in determining the types of transactions that the standard should
address… (RSM International Association, 2009, p. 5).
Revelations of the various SME definitions illustrate that there is inconsistency in the
definitions of SMEs across the globe. In particular, the definition of an SME in the context
of IFRS for SMEs is significantly different to that of most other countries and is based on
the listed status of an entity rather than on its size-threshold. Authorities at the individual
jurisdiction level are permitted to decide what constitutes an eligible entity and are entitled
to apply IFRS for SMEs (IASB, 2009a). However, the inconsistency between general
8
The IASB has made limited amendments to IFRS for SMEs after completing the initial comprehensive
review in May 2015 (IFRS Foundation, 2015a). The definition in paragraph 1.3 (b) has been rephrased as “it
holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. Most
banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks
would meet this second criterion” (IFRS Foundation, 2015a, p. 19).
27
definitions of an SME and IASB’s definition is problematic in terms of the implementation
of IFRS for SMEs, as will be explained in Section 2.6.
2.3 IMPORTANCE OF SMES ACROSS THE GLOBE
SMEs play a vital role in economic and social development in developed and developing
economies. In many APEC economies, SMEs hold a major share of businesses and
employment and contribute significantly to economic output (APEC, 2009). For example,
in Australia, SMEs accounted for 99.7 percent of actively trading businesses in June 2009
(DIISR, 2011). Importantly, the majority of Australian SMEs function as the resource
providers for large manufacturing firms. In terms of employment, SMEs accounted for
70.5 percent of total industry employment in 2009-2010 (DIISR, 2011).
In other countries and regions, the contributions made by SMEs are also significant. For
example, SMEs in China play a significant role in economic development, accounting for
a GDP contribution of 60 percent in 2009. Chinese SMEs created around 80 percent of
urban job opportunities in 2009 (Zhu, Wittmann, & Peng, 2012). More importantly, the
role of SMEs in the field of technology innovation is regarded as remarkable. Since
economic reform, more than 65 percent of invention patents, 75 percent of technological
innovation, and 80 percent of new product development have been recorded by Chinese
SMEs (APEC, 2008). In Japan, almost 99 percent of businesses are considered to be SMEs,
representing the majority of the employed population and accounting for a significant
proportion of the economic output (EIU, 2010).
The economic and social contribution of SMEs in a number of developing countries has
also received increased attention. SMEs in Sri Lanka provide a growing contribution to the
GDP (52 percent in 2011), particularly in agriculture, plantation, construction,
manufacturing and trade sectors (Department of Development Finance, 2011). The SME
Chamber of India (2012) reports that around 45 percent of industrial output, 40 percent of
exports and 42 million people in employment are contributed by SMEs. In South Africa,
SMEs, which account for around 91 percent of formal business entities, had contributed
around 57 percent and 60 percent to the GDP and employment respectively by the end of
2009 (Kongolo, 2010).
28
In Europe, SMEs accounted for a 67 percent share of the total employment in 2010 (EIM
Business and Policy Research, 2011).9 In the period 2002-2010, SMEs created 85 percent
of net new jobs in the EU, of which micro-firms (by definition having fewer than 10
employees) accounted for the highest percentage of 58 percent (EIM Business and Policy
Research, 2011). This figure also indicates a significant growth of micro-firms in the EU
during the last few years.
The United States Trade Representative (USTR) (2010) reports that SMEs in
manufacturing and services sectors have entered into ‘direct exports’, by contrast with
large multinational firms, which trade mostly through foreign affiliates. During the period
2005-2009, 73 percent of foreign sales were committed by their exporting SMEs through
direct exports. Importantly, these direct exports have led to the creation of nearly 2 million
jobs (USTR, 2010).
The above facts confirm that the SME sector has been positioned as the most crucial sector
and the backbone of many developed and developing economies around the world.
Therefore, the accounting information presented by these focal entities is equally
important. It is envisaged that the global convergence of the financial reporting practices
of SMEs will possibly open access to international finance through high quality,
comparable financial information (IASB, 2009a).
2.4 IFRS FOR SMES AT A GLANCE
IFRS for SMEs are a simplified version of full IFRS which is primarily based on the
fundamental principles of full IFRS (IASB, 2009b). However, IFRS for SMEs is a stand-
alone document—logically structured into 35 sections by topic. IFRS for SMEs approaches
with significantly reduced disclosures of around 300, compared to full IFRS of 3000
disclosures, and with reduced guidance. The standard is based on simplified recognition
and measurement principles and several easy accounting policies. Several topics have been
omitted from IFRS for SMEs which are not relevant to SMEs (e.g. earnings per share,
interim financial reporting, segment reporting, and special accounting for assets held for
9
A study on the impact of SMEs on the EU labor market was conducted by EIM Research & Business
Policy-Netherlands on behalf of the EC in 2011.
29
sale), and extra considerations specific to SMEs (e.g. combined financial statements,
original issue of shares or other equity instruments, sale of options, rights and warrants,
and capitalization or bonus issue of shares and share splits) have been incorporated (IASB,
2009b).
The main simplification of recognition and measurement principles of IFRS for SMEs
compared to full IFRS are contrasted in several sections of IFRS for SMEs (the key
differences between IFRS for SMEs and full IFRS are shown in Table 2.2).10 The
accounting treatment under Section 19 Business Combinations and Goodwill in IFRS for
SMEs is significantly different to IFRS 3 Business Combinations. Under IFRS 3, goodwill
and other intangible assets with a definite useful life are reviewed for impairment and not
amortized. In contrast, goodwill and intangible assets are amortized over their useful life
in IFRS for SMEs. If a reliable estimate of the useful life cannot be made, “life” is
presumed to be 10 years (Ernst & Young, 2010; IASB, 2009a).11
Section 14 Investments in Associates and Section 15 Investments in Joint Ventures of IFRS

for SMEs, permit investments in associates and jointly controlled entities to be accounted
for, using the cost model (if a published price quotation is not available), the equity method
and the fair value model. In contrast, International Accounting Standard (IAS) 28
Investments in Associates & Joint Ventures permits the equity method to be used in the
consolidated accounts (Ernst & Young, 2010; IASB, 2009a).
Recognition and measurement of “uncertain tax positions” have been incorporated into
IFRS for SMEs (Sections 29 Income Tax) and deferred tax assets have to be recorded under
IFRS for SMEs with offsetting valuations allowances, which is not covered by IFRS (IAS
12 Income Tax) (Ernst & Young, 2010; IASB, 2009a).12
10
The simplification in the recognition and measurement requirements of IFRS for SMEs discussed in this
paper are based on the first publication of IFRS for SMEs issued in 2009. The analysis also refers to the
amendments made in May 2015, which will be effective from the annual periods beginning on or after 1
January 2017.
11
The amendments to IFRS for SMEs require that if a reliable estimate of useful life cannot be made,
management must use their best estimate which shall not exceed 10 years (IFRS Foundation, 2015a).
12
The IASB has amended Section 29 Income Tax of IFRS for SMEs by aligning the main recognition and
measurement requirements for income tax with IAS 12 Income Taxes of full IFRS which will be effective
on or after 1 January 2017 (IFRS Foundation, 2015a).
30
2.5 ADOPTION OF IFRS FOR SMES ACROSS THE WORLD
It is now nearly six years since IFRS for SMEs was first issued. The recent statistics show
that nearly 70 jurisdictions have either adopted IFRS for SMEs or made a public
announcement of their intention to apply the standard in the future (IFRS Foundation,
2014a). Some countries in South America, Central America, the Caribbean, Africa, Asia,
Middle East and European regions have adopted IFRS for SMEs (see Table 2.3) (IFRS
Foundation, 2014a).
South Africa was an early respondent to IFRS for SMEs, having adopted the standard with
no modifications when the ED of IFRS for SMEs was issued by the IASB in October 2007
(IFRS Foundation, 2012a). However, the South African Institute of Chartered Accountants
(SAICA) had been working on developing a third tier financial reporting framework for
micro-entities (Micro GAAP) as they believed that the ED of IFRS for SMEs was
burdensome for micro-entities (SAICA, 2012). Later, SAICA withdrew the proposed
Micro GAAP as IFRS for SMEs was issued in 2009 in a more simplified version than the
ED. Nevertheless, the SAICA has developed a separate electronic guide for micro-entities
on applying IFRS for SMEs, comprising of more practical examples, illustrative financial
statements and user and disclosure checklists (SAICA, 2012).
Hong Kong, on the other hand, has also adopted IFRS for SMEs, but with a few
modifications made to the standard—referring to them as the Hong Kong Financial
Reporting Standards (HKFRS) for Private Entities. Their standard is primarily based on
IFRS for SMEs, but refers to “Private Entities” rather than “SMEs”. However, the same
definition as applied by the IASB to define eligible entities for IFRS for SMEs has been
adopted. The standard setters believe that the national criteria used to define SMEs often
refer to smaller entities irrespective of whether they prepare GPFSs for external users.
Therefore, based on this argument, the Hong Kong Institute of Certified Public
Accountants (HKICPA) has replaced the term “SMEs” with “Private Entities”. All other
smaller entities which do not come under the “Private Entities” definition are therefore
eligible to apply the locally developed SME Financial Reporting Framework and Financial
Reporting Standard (SME-FRF & FRS). Furthermore, HKFRS for Private Entities has
replaced certain income tax recognition and measurement principles in Section 29 of IFRS
for SMEs with certain tax requirements in the extant version of HKAS (Hong Kong
31
Accounting Standards) 12 Income Tax. These changes ensure the appropriateness of
HKFRS for Private Entities, and ease the changeover from the existing HKFRS to HKFRS
for Private Entities (HKICPA, 2011, 2012).
For SMEs in Brazil, the Brazilian Accounting Pronouncement Committee has introduced
CPCs for SMEs (new Brazilian GAAP for SMEs) which is a translation (Portuguese
version) of IFRS for SMEs. However, in addition to the IASB definition for SMEs (non-
publicly accountable entities), a Brazilian SME also needs to meet certain “size criteria”
to qualify for the application of the standard (PriceWaterhouseCoopers, 2012).13 Brazil has
also made a few modifications to IFRS for SMEs by requiring SMEs to use the equity
method to account for investments in subsidiaries in separate financial statements (IFRS
Foundation, 2014a).
Countries such as Argentina, Bahamas and Cambodia have also adopted IFRS for SMEs
as published by the IASB with no amendments made to the standard. These countries have
kept the use of the standard optional whereby SMEs may use the national GAAP or
alternatively full IFRS, according to their requirements (see Figure 2.1 for the application
status of IFRS for SMEs).
It is important to note that major developed and developing countries such as Australia,
the United Kingdom, France, Germany and Canada have still not adopted IFRS for SMEs.
There are several reasons for a number of prominent countries choosing not to adopt IFRS
for SMEs, which are revealed in Section 2.6.
2.6 PROBLEMS POSED BY IFRS FOR SMES
The discussions on issues in the financial reporting convergence process have been
motivated since the inception of the implementation process of the full set of IFRS. There
have been several functional complications reported in the convergence process of IFRS
by countries that have adopted IFRS (Alp & Ustundag, 2009; UNCTAD, 2007a; Wong,
2004). Conversely, due to the recent publication of IFRS for SMEs and the slow take-up
of the new standard by various jurisdictions across the globe, the consequences of adopting
13
Size criteria include: Revenue < R$300 million and Total assets < R$240 million.
32
IFRS for SMEs are still presumed to be impending. Diverse complications and
controversial issues in adopting IFRS for SMEs have been reported by many jurisdictions,
especially by developed countries. Taking examples from the implementation of the full
set of IFRS and IFRS for SMEs context, the next section provides a holistic view on the
problems experienced and the possible challenges in implementing IFRS for SMEs across
the globe. To evaluate the problems posed by the implementation of IFRS for SMEs, this
discussion applies, where relevant, decision usefulness theory and pecking order theory.
2.6.1 Issues with the IASB’s development process of IFRS for SMEs
The IASB has set meeting the needs of users of SME financial statements as one of the
primary objectives of introducing IFRS for SMEs. The IASB (2009b) points out that the
differences between full IFRS and IFRS for SMEs should be established based on the
accounting information needs of the users and cost-benefit considerations. Such views
show that the accounting information needs of the users have been an important benchmark
in the differential reporting framework introduced by the IASB.
As explained by the decision usefulness theory, assessing the decision usefulness of the
users is a primary test for defining the generally acceptable principles of accounting
regulations. However, Schiebel (2008) demonstrates that IASB has given less
consideration to users’ participation in the consultation process during the development of
the new standard because the major commentators were represented by auditors,
accountants and standard setters.14 Additionally, the European Union consultation on IFRS
for SMEs by German Cooperative and Raiffeisen Confederation (DGRV) (2010) reports
that no IASB Board member has an SME background or has participated in an SME
working group. Therefore, it is unlikely that the concerns of SMEs are adequately
addressed in the standard setting process of IFRS for SMEs. If IFRS for SMEs do not
reflect the information needs of external users, the perceived benefits of the published
information of SMEs for external users become uncertain. In particular, this situation
would be more distressing for small and micro-entities.
14
The IASB engaged in a long consultation process before releasing IFRS for SMEs in July 2009. They
published a discussion paper for public comment in June 2004 to gather preliminary views on the new
standard.
33
The IASB’s objective of allowing SMEs to access international competitive funds by
producing high quality, comparable financial statements is a remote objective. This
objective coincides with the pecking order theory, which explains that an entity’s choice
of finance between internal and external sources varies with the level of information
asymmetry of financial information. Regardless of reducing the information asymmetry,
SMEs in general are hesitant to seek external sources of capital because of several external
constraints such as the complex procedures involved in granting loans, collateral
requirements and the associated high capital cost (Hyz, 2011). Rather, the majority of
SMEs still rely on owner financial resources and retained earnings as suggested by the
pecking order theory. Kauffmann (2005) confirms that there is limited access to formal
finance sources as a result of the high default risk among SMEs in Africa. Furthermore,
the development stage of the entity, creditworthiness, liquidity position and delinquency
of SMEs are also found to be barriers to accessing external funds. Therefore, the
preparation of high quality financial statements may not be the exclusive solution for
accessing external funds, particularly accessing international funds.
A narrow definition of non-publicly accountable entities has made it confusing for eligible
entities to apply the eventual standard. As previously outlined, the IASB (2009a) defines
an SME as an entity that does not have public accountability but prepares general purpose
financial statements for external users. However, there appears to be an inconsistency in
this definition between the criterion used to define an SME – “non-publicly accountable
entities” and the intended users of the standard – “SMEs”. Whilst conveying the
importance of introducing IFRS for SMEs, the IASB stresses that SMEs are estimated to
represent more than 95 percent of all companies around the world (IFRS Foundation,
2012a). However, this estimation is based on those SMEs that were categorized according
to size-thresholds, not necessarily based on the criterion of non-publicly accountable
entities envisaged by the IASB.
The history of the development of the project and implementing IFRS for SMEs provides
evidence that the IASB has been confused in selecting an appropriate title, with changes
made to the title several times. The title “IFRS for SMEs” was finally agreed a few months
34
before the release of the standard in July 2009 (RSM International Association, 2009).15
This may pose issues in implementing the standard due to the inconsistency between the
IASB definition of SMEs and the various definitions adopted by other countries and
regions to define SMEs.
It is worth mentioning that the majority of SME definitions include “micro” enterprises,
though the abbreviation “SME” refers only to small and medium enterprises. For this
reason, the abbreviation “MSME” (micro, small and medium-sized enterprises) is
becoming popular in place of “SME” for definitions adopted by different economies. For
example, South Asian economies such as India, Bhutan, and Maldives are currently using
the abbreviation MSME. However, there appears to be an injustice in discussing these three
categories of enterprises together, because micro-enterprises and SMEs are distinctly
dissimilar in their business scope. The question may again be posed as to whether micro-
firms should be treated as SMEs according to the definition adopted by IASB for defining
small and medium entities in IFRS for SMEs. Certainly, differently defined SMEs would
be a challenge when making comparisons of businesses across the globe.
2.6.2 National legislations and enforcement issues
One of the major issues that need to be discussed during the implementation process of
IFRS is the extent to which the fragmented regulatory authorities at the individual
jurisdiction level hinder the effective and efficient implementation of international
standards (Alp & Ustundag, 2009; UNCTAD, 2007a). Using examples from countries such
as Pakistan, South Africa and Turkey to demonstrate, UNCTAD expounds this divergence
issue by saying “the practical implementation issue that arises in this context is the extent
to which IFRS-based general-purpose financial statements could be used for prudential
regulation. Such an arrangement would require clear understanding to be reached among
the different regulators” (UNCTAD, 2007a, p. 10).
15
Other names suggested: IFRS for Private Entities, IFRS for Non-publicly Accountable Entities, IFRS for
Nonpublic-Interest Entities, IFRS for Private Companies, IFRS for Smaller Entities, IFRS for Unlisted
Entities, and IFRS for Limited Interest Entities.
35
A number of countries have been pressured to establish new institutions or to reinforce the
roles of existing institutions to strengthen the enforcement conduct of the regulatory
authorities (UNCTAD, 2007a). Moreover, Alp and Ustundag (2009) and UNCTAD
(2007a) point out that the successful enforcement of international standards at each country
level will be challenging in the absence of consistency in the regulatory framework and the
legal backing of IFRS. Within this context, the implementation of IFRS for SMEs would
be confronted with national legislation requirements. In many countries, SMEs are
required to prepare financial statements in compliance with certain tax legislation,
especially for the purpose of filing tax returns. Countries such as Lebanon, Slovakia,
Austria, and Russia believe that SMEs are in favor of preparing financial statements for
tax purposes only (IFRS Foundation, 2011). Therefore, IFRS for SMEs is believed to be a
burden and too difficult for their SMEs to adopt. For example, in Germany, financial
statements usually serve a multi-purpose function and therefore, SMEs prefer to prepare a
single set of financial statements which also satisfies taxation purposes (Evans et al., 2005).
France, on the other hand, rejected IFRS for SMEs as they do not adequately fit with their
integrated tax and accounting framework (PWC, 2010). Evans et al. (2005) also points out
that the preparation of separate financial and tax accounts would be costly and a burden
for small entities.
There are several incidences in which the issue of adopting IFRS for SMEs arises due to
inconsistencies in reporting frameworks determined by individual jurisdictions (locally
developed GAAPs) and IFRS for SMEs. Countries such as Japan, Austria, Germany,
Belgium, Indonesia, India and several other jurisdictions emphasize their requirement for
compliance with national laws and other local GAAPs for SMEs, rather than adopting
IFRS for SMEs (IFRS Foundation, 2011). There are also countries that do not apply GAAP
at present for their SMEs. The United Arab Emirates (UAE), for instance, currently does
not have national GAAP for SMEs in its reporting framework and is therefore uncertain
about adopting IFRS for SMEs for all the business entities due to its immaturity in applying
a financial reporting framework and due to potential knowledge shortfall (ICAEW, 2010).
The UAE economy is substantially represented by family-owned businesses. These family
businesses have generally not opted for the use of IFRS for SMEs (IFRS Foundation,
2014a). Japan, on the other hand, has still not formally adopted full IFRS in their reporting
framework and therefore is not considering adopting IFRS for SMEs at this stage (IFRS
Foundation, 2011).
36
2.6.3 Complexity and other difficulties in implementing IFRS for SMEs
The issue of the complexity of the international standards has been persistently discussed
since the inception of IFRS implementation process. A number of studies have identified
that the complex nature of the full set of IFRS poses several practical difficulties,
particularly in developing economies (Alp & Ustundag, 2009; UNCTAD, 2007a; Wong,
2004). Moreover, a lack of technical expertise in the accounting and auditing professions
and the potential knowledge shortfall in dealing with international standards has been
widely articulated (Alp & Ustundag, 2009; UNCTAD, 2007a). IFRS for SMEs are deemed
to be a less complex and simplified version of the full set of IFRS, but as far as the intended
users of the new standard are concerned, several arguments have been made about the
incongruity and the burden of IFRS for SMEs. For example, having experienced several
difficulties in adopting full IFRS in 2005, Australia is more concerned about the possible
transition issues that may arise during the implementation process of IFRS for SMEs
(AASB, 2010a). The transition process from local GAAP/full IFRS to IFRS for SMEs may
impose certain difficulties on business practices, processes and systems, which often turn
out to be costly, complex and prolonged for small entities to take on.
Australia is of the view that IFRS for SMEs still appear to be complex in the recognition
and measurement requirements (AASB, 2010a). Deloitte Touche Tohmatsu (Australia)
reports that:
The approach of effectively adopting IFRS for all entities in Australia from 2005,
albeit with an overlaid ‘reporting entity’ concept, has meant that a lot of the ‘pain’
of adopting IFRS has already been incurred in the Australian context. Compared
with IFRS, IFRS for SMEs do not result in a substantial reduction in complexity
in the recognition and measurement requirements - and in fact many
‘simplifications’ may be more onerous in practice (e.g. introduction of ‘uncertain
tax position’ accounting for income taxes), be counterintuitive (e.g. mandatory
amortization of goodwill over a 10 year period) or may ultimately be adopted in
‘IFRS proper’ (e.g. rewrite of financial instruments requirements). Furthermore,
there are as yet no widely accepted interpretations of contentious issues under
IFRS for SMEs, a position similar to the original IFRS transition in 2005, with all
the uncertainty this brought on transition (AASB, 2010a, p. 1).
37
Difficulties in implementing an international standard because of a lack of widespread
technical expertise in the accounting environment are also a concern. Australia is also of
the view that the coexistence of opposing IFRS recognition and measurement principles
for identical circumstances harms the standards and also the practitioners. For these
reasons, Australia has so far not adopted IFRS for SMEs. Instead, the AASB has adopted
the Reduced Disclosure Regime (RDR) implemented under the revised differential
reporting framework for issuing new accounting standards—AASB 1053 Application of
Tiers of Australian Accounting Standards and AASB 2010-2 Amendments to Australian
Accounting Standards arising from Reduced Disclosure Requirements in 2010. This has
made amendments to the existing Australian Accounting Standards, including the
Interpretations. The publicly accountable entities are required to apply full IFRS as adopted
in Australia under Tier 1, whereas all other preparers of GPFSs which fall into Tier 2, are
required to apply IFRS recognition, measurement and presentation requirements with
substantially reduced disclosures (AASB, 2010b).16
Similarly, the European Commission has kept the adoption of IFRS for SMEs within the
European Union optional. There appears to be no strong objection to adopting the new
standard; however, the EC is of the view that the objectives of simplification and reduction
of administrative burden would not be served by IFRS for SMEs (EC Explanatory
Memorandum, 2011). The European Financial Reporting Advisory Group (EFRAG)
reports that IFRS for SMEs’ conventions are incompatible with EU Directives (Fourth &
Seventh) in several ways (EFRAG, 2010).17 This will result in financial statements
prepared under IFRS for SMEs being neither comparable with financial statements
prepared according to EU Accounting Directives nor with full IFRS financial statements
(DGRV, 2010). In addition to the issues mentioned above, complexities arising with future
changes to full IFRS and additional difficulties encountered by subsidiaries and companies
planning to transition to full IFRS are major concerns in Europe in relation to not adopting
IFRS for SMEs.
For these reasons, after certain review processes for the adoption of IFRS for SMEs and
EU Accounting Directives, the European Commission published a Proposed Directive on
16
See http://www.aasb.gov.au/Pronouncements/RDR-early-application-versions-2011-2012.aspx for
2011/12 RDR versions.
17
EFRAG carried out this compatibility study on behalf of the European Commission in 2010.
38
25th October 2011 which is a specific regime for small companies and replaces the Fourth
(78/660/EEC) and Seventh (83/349/EEC) Company Law Directives (Treaty on the annual
accounts of certain types of companies and Treaty on consolidated accounts respectively)
(EC Explanatory Memorandum, 2011). The aims of this Proposed Directive are to reduce
the administrative burden on small companies and increase the comparability of the
financial statements. The main simplification effects are outlined in Table 2.4.
The principal modification to the existing provisions is the introduction of general

principles of “materiality” and “substance over form” to increase the clarity of the financial
statements (EC Explanatory Memorandum, 2011).
Canada has also opted for developing an independent set of standards for their private
entities rather than choosing IFRS for SMEs. KPMG (2009, p. 2) states that “some
requirements of IFRS for SMEs, such as consolidation; componentization of property,
plant and equipment; and deferred income tax accounting do not recognize the needs of
and are inappropriate for Canada’s private businesses and the users of their financial
statements.” Followed by a “made-in-Canada” approach, the Canadian Accounting
Standards Board has published a simplified set of accounting standards for private
enterprises which is called “Accounting Standards for Private Enterprises (ASPE)” in
2009.
2.6.4 Technical difficulties inherent in IFRS for SMEs
With respect to the technical matters that persist with the implementation of the full set of
IFRS, the UNCTAD argues that “the practical implementation of IFRS requires adequate
technical capacity among preparers, auditors, users and regulatory authorities. Countries
that implement IFRS face a variety of capacity-related issues; depending on the approach
they take” (UNCTAD, 2007a, p. 11).
The practical implementation of IFRS for SMEs would also be challenging, because the
capacity limitations of financial markets, institutions and regulatory authorities vary across
the globe. Prominent professional accounting networks such as PWC (2011), Ernst &
39
Young (2010) and KPMG (2010) demonstrate the possible problematic sections of IFRS
for SMEs that could develop with so-called capacity limitation issues.
As specified by Section 26 Share Based Payments of IFRS for SMEs, if the fair value of
shares in equity-settled share-based payments is not observable, and obtaining entity
specific market data is impracticable, the directors should use their judgment to apply the
most appropriate valuation methodology (see Table 2.2). Since full IFRS (IFRS 2 Share
Based Payments) allows using “Intrinsic Value” in the absence of a reliable estimate of
fair value, the IASB believes that the simplified valuation of share-based payments would
be appropriate for SMEs. However, PWC (2011) points out that only in rare situations is
it unable to estimate the reliable fair value. Furthermore, the Institute of Chartered
Accountants Australia (ICAA) (2012, p. 3) points out that “an intrinsic value model would
require a valuation to be conducted on the SME’s shares in any event. It is difficult to see
any simplifications here”. Therefore, ICAA (2012) suggests that it is necessary to specify
valuation models for SMEs to determine the fair value. The technical challenges in fair
value-based measurement requirements in IFRS have, however, been a major issue of
concern. More specifically, differences in the liquidity of capital markets and the lack of
availability of recent capital market information of different economies would be
challenging issues, for which practitioners need to seek alternative sources of
measurement. The accurate estimation and consistent application of these alternative
measurements would nevertheless be a confronting issue (Alp & Ustundag, 2009; Mala &
Chand, 2012; UNCTAD, 2007a).
Accounting for Borrowing Costs (Section 25) of IFRS for SMEs is another area where
technical implementation difficulties may occur. Section 25 allows an SME to expense all
borrowing costs to profit or loss in the period in which they are incurred. However, Ernst
& Young (2010) points out that this recognition may be a significant burden for certain
industries, such as ‘construction’, because it would affect the profit or loss with a
considerable cost being charged to income statement.
Deferred tax assets (Section 29), which have to be recorded with offsetting valuation
allowances, and recognition and measurement under “uncertain tax positions”, have been
incorporated into IFRS for SMEs. ICAA (2012) and Ernst & Young (2010) believe that
these two requirements will be difficult for small entities to apply in practice and that their
40
incomprehensible nature will lead to interpretation issues for the preparers of financial
statements.18 Similarly, the insufficiency of available guidance on the foreign currency
translation (Section 30), which may result in different interpretations being adopted by
different entities, is also a concern (Ernst & Young, 2010).
Section 17 of IFRS for SMEs has prohibited the revaluation option of accounting for
Property, Plant and Equipment (PPE) believing that the revaluation of PPE is one of the
complex accounting policy options in full IFRS. Considering this as a significant barrier
to the adoption of IFRS for SMEs in jurisdictions where SMEs commonly revalue their
PPEs, many accounting regulatory bodies around the world have made representations to
the IASB to reconsider incorporating the revaluation option in IFRS for SMEs.
Revaluation of PPE has been a common practice among unlisted companies in many
countries, particularly where there has been a history of inflation (ACCA, 2012). Many
jurisdictions are of the view that the revaluation option does not add significant complexity;
rather the fair value measurement in PPE would enhance the relevance and reliability of
financial statements for users of SMEs. It would also facilitate access to capital, as in many
cases the carrying value of PPE can be a significant portion of an entity’s assets (Chartered
Accountants of Sri Lanka, 2014; EFRAG, 2014). Hence, the inclusion of revaluation
option would offer an opportunity for different jurisdictions to select a measurement option
which suits their circumstances (EFRAG, 2014). The EFRAG (2014) also signifies that the
negative effects of the application of complex accounting policy options could be
outweighed by the increased usefulness of the financial information provided by SMEs.19
ACCA (2010) and KPMG (2010) have raised concerns about issues arising from the effect
of changes in recognition and measurement principles of IFRS for SMEs on tax and the
distributable profits of SMEs. KPMG (2010) points out that changes in the amount of taxes
payable (which is either affected by changes in net profit or tax law based on the accounting
treatment), the ability to pay dividends; and management compensation (which is based on
either net profit or other financial metrics) are the possible impacts of changes in
18
As the IASB has amended the Section 29 Income Tax of IFRS for SMEs by aligning the main recognition
and measurement requirements for deferred income tax with IAS 12 Income Taxes, it can be expected that
these issues will be minimised when the amendments come into effect from January 2017.
19
After an in-depth consultation with constituents, the IASB has decided to include the option to use the
revaluation model for PPEs with effect from 1 January 2017. As such, it can be assumed that these
amendments will alleviate these complications and SMEs will reap the aforesaid benefits.
41
recognition and measurement principles of IFRS for SMEs. Therefore, KPMG (2010)
urges the need for sufficient forward planning to control the adverse impacts of adopting
IFRS for SMEs.
Furthermore, when developing IFRS for SMEs, some key concepts and application
guidance have been dropped in certain sections of IFRS for SMEs. For example, under the
section on intangible assets acquired in a business combination, there is an absence of
guidance on the types of intangibles that might be recognized, as well as no detail on fair
value measurement considerations. Further, the recognition requirements of financial
guarantees are not mentioned (ICAA, 2012). Nevertheless, even within the framework of
principles-based standards, the reduced guidance of IFRS for SMEs may pose certain
difficulties when accountants exercise their professional judgment.
It is argued that the absence of specific guidance on a particular accounting issue leads the
users of the standards (specifically the accountants) to a tiered hierarchy to allow the
selection of an appropriate accounting policy. This hierarchy flows from the SME’s own
accounting framework (IFRS for SMEs) of pervasive concepts, to the application of
judgment in consultation with the full set of IFRS (ICAA, 2012). For an example, the IFRS
Foundation (2012b, p. 1) reports that:
In the absence of specific requirements for transactions, events or conditions,

paragraph 10.4 of IFRS for SMEs requires management to use its judgment in
developing an accounting policy that is reliable and results in information that is
relevant to the economic decision-making needs of users. Paragraph 10.5
establishes the following hierarchy for an entity to follow in deciding on the
appropriate accounting policy:
a) the requirements and guidance in IFRS for SMEs dealing with similar and
related issues; and
b) the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses and the pervasive principles in Section 2
Concepts and Pervasive Principles.
Paragraph 10.6 notes that in making the judgment described in paragraph 10.4,
management may also consider the requirements and guidance in full IFRSs dealing with
42
similar and related issues. When following paragraphs 10.4 and 10.5, full IFRS principles
may be used in the absence of specific guidance in IFRS for SMEs. Since paragraph 10.4
and Section 2 are based on full IFRSs, using requirements in full IFRSs will result in an
appropriate accounting treatment.
The Hong Kong Institute of Certified Public Accountants (2011, p. 3) also points out that:
If full IFRS is to be used as a fallback, it should first of all not conflict with the
requirements and guidance in IFRS for SMEs dealing with similar and related
issues and secondly it should not conflict with the pervasive principles in Section
2 of IFRS for SMEs.
Moreover, they are concerned that circumstances may arise, or already exist, where new
IFRSs are issued and these new IFRSs are based on principles other than the older IFRS
standards on which IFRS for SMEs is based. The specific guidance in the new IFRS could
then be applied even when it is inconsistent with guidance provided in IFRS for SMEs on
related issues. Furthermore, the Singapore Accounting Standards Council (ASC) (2011, p.
2) points out that:
As requirements and guidance in full IFRS may not always be consistent with
those in IFRS for SMEs, applying full IFRS guidance could result in non-
compliance with paragraph 10.5(a), and hence the standard itself. Application of
this hierarchy is also problematic in countries who adopt IFRS for SMEs for their
non-publicly accountable entities without converging with full IFRS.
In addition to the technical difficulties discussed above, criticisms have been made against
differential reporting for SMEs that could lead to different “true and fair views”. Evans et
al. (2005) argue that the “true and fair view” principle would not be consistent between
entities in the same jurisdiction if different entities are subject to different reporting
requirements as specified by full IFRS and IFRS for SMEs. Moreover, the Association of
Chartered Certified Accountants (ACCA) (2010) points out that the “true and fair view”
becomes subjective when a fair presentation is viewed against differential reporting
regimes rather than a single reporting framework common to all entities. Therefore, a
number of researchers have suggested giving consideration to reduced or different
43
disclosure requirements for SMEs (compared to full IFRS), rather than different
recognition and measurement principles which could lead to different “true and fair views”
(Evans et al., 2005).
As evidenced by developed economies such as Australia, New Zealand and the United
Kingdom, the major reason for the reluctance to adopt IFRS for SMEs has been the
negative perception towards the “two different true and fair views”. For example, Australia
is of a strong view that “the development of two separate and unrelated suites of accounting
principles operating in one economic environment is undesirable” (ICAA, 2014, p. 2).
Australian regulators also assert that the IASB’s overemphasis on the simplification of
accounting principles would lead to divergence in reporting needs between non-publicly
and publicly accountable entities. They further stress the existence of inconsistency in the
“true and fair view” principle among entities in the same jurisdiction if different reporting
requirements as specified by full IFRS and IFRS for SMEs are applied.
The self-contained nature and the stable platform for IFRS for SMEs prevent SMEs
departing from the standard and choosing accounting policies from full IFRS (ICAA, 2014;
Kemp, 2010). The ICAA and prominent accounting regulatory bodies in Australia have
raised concerns that the rapid major changes which have taken place in full IFRS would
have to be appropriately embedded into IFRS for SMEs in order to minimize the
divergence between IFRS for SMEs and full IFRS. Australia is not in favour of the IASB’s
decision on IFRS for SMEs to maintain a stable platform without opting for regular updates
with recurring changes in full IFRS. This complexity has been articulated by the ICAA and
AASB in all their correspondence with the IASB. This has been further articulated in their
response to the IASB’s recent Request for Information on the ED for SMEs and they
emphasize that the IASB needs to reconsider its decisions regarding the simplification of
accounting principles in order to make IFRS for SMEs more reasonable and appealing to
users (see AASB, 2014; ICAA, 2014 for a review).
The recent comment letter sent by the ICAA to the IASB on ED for IFRS for SMEs
acknowledges that:
One possible consequence of an IFRS for SMEs standard diverging in this way is
that the reporting needs of many non-publicly accountable entities will not be
44
effectively addressed. The decisions of different jurisdictions worldwide on the
adoption of IFRS for SMEs may already be evidence of that. Jurisdictions such as
Australia and the UK have used some of its principles in developing local
standards for use by non-publicly accountable entities, rather than adopting IFRS
for SMEs standard as is. Other jurisdictions have chosen to retain local Generally
Accepted Accounting Principles (GAAP) and full IFRS alternatives in preference
(ICAA, 2014, p. 2).
Due to the complexities and disagreements cited above, records indicate that amongst the
countries who opted for IFRS for SMEs, many jurisdictions have given SMEs a choice
between full IFRS and the local GAAP instead of IFRS for SMEs (see Figure 2.1) (IFRS
Foundation, 2014a). For example, Israel has decided not to make the use of IFRS for SMEs
mandatory due to the differences in measurement requirements between IFRS for SMEs
and full IFRS. However, Israel intends to reconsider mandatory adoption after the first
revision of IFRS for SMEs (IFRS Foundation, 2014a; UNCTAD, 2013). The Singapore
Accounting Standards Council (ASC) has issued additional guidance to the Singapore
Financial Reporting Standards (SFRS) equivalent to IFRIC 15 Agreements for the
Construction of Real Estate. This guidance has been made as an integral part of the SFRS
for Small Entities and is intended to be consistent with the requirements of IFRIC 15 of
full IFRS (IFRS Foundation, 2014a).
As IFRS for SMEs is not appealing in its current state, some jurisdictions have decided to
make significant modifications to the standard in order to conform to the requirements of
full IFRS. For example, countries such as the United Kingdom and Ireland have modified
the standard by adding (1) the revaluation option to revalue PPE and intangible assets, (2)
an option to capitalize borrowing costs on qualifying assets, and (3) a timing difference
approach to deferred income taxes rather than a temporary difference approach, etc. in
order to mitigate the significant differences between the non-listed and listed entities (IFRS
Foundation, 2014a). Pakistan is currently considering the adoption of IFRS for SMEs.
However, Pakistan authorities will only consider adopting the standard by removing the
differences in some recognition and measurement criteria, such as capitalization of
borrowing cost on qualifying assets, revaluation option on PPE and valuation allowance of
deferred tax assets (UNCTAD, 2013).
45
As evidenced by the existing literature on international reporting standards for SMEs, the
implementation and adoption of IFRS for SMEs still seems to be controversial. The
problems associated with the transformation process to a common set of international
accounting standards, and the technical issues inherent in the recognition and measurement
principles of the new standard, are expected to be a continuing challenge in achieving
comparable global financial information produced by SMEs worldwide.
2.7 CONCLUSIONS AND IMPLICATIONS
The objective of this paper was to critically review IFRS for SMEs, including their
development and implementation processes. Using the decision usefulness theory and the
pecking order theory, the viability of the IASB’s focus on enhancing decision usefulness
and reducing the information asymmetry of financial information of SMEs was appraised
in this paper. As suggested by the decision usefulness theory, an accounting regulatory
framework needs to be derived through the financial information needs of the users at large.
However, the analyses revealed that the user’s orientation has not been adequately
addressed by the IASB during the standard setting process of IFRS for SMEs. This infers
that the IASB has followed an indeterminate basis for modifying and simplifying full IFRS
principles and disclosure requirements for SMEs. In light of the cost-benefit
considerations, SMEs may be hesitant in choosing IFRS for SMEs, if IFRS for SMEs do
not clearly represent the user’s information needs.
In accordance with the pecking order theory, internal sources of funding still appear to
have primacy in the hierarchy of funding of SMEs and certain barriers to accessing external
sources of capital move beyond the information asymmetry of financial information
provided by SMEs. The analyses suggest that a proper mechanism would be required at
individual jurisdiction level to safeguard the SMEs before they are exposed to global
comparisons for accessing international competitive funds as envisaged by the IASB.
While many countries have adopted IFRS for SMEs, with or without modifications, there
are still a number of prominent countries who have yet to adopt this set of standards. This
study provides evidence that countries opposed to the adoption of IFRS for SMEs have
identified many problems with it, including the perceived burden for small and micro-
46
entities, inconsistencies with reporting frameworks at a national level and difficulties in
the adoption process. Furthermore, technical difficulties inherent in certain sections of
IFRS for SMEs and their potential complexity in the preparation of financial statements
were also outlined. Countries have also highlighted the existence of inconsistency in the
“true and fair view” principle among entities in the same jurisdiction if different reporting
requirements, as specified by full IFRS and IFRS for SMEs, are applied. Therefore,
adopting IFRS for SMEs appears to be challenging, with several practical difficulties in
their implementation.
Though it is obvious that IFRS for SMEs are a simplified version of full IFRS, the
application of this set of standards still seems to be burdensome for small and micro-
entities, especially micro-entities. Countries that adopt locally developed GAAP, in
particular, seem reluctant at present to accept IFRS for SMEs for this specific reason. The
necessity of enforced international reporting standards for smaller and micro-entities still
remains uncertain, and there may be a need for further simplification or for a fully
simplified set of new standards which address the modest financial accounting needs of
micro-entities.20
The interpretation of the eligibility of entities to adopt IFRS for SMEs and the title of the
new standard itself has also created controversy. If the “size-threshold” is used as a
common indicator to separate small and medium-sized entities from large enterprises,
embarrassment might be created among entities regarding their eligibility to apply this set
of standards. A controversial issue would be that large private entities with no public
interest could also apply IFRS for SMEs though they do not yet belong to the SME
category. Therefore, it may be necessary to create an alignment between the quantitative
and qualitative criteria—the “size” and “non-listed status” of an entity (as decided in
Brazil), to minimize the difficulties associated with the interpretation of which entities are
eligible to apply IFRS for SMEs. Furthermore, a single set of reporting standards would
be difficult to implement across all SMEs, which are defined differently across the globe.
20
The IASB, in consultation with the SME Implementation Group (SMEIG), has developed and published
guidelines to help micro-entities apply IFRS for SMEs.
47
As far as the cost implications in adopting IFRS for SMEs are concerned, the preparation
of financial statements under the new standard is said to be cost-effective, with IFRS for
SMEs having significantly reduced disclosure requirements compared to full IFRS. This
might be true if a transition is made from full IFRS to IFRS for SMEs. At present, SMEs
in many countries prepare their financial statements based on local GAAP requirements,
so the transition from local GAAP to IFRS for SMEs may therefore increase the cost of
the preparation of financial statements. Costs associated with training, changes to the
existing systems/packages, the re-establishment of financial statements, extra consultation,
and so on would also be onerous for SMEs adopting IFRS for SMEs. Thus, the precise
effect on the cost-benefit considerations of such simplification in the recognition and
measurement requirements of IFRS for SMEs is uncertain.
The implementation of two versions of international financial reporting standards (full

IFRS and IFRS for SMEs) in the same jurisdiction may present certain difficulties for
entities. Differential reporting may also pose difficulties if an entity that has adopted IFRS
for SMEs wishes to shift to full IFRS. Some countries are more concerned with the issue
of compatibility of international standards with local legislation, because offering an option
to adopt full IFRS, local GAAP or IFRS for SMEs according to requirements or discretion
would create future complications in terms of the comparability of financial statements
across various business categories. These complications present challenges to the
implementation of IFRS for SMEs given the many national and cultural diversities around
the world.
Certain limitations of this study need to be acknowledged. The discussion on the

implementation issues of IFRS for SMEs was based on prior studies that reported the
transformation of the full set of IFRS, IFRS for SMEs, and recent information published
by IFRS Foundation and prominent professional accounting bodies on the implementation
of IFRS for SMEs. This may limit the scope of the study; however, based on the conceptual
and practical issues identified, future research could be undertaken in various jurisdictions
to reveal the actual implementation difficulties and issues encountered at the country
and/or regional level in the adoption of IFRS for SMEs. From the perspective of those
countries that have already adopted the new standard, future studies could also investigate
the cost-benefit considerations of IFRS for SMEs.
48
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55
Table 2.1: Size threshold for SMEs worldwide
Region/ Micro Enterprise Small Enterprise Medium Enterprise
Country Employee Total Assets/Total Annual Employee Total Assets/Total Annual Employee Remarks
Total Assets/Total Annual Turnover
Headcount Turnover Headcount Turnover Headcount
European < 10 ≤ € 2 million and ≤ € 2 m < 50 ≤ € 10 million and ≤ € 10 m < 250 ≤ € 43 million and ≤ € 50 m
Union
Australia <4 < 19 20 – 199
Canada < 100 employees for manufacturing < 500
< 50 employees for service employees
Korea ≤ 10 employees for manufacturing ≤ 50 employees for manufacturing <300 Capital worth $8 million for
manufacturing
Manufacturing & Others Wholesale Retail Services
APEC
Japan ≤ 300 Capital Size ¥ ≤ 300 m ≤ 100 Capital Size ¥ ≤ 100 m ≤ 50 Capital Size ¥ ≤ 50 m ≤ 100 Capital Size ¥ ≤ 50 m
employees
<Rs. 25 Lakhs investment < Rs.5 Crore – >Rs. 25 Lakhs < Rs.10 Crore – >Rs. 5 Crore Applies to Manufacturing & Production
in plant & machinery investment in plant & machinery investment in plant & machinery Enterprises
India <Rs. 10 Lakhs investment <Rs. 2 Crore – >Rs. 10 Lakhs <Rs. 5 Crore – >Rs. 2 Crore Applies to Service Enterprises
in equipment investment in equipment investment in equipment
10 – 24 or less Assets worth Tk 5 - 50 25 – 99 Assets worth Tk 50 Lakh to Tk 100 – 250 Assets worth Tk 10 – 30 Crore Applies to Manufacturing Enterprises
Lakh 10 Crore
Bangladesh
10 or less Assets worth Tk 5 Lakh or 10 – 25 Assets worth Tk 5 Lakh to Tk 1 50 – 100 Assets worth Tk 1 – 15 Crore Applies to Service Enterprises
less Crore
<5 Investment capital less 5 – 19 Investment capital between NU 1 20 – 99
Investment capital between NU 10 –
Bhutan
than NU 1 million – 10 million 100 million
Fixed assets up to Rs. 30 million Fixed assets between Rs. 30 – 100
Nepal
million
up to 5 Annual income of MRF 6 – 30 Annual income between MRF 31 – 100 Annual income between MRF As defined by Ministry of Economic
Maldives
500,000 500,001 – 5,000,000 5,000,001 – 20,000,000 Development
SMEs are defined as enterprises with a capital investment of less than Rs. 5 million which employ fewer than 50 employees As defined by Department of Small
Industries
South Asia
Sri Lanka SMEs are defined as enterprises with a capital investment of less than Rs. 20 million in plant, machinery and equipment excluding land and buildings, an As defined by The Export Development
annual turnover not exceeding Rs. 40 million, and a total annual turnover not exceeding Rs. 100 million Board
SMEs are defined as enterprises whose employment size is up to 250, with paid up capital to Rs. 25 million and an annual sales value up to Rs. 250 As defined by Government of Pakistan
Pakistan million.
Source:
1. Dorji, L. (2012). MSME Development in Bhutan. Department of Employment. Ministry of Labour and Human Resources. Retrieved from http://www.undp.org.my/page.php?pid=98&menu=main
2. Industrial Enterprises Act. (1992). An Act made to provide for the industrial development. Retrieved from http://www.fncci.org/iea92.pdf
3. Ministry of Economic Development (MED). (2012). Small and medium enterprise definitions. Retrieved from http://www.trade.gov.mv/?lid=115
4. Ministry of Industries (MOI). (2010). National industrial policy. Retrieved from http://www.moind.gov.bd/index.php?option=com_content&task=view&id=489&Itemid=524
5. Ministry of Industries Production and Special Initiatives. (2007). SME Policy: SME led economic growth, creating jobs and reducing poverty. Government of Pakistan. Pakistan, Retrieved from
6. Ministry of Law and Justice. (2006). The micro, small and medium enterprises development Act No.17; India. Retrieved from http://www.dic.kerala.gov.in/web/pdffiles/micro_small.pdf
7. Task Force for SME Sector Development Program. (2002). White Paper - National strategy for small and medium sector development in Sri Lanka. Retrieved from
http://www.ips.lk/publications/series/gov_reports/sme_white_paper/sme_white_paper.pdf
56
Table 2.2: Major differences between IFRS for SMEs and full IFRS
IFRS for SMEs IFRS Equivalent Key areas of differences between IFRS for SMEs and IFRS
Section Topic
6 Statement of Changes in Equity IAS 1 Presentation of Financial “Statement of Income & Retained Earnings” is a new statement incorporated into IFRS for SMEs.
and Statement of Income and Statements A statement of income and retained income may be presented in place of the statement of
Retained Earnings comprehensive income and statement of changes in equity, if the only changes to equity comprise
profit or loss, payment of dividends, corrections of prior year errors and changes in accounting policy.
10 Accounting Policies, Estimates IAS 8 Accounting Policies, If IFRS for SMEs does not specifically address a transaction, other event or condition, an entity’s
and Errors Changes in Accounting management shall use its judgment in developing and applying an accounting policy. In making the
Estimates and Errors judgment, management shall refer to, and consider the applicability of: (a) the requirements and
guidance in IFRS for SMEs dealing with similar and related issues; and (b) the definitions, recognition
criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive
principles in Section 2 Concepts and Pervasive Principles. Management may also consider the
requirements and guidance in full IFRS dealing with similar and related issues, but not mandatory.
11-12 Basic Financial Instruments and IAS 39 Financial Instruments: An embedded derivative is separated from the host contract and accounted for as a derivative under
Other Financial Instruments Recognition IAS 39 under certain conditions. There is no concept of embedded derivatives under IFRS for SMEs.
Issues and Measurement Derecognition and Hedging requirements have been simplified.
14-15 Investments in Associates and IAS 28 Investments in A venturer shall account for all of its interests in jointly controlled entities using either: (a) the cost
Investments in Joint Ventures Associates and Joint Ventures model; (b) the equity method; or (c) the fair value model. However, IFRS for SMEs permits the use
of the cost model only if a published price quotation is not available, otherwise use of the fair value
is permitted.
16 Investment Property IAS 40 Investment Property Under subsequent measurement, an investment property whose fair value can be measured reliably
without undue cost or effort must be measured at fair value at each reporting date with changes in fair
value recognized in profit or loss. An entity accounts for all other investment property as property,
plant and equipment using the cost-depreciation-impairment model in Section 17.
17 Property, Plant & Equipment IAS 16 Property, Plant & An entity must measure all items of property, plant and equipment after initial recognition at cost less
Equipment any accumulated depreciation and any accumulated impairment losses. Only the historical cost
method is permitted, no revaluations. However, the amendments to IFRS for SMEs have included the
option to use the revaluation model for PPEs with effect from 1 January 2017.
18-19 Intangible Assets other than IAS 38 Intangible Assets Under IFRS for SMEs, in subsequent measurement, intangible assets are measured at cost less
Goodwill and Business accumulated amortization and impairment losses. It does not permit the application of the revaluation
Combinations & Goodwill model to intangible assets.
Goodwill and intangible assets are amortized over its useful life. If a reliable estimate of useful life
cannot be made, the life is presumed to be 10 years. However, the amendments to IFRS for SMEs
require that if a reliable estimate of the useful life cannot be made, management must use their best
estimate which shall not exceed 10 years.
57
20 Leases IAS 17 Leases Additional guidance is given on operating leases. Operating leases are expensed on a straight-line
basis or another basis that represents the use of the asset, unless payments to the lessor increase with
expected inflation, in which case the payments are expensed when payable.
24 Government Grants IAS 20 Accounting for An entity shall recognize government grants according to the nature of the grant as follows:
Government Grants and
Disclosure of Government a) A grant that does not impose specified future performance conditions on the recipient is
Assistance recognized in income when the grant proceeds are receivable.
b) A grant that imposes specified future performance conditions on the recipient is recognized
in income only when the performance conditions are met.
c) Grants received before the income recognition criteria are satisfied are recognized as a
liability and released to income when all attached conditions have been complied with.
Grants are measured at the fair value of the asset received or receivable.
25 Borrowing Costs IAS 23 Borrowing Costs All borrowing costs are expensed in profit or loss in the period in which they are incurred.
26 Share-Based Payments IFRS 2 Share-Based Payments IFRS for SMEs uses a hierarchy to determine the fair value of shares issued based on:
a) Observable market prices.

b) If unobservable, entity specific observable market data, such as a recent transaction in the
instruments or a recent independent valuation of the entity.
c) If the fair value is not observable and obtaining entity specific market data is impracticable,
the directors should use their judgment to apply the most appropriate valuation methodology.
28 Employee Benefits IAS 19 Employee Benefits All actuarial gains and losses must be recognized in full either in profit or loss or in other
comprehensive income. Post-retirement defined benefit plans recognition and measurement are
significantly different to IFRS.
29 Income Tax IAS 12 Income Taxes Deferred tax assets have to be recorded under IFRS for SMEs with offsetting valuation allowances
(this is not included in IAS 12). “Uncertain tax positions” recognition and measurement have been
incorporated in IFRS for SMEs. However, the amendments have aligned the main recognition and
measurement requirements for deferred income tax with IAS 12 Income Taxes with effect from 1
January 2017.
30 Foreign Currency Translations IAS 21 The Effects of Changes Exchange differences on monetary items are recognized in profit or loss for the period except for
in Foreign Exchange Rates those differences arising on a monetary investment in a foreign entity (subject to strict criteria of what
qualifies as net investment). In the consolidated financial statements, such exchange differences are
recognized in other comprehensive income and reported as a component of equity.
Source: Ernst & Young (2010); IASB (2009a); IFRS Foundation (2015a)
58
Table 2.3: Examples of countries which have adopted/planned to adopt IFRS for SMEs
Region Countries
South America Argentina, Brazil, Chile, Colombia, Ecuador, Guyana, Peru and Venezuela
Caribbean Anguilla, Antigua & Barbuda, Bahamas, Barbados, Dominica, Dominican
Republic, Jamaica, Montserrat, Saint Lucia, St Kitts-Nevis, St Lucia and
Trinidad & Tobago
Central Belize, Costa Rica, El Salvador, Grenada, Guatemala, Honduras, Nicaragua,
America Panama, St Vincent and the Grenadines
Africa Botswana, Ghana, Kenya, Lesotho, Mauritius, Nigeria, Rwanda, Sierra
Leone, South Africa, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe
Asia Bangladesh, Cambodia, Fiji, Hong Kong, Maldives, Myanmar, Philippines,
Singapore and Sri Lanka
Middle East Bahrain, Iraq, Israel, Jordan, Saudi Arabia, United Arab Emirates and Yemen
Eurasia Azerbaijan and Turkey
Europe Armenia, Georgia, Herzegovina, Ireland, Macedonia, Serbia, Switzerland and
United Kingdom
Source: IFRS Foundation (2014a)
Table 2.4: Proposed directive simplification – European Commission

The proposal has introduced a specific regime for small companies that will considerably reduce
the administrative burden currently borne by small companies when they prepare their financial
statements. It has reduced the disclosures by way of notes to the accounts to:
(i) accounting policies;

(ii) guarantees, commitments, contingencies and arrangements that are not recognized
in the balance sheet;
(iii) post-balance sheet events not recognized in the balance sheet;
(iv) long-term and secured debts; and
(v) related party transactions. It should be noted that mandating the disclosure of items
(iii) and (v) will result in new obligations imposed for small companies, as a
majority of Member States have provided for exemptions from these disclosures for
such companies.
The Proposed Directive also aims:
(i) to harmonize thresholds to ensure that the administrative burden reduction actually
reaches all small companies in the EU. Currently many companies that are small
under EU definitions enter the medium-sized or large company category; and
(ii) to improve the comparability and clarity of financial statements prepared by
medium-sized and large companies, and by small companies to a limited extent.
General principles such as “substance over form” become mandatory so as to
increase the clarity of financial statements.
The EC has recommended small companies to:
(i) impose no requirements for a statutory audit; and
(ii) exempt small groups from preparing consolidated financial statements.
Source: EC Explanatory Memorandum (2011, pp. 6-7)
59
Figure 2.1: Application status of IFRS for SMEs in countries that have adopted the
standard
1%
Require to use IFRS for SMEs for all

12%
the SMEs
23%
Choice to use full IFRS instead of the
IFRS for SMEs
Choice to use either full IFRS or local

GAAP instead of the IFRS for SMEs
Choice to use loacl GAAP instead of

64%
the IFRS for SMEs
Source: IFRS Foundation (2014a)
60
CHAPTER 3
(PAPER 2)
Confirmation Bias in the Reporting Judgments of Accountants When

Applying International Financial Reporting Standards (IFRS) For Small and
Medium-Sized Enterprises (SMEs)
61
ABSTRACT
This study conducts an experiment that investigates confirmation bias in the reporting
judgments of accountants when applying International Financial Reporting Standards
(IFRS) for small and medium-sized enterprises (SMEs). In particular, the study examines
the likelihood that prior knowledge and beliefs about full IFRS influence the reporting
judgments of accountants when applying IFRS for SMEs. This study also examines the
likelihood that judgment justification requirements and the availability of decision aids
assist in mitigating the confirmation bias that arises from prior knowledge and beliefs on
full IFRS. The results indicate that the inability of accountants to choose the accounting
treatment that best reflects the economic substance of a transaction when applying IFRS
for SMEs is a function of the bias towards the recognition and measurement principles of
full IFRS. The results also suggest that confirmation bias in judgments can be mitigated by
increasing accountants’ awareness of justification requirements and by using appropriately
designed decision aids which contrast the differences in the recognition and measurement
criteria between full IFRS and IFRS for SMEs. These results are likely to be of interest to
the 70-plus countries that have adopted the SME standard and other countries that continue
to contemplate the adoption of IFRS for SMEs.
Keywords: Confirmation bias, IFRS, SMEs, reporting judgment, judgment justification,

decision aids.
62
3.0 INTRODUCTION
The International Financial Reporting Standards (IFRS) for small and medium-sized
enterprises (SMEs) were issued by the International Accounting Standards Board (IASB)
in 2009 to introduce a simplified version of full IFRS with significantly reduced
recognition and measurement principles and disclosure requirements. This study examines
the confirmation bias in the reporting judgments of accountants when applying IFRS for
SMEs.21 In particular, the study examines the likelihood that prior knowledge and beliefs
about full IFRS influence the reporting judgments of accountants when applying IFRS for
SMEs.22 This study also examines the likelihood that judgment justification requirements
and the availability of decision aids help to mitigate the confirmation bias that arises from
prior knowledge and beliefs on full IFRS.
Diverse complications and controversial issues in the adoption of IFRS for SMEs have
been reported by many jurisdictions. For example, prominent developed countries that
have adopted the full set of IFRS, such as Australia, the United Kingdom and European
Union member states, have yet to adopt IFRS for SMEs. The relevance and necessity of
applying two different sets of standards in the same jurisdiction, in particular, have been
questioned. Problems that may arise when certain accounting policies, recognition and
measurement requirements are different across full IFRS and IFRS for SMEs are of major
concern to prominent accounting institutions and accounting regulators (Australian
Accounting Standards Board (AASB), 2012; EC Explanatory Memorandum, 2011).
Australia is one of the first countries to declare that it will not adopt IFRS for SMEs,
arguing that this standard has many inherent problems. Instead, a second tier of reporting
requirements comprising full IFRS recognition and measurement and reduced disclosure
similar to IFRS for SMEs has been implemented.
Canada has rejected the adoption of IFRS for SMEs for private enterprises, although
Canada adopted full IFRS for all publicly accountable enterprises. The Accounting
21
The psychological phenomenon whereby people manifest a strong tendency to confirm rather than
disconfirm current beliefs and hypotheses in judgment and decision making is commonly referred to as
confirmation bias.
22
‘Prior belief’ refers to a decision maker’s beliefs on different values of an issue before the results of a study
are evaluated (see Edwards & Smith, 1996; Lord, Ross & Lepper, 1979).
63
Standards Board (AcSB) in Canada has developed a separate financial reporting
framework that is tailored to the needs of private enterprises (IFRS Foundation, 2015b).
The AcSB is of the view that substantial deviations in recognition and measurement
principles of full IFRS may result in inconsistent interpretations, which would adversely
affect comparability and consistency. Further, the AcSB also points out that diversity of
practice between private and publicly accountable entities may be more of a problem for
practitioners who are involved in financial reporting practices of both private and publicly
accountable entities (AcSB, 2008).
Similarly, the European Commission (EC) has kept the adoption of IFRS for SMEs within
the European Union optional. There appears to be no strong objection to adopting the new
standard; however, the EC is of the view that the objectives of simplification and reduction
of administrative burden would not be served by IFRS for SMEs (EC Explanatory
Memorandum, 2011). The European Financial Reporting Advisory Group (EFRAG)
reports that IFRS for SMEs’ conventions are incompatible with EU Directives (Fourth &
Seventh) in several ways (EFRAG, 2010). This will result in financial statements prepared
under IFRS for SMEs being neither comparable with financial statements prepared
according to EU Accounting Directives nor with full IFRS financial statements (DGRV,
2010). In addition to the issues mentioned above, complexities arising from future changes
to full IFRS and additional difficulties encountered by subsidiaries and companies
planning transition to full IFRS are major concerns in Europe for not adopting IFRS for
SMEs.
A key issue in adopting IFRS for SMEs is that a thorough understanding and awareness by
accountants of the differences between the two sets of standards is required. Accountants’
reporting judgments on IFRS for SMEs may be biased when the recognition and
measurement requirements of IFRS for SMEs vary from those for full IFRS. For example,
expensing all research and development costs and borrowing costs when they are incurred,
recognising revenue of agreement for the construction of real estate, and the amortization
of goodwill over their useful life in a business combination, are some of the significant
deviations from the provisions of full IFRS. Accountants in many nations (i.e., 120 plus
countries) had been educated and trained to apply full IFRS for a number of years prior to
IFRS for SMEs coming into effect. Bias towards prior beliefs about full IFRS may hinder
the ability of accountants to choose the accounting treatment that best reflects the economic
64
substance of a transaction when applying IFRS for SMEs. This also implies that
accountants will not perceive IFRS for SMEs as being a stand-alone document.
The IASB has widely adopted the principles-based approach in setting their accounting
standards. Tweedie (2007) observed that the true-and-fair override embedded in the
principles-based approach in IFRS requires the application of professional judgment.
There is also the extensive use of professional judgment in the principles-based approach
to IFRS in the simplified nature of IFRS for SMEs. In assessing the merits and challenges
of using principles-based IFRS for SMEs, no attention has been paid to the notion that
accountants might not be able to apply the simplified accounting policies, recognition and
measurement requirements in IFRS for SMEs independent of their prior knowledge and
beliefs about full IFRS. The human tendency to dislike change and to prefer to continue
with past practices can result in misleading financial reporting if accountants incorrectly
apply their prior knowledge and beliefs about full IFRS in the context of IFRS for SMEs.
The established body of evidence in psychology and audit literature that pertains to bias in
judgments associated with a decision maker’s prior knowledge and beliefs provides a
strong rationale for examining this issue and to provide both a practitioner and theoretical
contribution on the impact of prior knowledge and beliefs about full IFRS on financial
reporting for SMEs.
Prior judgment and decision making research suggests that decision makers often search
their long-term memory (pre-existing knowledge structures) to retrieve evidence about
current matters (Birnberg & Shields, 1984; Choo & Trotman, 1991). In the process of
retrieving prior knowledge for subsequent decision making, there is a tendency to confirm
rather than disconfirm currently held beliefs and hypotheses about a transaction or event,
commonly referred to as confirmation bias (Waller & Felix, 1984). This phenomenon can
also bias the reporting judgments of accountants when using IFRS for SMEs. Based on the
argument that accountants hold strong prior knowledge about full IFRS, the subsequent
reporting judgments of accountants on IFRS for SMEs may be biased towards full IFRS
where the recognition and measurement requirements are different across the two sets of
standards in identical cases or transactions. An examination of this issue will be useful for
all the nations (i.e., 70 plus countries) that have already adopted IFRS for SMEs, and who
are seeking ways to enhance the judgments of their accountants and potentially improve
the quality of financial reporting for SMEs in their respective jurisdictions.
65
To explore these issues and examine the impact of prior knowledge and beliefs on full
IFRS on financial reporting for SMEs, an experiment is conducted in which experienced
accountants are placed in a revenue recognition decision context. Judgment justification in
the hypothetical scenario is manipulated between participants, who are either required or
not required to justify their judgments. The availability of a decision aid is manipulated
between participants and participants were either provided or not provided with the
differences in revenue recognition criteria between full IFRS and IFRS for SMEs.
The first hypothesis presumes that the tendency to confirm prior knowledge and beliefs
about the full set of IFRS will bias the reporting judgments of accountants when applying
IFRS for SMEs. The results indicate the presence of confirmation bias towards the full set
of IFRS in financial reporting for SMEs. As expected, the inability of accountants to
choose the accounting treatment that best reflects the economic substance of a transaction
when applying IFRS for SMEs is a function of the bias towards the recognition and
measurement principles of full IFRS. The second and third hypotheses examine the
potential role that the judgment justification requirement and the availability of decision
aids play in mitigating the confirmation bias arising from prior beliefs about full IFRS. The
results suggest that confirmation bias in judgments can be eliminated by increasing
accountants’ awareness of the justification requirements. The results also indicate that
confirmation bias in judgments can be eliminated by the use of appropriately designed
decision aids which contrast the differences in the recognition and measurement criteria
between full IFRS and IFRS for SMEs.
This study contributes to the important debate on whether IFRS for SMEs have the
potential to improve the quality of financial reporting for SMEs. The findings indicate that
accountants are yet to shift their mindset and accept IFRS for SMEs as a stand-alone set of
standards. The results of this study imply that countries adopting IFRS for SMEs can only
reap benefits if the necessary investment in accounting education and training is made so
that accountants are able to differentiate between the recognition and measurement criteria
of full IFRS and IFRS for SMEs. These outcomes bring into question the argument that
adopting IFRS for SMEs ensures better reflection of economic reality in financial reporting
for SMEs.
66
The remainder of the paper is organized as follows. Section 3.1 provides the background
and Section 3.2 outlines the relevant literature and develops the hypotheses. Sections 3.3
and 3.4 describe the experiment used to test the hypotheses and present the results. Section
3.5 provides a summary and offers the conclusions and implications of the study.
3.1 BACKGROUND
The IASB promulgated a simplified version of full IFRS as a regulatory remedy in

response to the strong international demand to reduce the complexity and administrative
burden of SME financial reporting (IASB, 2009a). By preparing financial statements in
accordance with simplified IFRS for SMEs, the IASB anticipates that the objectives of
generating high quality financial information and enhancing the comparability of financial
statements between SMEs across the globe will be achieved. Realizing these objectives
seems to be challenging for practising accountants because several arguments against the
simplified IFRS for SMEs have been made since their publication in 2009.
The need for general comparability between full IFRS and IFRS for SMEs received a great
deal of attention during the initial comprehensive review of IFRS for SMEs carried out by
the IASB in late 2012 (AASB, 2012; Association of Chartered Certified Accountants
(ACCA), 2012). The comment letters sent by many prominent accounting institutions and
accounting regulatory bodies during this comprehensive review substantiate the
implications of the differences in accounting policies, principles and accounting treatment
between full IFRS and IFRS for SMEs, and their adverse effects on the consistent
interpretation and application of the standards (AASB, 2012; ACCA, 2012). Regardless of
the cost-benefit reasons for applying IFRS for SMEs, many prominent accounting
institutions and accounting regulatory bodies have seen simplification in IFRS for SMEs
as an unnecessary departure from the principles and practices of full IFRS (AASB, 2012;
ACCA, 2012).
Emphasis has moreover been placed on the limitations of implementing two sets of
standards in the same jurisdiction. If two sets of standards exist, one set (possibly the
simplified set of standards) will inevitably have second class status. Accounting education
will also be affected, because two different accounting principles have to be taught (ACCA,
67
2012). The continuous amendments made to full IFRS and the extent to which these
amendments are required to be incorporated in IFRS for SMEs have also been seen as
challenging. For example, IFRS 10 Consolidated Financial Statements has recently been
updated, with changes made to some aspects of the definition of control. Such differences
in definitions between the two standards may create more interpretation difficulties
(ACCA, 2012).
The many criticisms of IFRS for SMEs are limited to certain discussions and reviews, and
there is a lack of empirical evidence on the effects on the judgments of accountants of the
differences between the two sets of standards. Further, even though prominent accounting
institutions and accounting regulatory bodies show that the consistent interpretation and
application of IFRS for SMEs are affected by the differential reporting framework
introduced by the IASB, the possible consequences of prior knowledge and beliefs about
full IFRS on the reporting judgments of IFRS for SMEs have not yet been adequately
addressed. Attending to these issues is nevertheless considered to be imperative, because
the differences between the two sets of standards may pose challenges to practising
accountants when there are substantial deviations from the traditionally applied accounting
policy options in full IFRS.
3.2 LITERATURE REVIEW AND HYPOTHESES
3.2.1 Prior knowledge and beliefs, and confirmation bias in judgment

and decision making
Confirmation bias can take different forms but this study draws upon relevant literature on
the remembrance and retrieval of experience-based prior knowledge and beliefs in
judgment and decision making. The experience-based knowledge acquisition process
develops cognitive structures that organise an individual’s declarative and procedural
knowledge in long-term memory. An accountant’s declarative knowledge of recognition,
measurement and disclosure principles is acquired through the formal education system.
The repeated application of declarative knowledge in accounting practice transforms this
knowledge into procedural knowledge. An accountant’s adaptation of procedural
knowledge gained through repeated application or experience results in the development
of strong schemata about different accounting transactions. These schemata assist in
68
organising experience and creating cognitive activities such as comprehension,
remembrance, explanation and prediction (Waller & Felix, 1984).
Figure 3.1 shows that the schemata act like beliefs or hypotheses that guide the selection
and comprehension of environment stimuli through which prior knowledge is retrieved in
a new experiential context. In validating the goodness of fit between schemata that reflect
beliefs or hypotheses and current experiential evidence, schemata tend to confirm rather
than disconfirm the evidence (Waller & Felix, 1984). In retrieving evidence and data from
long-term memory, the initial activation of memory presumably mainly retrieves prior
beliefs, whereas the deliberate memory search retrieves material that refutes arguments
that are themselves incompatible with an individual’s prior beliefs, resulting in a
confirmation bias in the individual’s conclusions (Edwards & Smith, 1996).
The existing literature has widely documented the existence of confirmation bias in the
judgments of individuals that is compatible with their prior knowledge and beliefs in
various contexts.
Research investigating taxation judgments consistently finds that tax professionals exhibit
confirmation bias towards their prior knowledge and beliefs about clients and relevant tax
laws. For example, Cloyd (1995) provides evidence that prior knowledge and beliefs about
clients and relevant tax law affect tax professionals’ information search and evidence
evaluation behaviours in performing a tax research task. They further reveal that the
attention devoted to relevant information, speed of information retrieval and the ability of
discriminating relevant vs. irrelevant information are also affected by prior knowledge and
beliefs. Wheeler and Arunachalam (2008) also report the existence of confirmation bias in
a tax research task. The subjects in their experiment were exposed to a multi-step tax
research task which required them to collect and assess tax evidence in relation to a bonus
pay issue in corporate taxation. Their findings provide evidence that tax professionals
preferentially select information in support of the tax position recommended during
planning (i.e. preferential selection of evidence to support one’s prior beliefs), which
results in confirmation bias when tax research is conducted for clients.
Several studies have documented that auditors rely on prior knowledge and beliefs on
various issues when they exercise judgments. In particular, the prior knowledge of
69
experiences stored in long-term memory and its implications for audit judgment when
retrieving information for current applications is evident. In explaining the cognitive
process of auditors learning from experience, Waller and Felix (1984) indicate that when
forming inductive arguments regarding financial statement assertions, auditors prefer to
seek confirmatory evidence rather than disconfirmatory evidence in their belief system.
Both Jeffrey (1992) and Tan (1995) have shown that repeat audit engagements instigate
bias in audit judgments due to auditors’ reliance on prior evidence. Jeffrey (1992) argues
that prior involvement has adverse consequences when an individual is overconfident in
their knowledge, ability and judgment, and thus commits to behavioural acts that result in
judgment bias. The study examines whether auditors’ personal involvement in repeat audit
engagements may induce a tendency to make subsequent decisions conform to their prior
loan evaluation decisions. The findings reveal that auditors’ personal involvement in repeat
loan evaluation tasks has a negative effect on the decision-making process, encouraging
them to make judgments that are biased towards their previous judgments on loan
collectability.
Tan (1995) investigated the impact of prior expectations, prior audit involvement and
review awareness on the judgment process of auditors. In particular, the study compares
the prior audit involvement condition with the memory of the different types of audit
evidence recalled and the judgment made for a financial viability prediction task. The
finding confirms the existence of auditors’ high reliance on memory for consistent
evidence that arises from repeat audit engagement. The study also provides evidence that
auditors with prior audit involvement deviate less from prior-year judgments when
undertaking audit for the current year than auditors without that experience.
As expounded in the literature, it is apparent that much of the information that individuals
use is stored in memory and retrieved as needed, and that this experience-based knowledge
is fundamental to the exercise of professional judgment in many decision-making contexts.
Bias in judgments associated with the recall and retrieval of previously encountered
information (mostly prior knowledge and beliefs engendered through experience) in
judgment and the decision making process is also evident. While studies have been
conducted in psychology, auditing and taxation contexts, research investigating the bias
associated with prior knowledge and beliefs in the context of IFRS reporting is absent. This
70
study fills this void by examining whether accountants’ prior knowledge and beliefs about
full IFRS will bias their reporting judgments when interpreting and applying IFRS for
SMEs.
3.2.2 Effect of prior knowledge and beliefs about full IFRS on reporting
judgments of accountants when interpreting and applying IFRS for
SMEs (H1)
Schank (1999) argued that individuals continue to reorganize information in their memory
as new experiences accumulate. His Theory of Dynamic Memory indicates that in
understanding an input, an individual will find the closest approximation to the input from
their past experience and then code the input in terms of the previous memory by means
of an index. Individuals use a memory index when storing new information, retrieving
existing knowledge, and creating new indices for novel information. In this process, the
more similar problems individuals encounter in a related task, the greater the number of
comparisons with prior experiences, and the stronger the prior experiences, the more new
indices are stored in their memory (see Kopp & O’Donnell, 2005 for further analysis on
Schank’s theory). Prior studies have also found that an individual can abstract the
underlying features of a problem even from studying only one example, and can then use
this knowledge to solve new problems (see Chand, Patel, & Patel, 2010; Earley, 2001 for
a review of these studies).
To examine the confirmation bias in SME reporting, the study selects the revenue
recognition decision context for the construction of real estate where the recognition and
measurement requirements are different across full IFRS and IFRS for SMEs. International
Accounting Standard (IAS) 18 Revenue paragraphs 14 and 20 includes the general
principles for the recognition of revenue, primarily based on the criterion of whether the
entity has transferred to the buyer the ‘significant’ risks and rewards of ownership of the
goods and when the outcome of a transaction can be reliably measured.
Furthermore, in recognising a real estate construction agreement as an agreement for the

sale of goods, IFRS Interpretations Committee (IFRIC) 15 Agreements for the
Construction of Real Estate, paragraph 17 in full IFRS specifies that ‘the entity may
71
transfer to the buyer control and the significant risks and rewards of ownership of the work
in progress in its current state as construction progresses’ (IFRS Foundation, 2008, p.
1324). In this case, if all the criteria in paragraph 14 of IAS 18 are met as construction
progresses, revenue is recognised by the entity by reference to the stage of completion,
using the percentage of completion method (IFRS Foundation, 2008).23
In contrast, Section 23 Revenue paragraph 23.A.15 of IFRS for SMEs promotes the end of
completion method for revenue recognition and the examples specify that ‘the buyer does
not obtain control or the significant risks and rewards of ownership of the work in progress
in its current state as construction progresses’ unless certain criteria are satisfied (IASB,
2009a, p. 144).24 These differences in recognition and measurement requirements between
the two sets of standards require accountants to exert judgment differently.
The study predicts that when accountants interpret and apply IFRS for SMEs, they will
search their long-term memory to retrieve evidence about transactions or events. The study
argues that accountants hold strong prior knowledge and long-standing beliefs about full
IFRS and therefore their reporting judgments on IFRS for SMEs may be biased towards
full IFRS, even though the recognition and measurement requirements in identical cases
or transactions across the two sets of standards are different. Accordingly, the following
hypothesis is formulated on the notion that an accountant manifests a strong tendency to
confirm rather than disconfirm currently held knowledge and beliefs.
H1: It is likely that the tendency to confirm prior knowledge and beliefs about full IFRS
will bias the reporting judgments of accountants when they interpret and apply
IFRS for SMEs.
23
Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:
(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; (b) the
entity retains neither continuing managerial involvement to the degree usually associated with ownership nor
effective control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it is probable
that the economic benefits associated with the transaction will flow to the entity; and (e) the costs incurred
or to be incurred in respect of the transaction can be measured reliably (IFRS Foundation, 2001a, p. 739).
24
Section 23 Revenue of IFRS for SMEs specifies that an entity that undertakes the construction of real
estate, directly or through subcontractors, and enters into an agreement with one or more buyers before
construction is complete, shall account for the agreement as a sale of services, using the percentage of
completion method, only if: (a) the buyer is able to specify the major structural elements of the design of the
real estate before construction begins and/or specify major structural changes once construction is in progress
(whether it exercises that ability or not), or (b) the buyer acquires and supplies construction materials and the
entity provides only construction services (IASB, 2009a, p. 144).
72
3.2.3 Effects of judgment justification on the financial reporting
behaviour of accountants
Justification denotes the process of providing evidence and explanations to support one’s
beliefs about a judgment or decision (Bonner, 2007; Peecher, 1996). It has two main
functions in the judgment and decision making process – uncertainty reduction and
documentation (Emby & Gibbins, 1987). First, uncertainty reduction is the decision
maker’s desire for evidence at various stages of the decision-making process before a
choice of action is made (Emby & Gibbins, 1987). If an individual is aware that their
judgment or decision needs to be defended, a justification goal is incorporated into their
intentional search and evaluation of information (Gibbins & Newton, 1994; Peecher,
1996). Second, justification documentation supports the decision-maker’s ability to defend
the chosen decision or action in light of the outcome (Emby & Gibbins, 1987). Imposing
the justification requirement on the decision maker creates the stimulus to begin with an
intentional search of information, with the purpose of defending their preferred decision.
Such a stimulus might take the form of an incentive, an attention directive, a pressure, a
motivation, an effort or a defensive bolstering.
The effect of justification on judgment performance has been widely examined in the audit
context because auditors often work in an accountability-inducing environment (Kennedy,
1993; Shankar & Tan, 2006). Audit research regards auditors’ awareness of justification
requirements in the audit review process as a quality control mechanism that helps to
eliminate bias associated with their audit judgments (Kennedy, 1993; Tan, 1995). For
example, Kennedy (1993) conducted an experiment to explore the effect of the
accountability of auditors in the form of justification of the audit review process on the
mitigation of the recency effect in a going-concern evaluation context. The study concludes
that effort-related bias can be mitigated by requiring auditors to be held accountable for
providing justifications in the audit review process.
Tan (1995) also investigated whether auditors’ awareness of the review process in audit
decisions overcomes the judgment consistency effect associated with prior audit
involvement. In their experiment, members of the treatment group were instructed to
provide a short written memo to justify the basis for their evaluations after the financial
viability task had been completed, and they were also instructed that a sample evaluation
73
might be chosen at random to be reviewed by executive officers. It was expected that the
awareness of a possible audit review would increase the auditors’ vigilance. The result
suggests that the auditors’ awareness of the audit review process induces a form of social
pressure that reduces the effect of judgment consistency resulting from prior audit
involvement.
Research in the audit context also documents that justification requirements improve the
accuracy and quality of audit judgments. Ashton (1992) examined the impact of
justification requirements on consistency, accuracy and consensus in processing multiple
pieces of information over a series of judgments. Auditors in his experiment performed a
bond-rating prediction task under two treatment conditions, justification requirement and
mechanical aid, and their impact on the consistency, accuracy and consensus of judgments
was measured. The results provide evidence that the accuracy and quality of audit
judgments are improved significantly when the justification requirements are specified
before auditors engage with a judgment-related task.
Judgment justification generally provides increased motivation for vigilant information

processing and better judgment performance (Tetlock, 1983). A decision maker expends a
great deal of effort in defending the judgments or opinions made as a result of the pressure
generated by the justification requirements, thus reducing the bias associated with those
judgments and increasing the accuracy and consistency of judgments. A requirement to
justify one’s judgment induces pressure to search unbiased evidence and process
information to increase accuracy by eliminating (or mitigating) the bias associated with
their judgments. Findings from the literature suggest that various forms of bias in the
judgment and decision making process, such as the recency effect, primacy effect and
consistency effect, are moderated by the justification requirements. Nevertheless, there is
a lack of evidence as to whether the justification requirements mitigate the confirmation
bias arising from the effects of prior knowledge and beliefs about accounting standards on
the financial reporting behaviour of accountants.
74
3.2.4 Effects of judgment justification requirements in mitigating the
confirmation bias that arises from prior knowledge and beliefs on
full IFRS (H2)
Most prior research explores the effects of justification on judgment and decision making
from the auditors’ standpoint, but there is limited evidence from the perspective of
accountants – the preparers of financial reports. The subjectivity involved in a principles-
based approach to IFRS stresses the need to induce a form of justification requirement in
the judgment of preparers. For example, the principles in the new professional judgment
framework developed by the Institute of Chartered Accountants of Scotland (ICAS)
emphasises the need for proper documentation of the judgment by preparers, requiring
them to appropriately justify why they agreed with the final solution rather than the
alternative options available (ICAS, 2012). Therefore, the justification requirement obliges
preparers to assess the accuracy of the judgments that have been made.
This study envisages that justification requirements can play an important role in
enhancing the ability of accountants to choose the accounting treatment that best reflects
the economic substance of a transaction when applying principles-based IFRS for SMEs.
The study expects that accountants who are aware of the requirement to document their
justifications will be motivated to put more effort into the judgment task. Their cognitive
processing will increase because the justification requirements will create the stimulus to
retrieve unbiased evidence and process all the pertinent information regarding the
accountant’s financial reporting decision in order to defend their preferred outcome.
On the other hand, accountants without a justification requirement may not conduct a
careful memory search to choose appropriate recognition and measurement principles of
IFRS for SMEs; instead, they may rely on evidence that will confirm their prior knowledge
and beliefs about full IFRSs. Consequently, it is expected that the confirmation bias on
judgments arising from the prior knowledge and belief effect will be mitigated as a result
of accountants’ justification requirements. Accordingly, the following hypothesis is
formulated:
75
H2: A judgment justification requirement is likely to mitigate the confirmation bias
arising from prior knowledge and beliefs about full IFRS when accountants interpret
and apply IFRS for SMEs.
3.2.5 Effects of decision aids on the financial reporting behaviour of

accountants
Decision aids can assist a decision maker in gathering, processing and analysing
information and their use has been widely advocated as a judgment and decision making
improvement tool (Bonner, 2007, p. 341). Various types of decision aids are available,
ranging from simple written instructions to complex computer-based decision support
systems. Regardless of the type of decision aids employed, prior research in general
provides evidence that they impact positively on judgment performance. For example,
Bonner (2007) notes that decision aids can assist individuals to enhance the efficiency and
effectiveness of information search strategies, hypothesis formation and evidence
evaluation, memory retrieval and cognitive processing in decision making.
The role that decision aids play in improving judgment performance has been widely
reported in the auditing and taxation context. Audit judgment is often equipped with many
forms of decision aids and many studies in this area have documented that they enhance
the accuracy and consistency of auditors’ judgments. Earlier studies, such as Boritz (1985)
and Butler (1985), show the effects of a simple decision aid called a five-step decision aid
procedure which helps auditors to make more accurate decisions. Kachelmeier and Messier
(1990) conducted an experiment to test the effect of decision aids on the magnitude and
variability of auditors’ sample size judgments. The findings indicate that decision aids
remove judgmental bias such as ‘beliefs about small numbers’ and result in more variations
in auditors’ judgments about sample size.
Ashton (1992) provides evidence that the availability of a mechanical aid improves the
judgment performance of auditors. Similarly, Anderson, Kaplan and Reckers (1997) and
Clarkson, Emby and Watt (2002) show that decision aids in the form of considering
alternatives and additional guidance reduce hindsight bias. Likewise, Lowe and Reckers
(2000) provide evidence that auditors who receive more guidance make better judgments
76
about the need for inventory adjustments than auditors who are not provided with this
guidance.
Wheeler and Arunachalam (2008) demonstrate that decision aids mitigate the confirmation
bias when conducting tax research for clients and assist in making more accurate
judgments. The results provide evidence that tax professionals demonstrate a preference
for selecting information in support of their client, but that the use of a decision aid reduces
bias in the selection and importance of information in support of the client, which leads to
accurate judgments being made.
Prior studies have also examined the effects of two combined decision aids on an
individual’s judgment and decision making. Studies such as Bonner, Libby and Nelson
(1996) and Ng and Tan (2003) provide evidence that the combination of two decision aids
improves the judgment of auditors. For example, Bonner et al. (1996) examined the effect
of a checklist aid and a mechanical-aggregation aid in applying experienced error
frequencies to conditional probability judgments in audit planning. An experiment was
conducted to examine the effectiveness of a checklist (a reminder of financial statement
errors in the transaction cycle) and mechanical-aggregation aids (to assist in the retrieval
and aggregation of conditional judgment) in alleviating a mismatch between task
organisation and knowledge organisation. The findings suggest that auditors’ judgment is
improved by both decision aids, although the effect is more strongly reflected in the use of
mechanical-aggregation aids than checklists, which helps to reverse the effect of the
mismatch between knowledge organisation and task organisation.
Prior studies also indicate that improving judgment performance varies with the nature and
quality of the decision aid provided and its relevance to the task. For example, Clarkson et
al. (2002) evaluated the quality of auditors’ judgments against two sets of debiasing
instructions: weak and strong (but brief) instructions respectively. Participants were
warned in the weak instructions to beware of the potential biasing effects of outcome
information and its influence, whereas the strong instructions stressed the non-
normativeness of incorporating outcome knowledge into evaluative judgments. The
findings confirm that strong instructions are an effective debiasing technique for
overcoming the outcome effect in an audit judgment setting, whereas weak instructions are
not as beneficial. A number of studies have also shown that it is important to provide only
77
a sufficient level of guidance to individuals because excessive guidance can lead to
information overload and decisions of lower quality (see Snowball, 1980).
The application of different types of decision aids such as checklists, mechanical aids and
non-statistical tools indicates the effectiveness of each type of decision aid in improving
judgment performance. This study considers whether a decision aid can mitigate the
confirmation bias arising from the effects of prior knowledge and beliefs of accounting
standards on the financial reporting behaviour of accountants.
3.2.6 Effects of decision aid in mitigating the confirmation bias that

arises from prior knowledge and beliefs on full IFRS (H3)
This study employs a written interpretation guideline as a decision aid to examine its effect
on mitigating the confirmation bias in judgment and decision making. Generally, written
instructions provide further explanation on how to make the relevant judgment, with the
aim of enhancing the cognitive processing of a decision maker. In particular, written
instructions reduce the effects of cognitive bias that occur as a result of searching the
knowledge held in memory for evidence associated with earlier beliefs and hypotheses
(Arkes, 1991; Bonner, 2007). An effective decision aid redirects a decision maker’s
attention, compelling them to adjust their customary approach of focusing on the elements
of the specific decision-related issue (Butler, 1985). Consistent with the findings that the
decision aid improves judgment performance, the study anticipates that providing
accountants with a decision aid that contrasts the differences in interpretation guidelines
between full IFRS and IFRS for SMEs will eliminate the reliance on full IFRS when
exerting judgment using IFRS for SMEs.
There are very few well-designed decision aids for accountants to assist them in making
financial reporting judgments. The interpretation guidance that accompanies the
accounting standards in principles-based IFRS can be considered as one form of decision
aid. Nevertheless, compared to full IFRS, IFRS for SMEs offer significantly less guidance.
This study argues that by providing a decision aid in the form of an interpretation guideline
that makes a clear distinction between the recognition and measurement principles of full
IFRS and IFRS for SMEs can play an important role in enhancing the ability of accountants
78
to choose the accounting treatment that best reflects the economic substance of a
transaction when applying principles-based IFRS for SMEs.
The decision aid designed for the purpose of this study clearly contrasts the interpretation
guidelines of full IFRS and IFRS for SMEs in relation to the recognition of revenues from
the construction of real estate. It is expected that accountants who are provided with the
interpretation guidelines would be able to clearly perceive the differences in the criteria for
recognising the revenues from real estate construction contracts in full IFRS (IFRIC 15)
and IFRS for SMEs (Section 23 Revenue) before making their judgment. Comparing the
differences between the two sets of standards will enable accountants to make more
accurate and unbiased judgments independent of their prior understanding of full IFRS.
On the other hand, accountants without the interpretation guidelines may not conduct a
careful memory search to choose appropriate recognition and measurement principles of
IFRS for SMEs; instead, they may rely on evidence that will confirm their prior knowledge
and beliefs about full IFRS. Consequently, it is expected that the confirmation bias arising
from the prior knowledge and belief effect on judgments will be mitigated as a result of
the interpretation guideline provided to the accountants. This study therefore tests the
following hypothesis:
H3: A decision aid in the form of an interpretation guideline is likely to mitigate the
confirmation bias arising from prior knowledge and beliefs about full IFRS when
accountants interpret and apply IFRS for SMEs.
3.3 EXPERIMENT
3.3.1 Participants and design
For the purpose of this study, the research setting should represent a country that applies
both the full set of IFRS and IFRS for SMEs. Sri Lanka has taken the lead in adopting
IFRS for SMEs in the Asia-Pacific region. Shortly after the standard was issued in 2009,
all entities not identified as ‘large’ were required to comply with IFRS for SMEs for the
reporting period beginning on or after 1st January 2012. The International Accounting
Standards (IAS) had been applied in Sri Lanka since 1996, and in 2010 the Institute of
79
Chartered Accountants of Sri Lanka (ICASL) fully converged with IFRS and issued the
Sri Lanka Financial Reporting Standards (SLFRS), the equivalent of IFRS.25 The new
SLFRS for SMEs is a completely stand-alone set of standards. The differential reporting
setting in Sri Lanka provides an appropriate research setting for undertaking the current
study.
The participants in the experiment were 92 qualified practising accountants who held
Associate Chartered Accountant (ACA) qualification and Fellow Chartered Accountant
(FCA) qualification from the ICASL with an average of five years of professional work
experience in financial reporting. The participants had relevant education, training and
experience in dealing with the Sri Lankan equivalents of full IFRS and IFRS for SMEs.
Because the experiment asks participants to choose the accounting treatment that best
reflects the underlying economics of transactions for an SME faced with a revenue
recognition decision context, it was important to select Sri Lankan-based accountants who
had experience in making financial reporting decisions in the context of IFRS for SMEs.
The experiment took place in a SLFRS seminar held for the practising members of the
ICASL at the ICASL premises. The accountants who attended the seminar were requested
to indicate their willingness to participate in the experiment. 92 accountants who indicated
their willingness to participate in the experiment were randomly assigned to one of the
three groups, with 33 participants in the control group, 30 participants in the justification
group and 29 participants in the decision aid group.
To test the hypotheses, this study conducts the experiment requiring participants to make
the revenue recognition decision for an SME. The revenue recognition decision context is
selected for the construction of real estate where the recognition and measurement
requirements are different across full IFRS and IFRS for SMEs.
Judgment justification in the hypothetical scenario is manipulated between participants,

who are either required or not required to justify their judgments. The availability of a
decision aid is manipulated between participants and they are either provided or not
25
The ICASL is the leading professional accounting body of Sri Lanka and has been entrusted with the
authority to develop and issue accounting standards.
80
provided with the differences in revenue recognition criteria between full IFRS and IFRS
for SMEs.
To preserve internal validity and to enable differences in the reporting judgments of

accountants to be attributable to the three variables of interest (confirmation bias in the
reporting judgments arising from prior knowledge and beliefs, judgment justification and
decision aid), particular care was taken in designing the scenario. Potentially confounding
variables that could affect the reporting judgments of accountants were controlled; for
example, prior research suggests that incentives may have such a pronounced impact that
the possible effect of confirmation bias arising from prior knowledge and beliefs on
judgment could be diminished (see Cuccia, Hackenbrack, & Nelson, 1995). In the context
of this study, no such incentives were provided to the accountants to influence their
reporting judgments. For the given scenario, participants were simply instructed to choose
the accounting treatment that best reflected the underlying economics of transaction for an
SME faced with a revenue recognition decision. It was emphasized to the participants that
they had to make a reporting judgment on behalf of the SME using IFRS for SMEs rather
than full IFRS.
3.3.2 Procedures
The participants were provided with a research instrument containing two sections
(Appendix 2). The first section required respondents to provide demographic data such as
gender, age, level of formal education, employer details and years of work experience. The
respondents were also asked to indicate their level of familiarity with the Sri Lankan
equivalents of full IFRS and IFRS for SMEs (measured both by how familiar they were
with full IFRS/IFRS for SMEs on a Likert scale where 1 denoted ‘not familiar’, and 4
denoted ‘very familiar’; and how frequently they referred to these standards in their
professional practice on a Likert scale where 1 denoted ‘never’, and 4 denoted ‘often’).
The first part of the second section included the case scenario. A practical scenario was
developed in which participants had to make a reporting judgment on behalf of the SME.
The scenario was based on accounting for revenues by entities that undertake the
construction of real estate directly or through subcontractors. The hypothetical company is
81
a medium-sized non-listed company which engages in the development of residential real
estate and selling individual apartments. A buyer who enters into an agreement with the
company is required to make progress payments at three completion stages between the
time of the initial agreement and the contractual completion. The participants were
required to provide a judgment on whether to use the percentage of completion method or
the completed contract method in recognising the relevant revenue from the construction
of the real estate for the SME.
To examine the confirmation bias in the reporting judgment of accountants when applying
IFRS for SMEs, the study measures the extent to which the participants retrieved
information consistent with their prior knowledge and beliefs about full IFRS. They were
given a combination of ten revenue recognition criteria deduced from both full IFRS and
IFRS for SMEs in the second part of Section 2. This consisted of six revenue recognition
criteria from full IFRS and four revenue recognition criteria from IFRS for SMEs.
Respondents were asked to select the relevant and irrelevant revenue recognition criteria
in relation to the judgment they made by circling the rating choice on a ten-point Likert
scale (where 1 denoted ‘irrelevant’ and 10 denoted ‘relevant’).
The first treatment group was the justification group, in which participants were required
to provide a written justification for their reporting judgment, i.e. why they chose the
percentage of completion method or the completed contract method in recognising the
relevant revenue from the construction of the real estate for the SME. The respondents in
this group were also instructed that some of them would be chosen at random to further
explain and justify their judgment to a panel (which included the researchers).
Consistent with the literature, the manipulation check for judgment justification was
conducted post-experiment using two questions (see Hatfield, 2000; Tetlock, 1983). Each
manipulation check question was answered using a seven-point Likert scale. The first
question sought to identify how motivated the accountants were to perform well on the
given task, where 1 denoted ‘not at all’ and 7 denoted ‘extremely motivated’. The second
question sought to identify how much effort the accountants expended on the given task,
where 1 denoted ‘very little effort’ and 7 denoted ‘a great deal of effort’. Additionally, the
respondents were asked to indicate the extent to which the requirement to justify the
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judgment enabled them to make a better judgment by circling the rating choice on a seven-
point Likert scale (where 1 denoted ‘not at all’ and 7 denoted ‘to a great extent’).
The subjects in the second treatment group were provided with a decision aid to assist them
in making their financial reporting judgment. This decision aid in the form of interpretation
guidelines provided a clear distinction between the interpretation guidelines of full IFRS
and IFRS for SMEs in relation to the recognition of revenues from the construction of real
estate. Since the objective of including a decision aid was to examine whether it mitigates
the confirmation bias arising from prior knowledge and beliefs about full IFRS, the
decision aid was included before the scenario in the research instrument. The manipulation
check for the decision aid was conducted post-experiment when participants were asked to
indicate the extent to which the decision aid enabled them to make a better judgment by
circling the rating choice on a seven-point Likert scale (where 1 denoted ‘not at all’ and 7
denoted ‘to a great extent’).
Further to providing their judgments on the scenario, the respondents were asked to
indicate the extent to which they applied their prior knowledge of full IFRS to reach an
appropriate judgment on the scenario by circling the rating choice on a seven-point Likert
scale (where 1 denoted ‘not at all’ and 7 denoted ‘to a great extent’). Additionally, the
respondents were asked to identify the perceived level of complexity of the scenario by
circling the rating choice on a seven-point Likert scale (where 1 denoted ‘not complex’
and 7 denoted ‘extremely complex’). They were also asked to indicate their perceived level
of familiarity in dealing with similar scenarios by circling the rating choice on a seven-
point Likert scale (where 1 denoted ‘not familiar’ and 7 denoted ‘very familiar’).
3.3.3 Pre-test
To obtain an indication of the accounting treatment that best reflects the underlying
economics of transaction and event in the financial statements (i.e., the most accurate
judgment) of the scenario, a pre-test was conducted. The research instrument was pre-
tested with three senior accountants and seven senior academics who also held professional
accounting qualifications in Sri Lanka. Each participant in the pre-test group made their
reporting judgment on the scenario with the help of the decision aid. The mean score of
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the judgment made by all the participants in the pre-test is an indication of judgment
consensus amongst the participants, and the consensus in the judgment of experts was used
as a proxy for judgment accuracy in the case (see Solomon & Shields, 1995).
Section 23 Revenue of IFRS for SMEs promotes the end of the completion method for
revenue recognition. As specified in paragraph 23A.15, ‘if an entity is required to provide
services together with construction materials to perform its contractual obligation to
deliver the real estate to the buyer, the agreement shall be accounted for as the sale of
goods. In this case, the buyer does not obtain control or the significant risks and rewards
of ownership of the work in progress in its current state as construction progresses. Rather,
the transfer occurs only on delivery of the completed real estate to the buyer’ (IASB, 2009a,
p. 144). According to the information provided in the given scenario, the condition to
consider the agreement as sale of goods is satisfied because the company provides all the
services and acquires all the materials required for the construction of the apartment. The
revenue of this agreement can only be recognised on delivery of the completed real estate
to the buyer. Consequently, the most accurate judgment in this scenario is that the revenue
should be recognised using the completed contract method.
The mean score of the judgments made by all the participants in the pre-test was used to
determine whether the SME should choose the percentage of completion method or the
completed contract method in recognising the relevant revenue from the construction of
the real estate. The mean score of the judgments made by all the participants in the pre-test
group was 1.57 (non-tabulated), which indicated that the company should recognize the
relevant revenue from the construction agreement using the completed contract method.26
Since the required judgment in the scenario is for an SME faced with a revenue recognition
decision, the revenue recognition criteria from IFRS for SMEs Section 23 Revenue is
considered as ‘relevant’ information that could influence the correctness of the judgment
to be made. The revenue recognition criteria from full IFRS are considered as ‘irrelevant’
information that would have no influence on the correct judgment to be made in the
scenario.
26
Accountants were asked to record their judgment on whether the company could recognise revenue of the
agreement using the percentage of completion method. They were asked to provide their judgment on the
matter on a seven-point Likert scale (where 1 denoted ‘strongly disagree’ and 7 denoted ‘strongly agree’).
84
To provide an array of information that was either relevant or irrelevant, each participant
in the pre-test group rated the ten revenue recognition criteria according to how relevant
they were to making their judgment. The mean score for each item was used to determine
whether each criterion was relevant (the criterion influenced the judgment of the
participant) or irrelevant (the criterion was of no value when making a judgment). The four
criteria with the highest mean scores (between 8.86 and 9.57) were selected as relevant
information in this study. The six criteria with the lowest mean scores (between 1.71 and
2.14) were selected as irrelevant information in this study. Relevant information consists
of the revenue recognition criteria that are relevant in making the judgment in accordance
with IFRS for SMEs. Irrelevant information consists of the revenue recognition criteria
that are included in full IFRS, but are irrelevant in making the judgment for an SME faced
with a revenue recognition decision.
3.4 RESULTS
3.4.1 Demographic details of respondents
92 professional accountants participated in this experiment. As shown in Table 3.1, of the

33 respondents in the control group, 13 were male and 20 were female; of the 30
respondents in the justification group, 17 were male and 13 were female; and of the 29
respondents in the decision aid group, 19 were male and 10 were female. The mean age
category of the respondents in each group was 32 years. The average number of years in
formal education was 17 years for the respondents in each group. The average professional
experience level was 5.36 years for the control group, 6.23 years for the justification group,
and 4.77 years for the decision aid group.
The respondents in each group were familiar with the Sri Lankan equivalents of full IFRS
as indicated by the mean response of 3.15 for the control group, 3.20 for the justification
group and 3.38 for the decision aid group (on a Likert scale where 1 denoted ‘not familiar’,
and 4 denoted ‘very familiar’). The respondents in each group were also familiar with the
Sri Lankan equivalents of IFRS for SME as indicated by the mean response of 2.67 for the
control group, 2.97 for the justification group and 2.69 for the decision aid group. The
respondents in each group further indicated that they often refer to Sri Lankan equivalents
of full IFRS in their professional practice as indicated by the mean response of 3.73 for the
85
control group, 3.57 for the justification group and 3.72 for the decision aid group (on a
Likert scale where 1 denoted ‘never’, and 4 denoted ‘often’). The respondents in each
group also indicated that they often refer to Sri Lankan equivalents of IFRS for SME in
their professional practice as indicated by the mean response of 2.94 for the control group,
3.17 for the justification group and 3.07 for the decision aid group.
3.4.2 Tests of hypotheses
3.4.2.1 Confirmation bias in the reporting judgments of accountants (H1)
H1 is tested using one-way Analysis of Variance (ANOVA) where ‘prior knowledge and
beliefs about full IFRS’ is the between-subject independent variable (confirmation biased
group/unbiased group) with the accountant’s revenue recognition decision serving as the
dependent variable.
H1 predicts that the tendency to confirm prior knowledge and beliefs about full IFRS will
bias the reporting judgments of accountants when they interpret and apply IFRS for SMEs.
To examine the effect of confirmation bias arising from prior knowledge and beliefs about
full IFRS, the respondents were dichotomized into a confirmation biased group/unbiased
group using the median split. The net score of revenue recognition criteria retrieved by
respondents was used for the purpose of categorisation.27 A higher RIR denotes the
retrieval of more relevant information in accordance with IFRS for SMEs (unbiased group)
while a lower RIR denotes the retrieval of more irrelevant information in accordance with
full IFRS (confirmation biased group). The ANOVA results with the dichotomized
variable reveal that the accountants in the unbiased group are significantly more likely to
make revenue classification decisions that best reflect the economic substance of a
transaction (mean = 3.15) than the accountants in the confirmation biased group (mean =
5.30, F = 27.110, p = 0.000). These results in Table 3.2 provide support for H1.
To further explore the confirmation bias in judgment when accountants interpret and apply
IFRS for SMEs, the respondents were dichotomized into a biased judgment group/unbiased
27
The difference between the sum of relevant information and the sum of irrelevant information (RIR) is
calculated by subtracting the total scores of irrelevant information from the total scores of relevant
information selected by individual subjects. The RIR score ranges from -56 (Lowest) to 34 (Highest).
86
judgment group using the median split of their reported judgments. A Single-Sample
Binomial Test was used to measure whether the proportion of participants falling into each
category differs from a pre-defined probability (0.50) of falling into one of these two
categories. The results indicate that the proportion of respondents falling into the category
of biased judgment group differs significantly (p = 0.009) from the hypothesised value of
50%. These results in Table 3.3 further support H1, indicating the presence of confirmation
bias in the judgments of the accountants.
3.4.2.2 Effect of judgment justification in moderating the impact of confirmation

bias in the reporting judgments of accountants (H2)
Two manipulation check questions were designed to verify the respondent’s justification
requirements. In the first question, the respondents were asked to indicate how motivated
they were to perform well on the given task on a seven-point Likert scale (where 1 denoted
‘not at all’ and 7 denoted ‘extremely motivated’). The ANOVA results indicate that the
accountants in the justification group were more motivated to complete the task well (non-
tabulated mean = 5.33) than the accountants in the control group, i.e. those who were not
required to provide a justification for their judgment (non-tabulated mean = 4.55, F =
7.360, p = 0.009).
In the second manipulation check question, the respondents were asked to indicate how
much effort they expended on the given task on a seven-point Likert scale (where 1 denoted
‘very little effort’ and 7 denoted ‘a great deal of effort’). The ANOVA results indicate that
the accountants in the justification group expended more effort to complete the task (non-
tabulated mean = 4.67) than the accountants in the control group (non-tabulated mean =
4.06, F = 3.805, p = 0.056). These results suggest that the manipulation of the justification
requirement between the two groups was successful.
H2 is tested using one-way ANOVA where the justification requirement is the between-
subject independent variable (justification requirement group/control group) with the
accountant’s revenue recognition decision serving as the dependent variable.
H2 predicts that the judgment justification requirement is likely to mitigate the

confirmation bias arising from prior knowledge and beliefs about full IFRS when
87
accountants interpret and apply IFRS for SMEs. The ANOVA results indicate that
accountants in the justification group are significantly more likely to make a revenue
classification decision that best reflects the economic substance of a transaction (mean =
4.03) than the accountants in the control group (mean = 5.42, F = 8.027, p = 0.006). The
results in Table 3.4 provide support for H2.
3.4.2.3 Effect of decision aid in moderating the impact of confirmation bias in the
reporting judgments of accountants (H3)
The respondents in the decision aid group were asked to indicate the extent to which the
decision aid enabled them to make a better judgment on the given task on a seven-point
Likert scale (where 1 denoted ‘not at all’ and 7 denoted ‘to a great extent’). The mean
response was 5.79, indicating that the decision aid assisted the accountants to make better
judgments.
H3 is tested using one-way ANOVA where the decision aid provided is the between-
subject independent variable (decision aid group/control group) with the accountant’s
revenue recognition decision serving as the dependent variable.
H3 predicts that the decision aid in the form of interpretation guidelines is likely to mitigate
the confirmation bias arising from prior knowledge and beliefs about full IFRS when
accountants interpret and apply IFRS for SMEs. The ANOVA results indicate that
accountants in the decision aid group are significantly more likely to make revenue
classification decisions that best reflect the economic substance of a transaction (mean =
3.07) than the control group (mean = 5.42, F = 18.620, p = 0.000). The results in Table 3.5
provide support for H3.
3.5 SUMMARY AND CONCLUSIONS
Most countries have moved towards adopting IFRS for SMEs in the belief that these stand-
alone set of standards will improve the quality of their financial reporting for SMEs. This
study provides novel evidence from a country that has adopted IFRS for SMEs on the
effectiveness of this set of standard in guiding accounting choices. The study employs a
88
behavioural experiment to investigate the effect of confirmation bias arising from prior
knowledge and beliefs about full IFRS on the reporting judgments of accountants when
applying IFRS for SMEs. This study therefore explores whether the mindset of accountants
who preparer financial statement has shifted to accept IFRS for SMEs as a stand-alone set
of standards.
The study finds support for the hypothesis that accountants who have a tendency to confirm
prior knowledge and beliefs about full IFRS are unlikely to choose the accounting
treatment that best reflects the economic substance of a transaction when applying IFRS
for SMEs. Enhanced comparability and better quality financial reporting for SMEs have
been promoted as the major benefits of adopting IFRS for SMEs. The ability of accountants
to apply principles in IFRS for SMEs to specific accounting issues is crucial to achieving
high quality reporting and consistent judgment outcomes. The results indicate that IFRS
for SMEs will lead to improved financial reporting quality only when the financial
statement preparer’s mindset shifts and when all preparers apply IFRS for SMEs as a stand-
alone set of standards i.e. independent of their prior knowledge and beliefs about full IFRS.
This study also finds evidence that the justification requirement and decision aids reduce
the confirmation bias in the reporting judgments of accountants when applying IFRS for
SMEs, which arises from prior knowledge and beliefs about full IFRS. The results suggest
that inducing a form of justification requirement when accountants make reporting
judgments for SMEs can eliminate the confirmation bias associated with prior knowledge
and beliefs about full IFRS. Retaining justification records that provide evidence to support
an accountant’s judgment is desirable in a real world context. Reporting to superiors or
outside authorities would also be a possible form of justification to preserve the
accountability of the preparers of SME financial statements.
The role that decision aids play in mitigating confirmation bias in the reporting judgment
of accountants when applying IFRS for SMEs provides novel evidence. The results
indicate that by providing a decision aid in the form of an interpretation guideline that
makes a clear distinction between the recognition and measurements principles of full
IFRS and IFRS for SMEs can play an important role in enhancing the ability of accountants
to choose the accounting treatment that best reflects the economic substance of a
transaction when applying IFRS for SMEs. Such decision aids help to draw accountants
89
away from their original frame of reference and encourage them to make more accurate
and unbiased judgments, independent of their prior knowledge and beliefs about full IFRS.
For financial statement preparers, the inability to recognise the differences in the
recognition and measurement principles of full IFRS and IFRS for SMEs diminishes
reporting accuracy. The results of this study will be of interest to accounting standard
setters and regulatory bodies who wish to minimise the complications inherent in adopting
two different versions of accounting standards in the same jurisdiction. An important
implication from the findings is the need for policy makers in countries adopting IFRS for
SMEs to invest in accounting education and training to improve accountants’ knowledge
and expertise, thus improving their ability to recognise the differences in the reporting
requirements of full IFRS and IFRS for SMEs. Such an investment may overcome bias in
the judgments of SME financial statement preparers and concerns regarding inter-firm
comparability.
The IASB’s objective of introducing IFRS for SMEs is centred on a new paradigm of
enhancing decision usefulness and reducing the information asymmetry of the financial
information provided by SMEs across the globe. The findings from this study have two
important implications for the IASB in achieving these objectives. First, the introduction
of more training materials and modules, working examples and training programs that
articulate the differences between full IFRS and simplified IFRS for SMEs would be
effective in guiding preparers through the standards and developing their knowledge,
understanding and ability to make judgments in accordance with the requirements of IFRS
for SMEs. Alternatively, the IASB could consider implementing reduced disclosures in
IFRS for SMEs that are nevertheless consistent with the recognition and measurement
principles of full IFRS, i.e. similar to the approach adopted in developed countries like
Australia and New Zealand. The latter approach may also attract other developed countries
and regions like European Union to adopt IFRS for SMEs.
It is noteworthy that the majority of the accountants indicated that there was confirmation
bias in their reporting judgment when applying IFRS for SMEs. Clearly, the mindset of
these accountants meant that they had not fully embraced the distinction between the
principles of full IFRS and IFRS for SMEs. Such a result warrants further investigation to
explore why financial statement preparers are still not willing to accept IFRS for SMEs as
a stand-alone set of standards. Future studies could also examine why there are varying
90
levels of confirmation bias among the preparers of financial statements and how this relates
to the different cognitive strategies preparers may develop in the context of applying IFRS
for SMEs. Such research would provide further insight into the role that confirmation bias
arising from prior knowledge and beliefs on full IFRS plays in diminishing the quality of
SME financial reporting practices.
It is important to note that the experiment focuses on a setting in which confirmation bias
in the reporting judgment of accountants is examined across one decision context, i.e.
recognition of revenues. To broaden the generalizability of the results, future studies could
explore the confirmation bias in other contexts where the recognition and measurement
requirements of IFRS for SMEs vary from those for full IFRS and their impact on the
reporting decisions of financial statement preparers. Further research could also explore
the interactive effects of confirmation bias and decision aids on the reporting judgments of
accountants to substantiate the findings of this study. Alternative decision aids such as
worked examples, for instance, might have a different impact on improving judgment and
decision making, and could be usefully explored by future studies.
91
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Table 3.1: Demographic data of the respondents
Demographic Data Control Group Justification Decision Aid

Group Group
Sample Size 33 30 29
Gender Male Female Male Female Male Female
13 20 17 13 19 10
Age (Mean) 32 32 32
Level of formal education in years (Mean) 17 17 17
Level of professional experience in years 5.36 6.23 4.77
(Mean)
Level of familiarity with the Sri Lankan 3.15 3.20 3.38
equivalents of full IFRS (Mean)
Level of familiarity with the Sri Lankan 2.67 2.97 2.69
equivalents of IFRS for SMEs (Mean)
Frequency of using the Sri Lankan 3.73 3.57 3.72
equivalents of full IFRS (Mean)
Frequency of using the Sri Lankan 2.94 3.17 3.07
equivalents of IFRS for SMEs (Mean)
Table 3.2: Descriptive statistics and ANOVA results for confirmation bias in the
reporting judgments of accountants
Prior Beliefs Mean Standard F p-value

Deviation
Confirmation biased group 5.30 1.685
n = 46 27.110 0.000***
Confirmation unbiased group 3.15 2.241

n = 46
***Significant at p < 0.01
Table 3.3: Binomial test of biased and unbiased judgments of accountants
Group N Observed Test p-value

Proportion Proportion
Biased Judgment Group 59 0.64
Unbiased Judgment Group 33 0.36 0.50 0.009***
96
Table 3.4: Descriptive statistics and ANOVA results for the effect of judgment
justification on the reporting judgments of accountants
Group Mean Standard F p-value

Deviation
Control Group 5.42 2.047
n = 33 8.027 0.006***
Justification Group 4.03 1.829

n = 30
Table 3.5: Descriptive statistics and ANOVA results for the effect of decision aid on the
reporting judgments of accountants
Group Mean Standard F p-value

Deviation
Control Group 5.42 2.047
n = 33 18.620 0.000***
Decision Aid Group 3.07 2.251

n = 29
Figure 3.1: Bias in knowledge retrieval process
Prior Knowledge in Long-term Environmental

Memory Stimuli
Confirmation
Beliefs Current
Schemata Bias
or Experiential
Hypotheses Data
Source: Waller & Felix (1984)
97
98
CHAPTER 4
(PAPER 3)
The Impact of the Reduced Guidance in International Financial Reporting

Standards (IFRS) For Small and Medium-Sized Enterprises (SMEs) on the
99
ABSTRACT
This study examines the effects of the reduced guidance in International Financial
Reporting Standards (IFRS) for small and medium-sized enterprises (SMEs) on the
reporting judgments of accountants. This study also examines the relative effectiveness of
explicit guidance and the examples provided in accounting standards. The findings provide
evidence that the ability of accountants to choose the accounting treatment that best reflects
the economic substance of a transaction is diminished when limited guidance is available
in IFRS for SMEs. The findings also show that accountants employ a biased reasoning
approach when evaluating the examples by overstating the similarities presented in the
examples. These findings will be of interest to the International Accounting Standards
Board (IASB) as the IASB continues to monitor the implementation issues and the need
for amendments to be made to IFRS for SMEs.
Keywords: IFRS, SMEs, reporting judgment, guidance, examples
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4.0 INTRODUCTION
The International Accounting Standards Board (IASB) has pursued a strong agenda in
recent years to develop a simplified set of International Financial Reporting Standards
(IFRS) for small and medium-sized entities (SMEs). The IASB anticipates that the
complexity and administrative burden of SME financial reporting will be eliminated by the
simplification of IFRS for SMEs (IASB, 2009a, 2012). Compared to the detailed
implementation guidance in full IFRS, there is significantly reduced guidance in IFRS for
SMEs. For example, under derecognition of financial assets in Section 11 Basic Financial
Instruments of IFRS for SMEs, no guidance is provided on the pass-through arrangements,
continuing involvement and other relevant aspects of the transfer of a financial asset.
Similarly, there is no detailed guidance on identifying the ‘significant influence’ in Section
14 Investments in Associates of IFRS for SMEs (IASC Foundation, 2010;
PriceWaterhouseCoopers (PWC), 2009). Therefore, this study examines the effects of the
reduced guidance in IFRS for SMEs on the reporting judgments of accountants and the
potential bias towards the examples provided as guidance when accountants rely on these
examples to determine the appropriate accounting treatment of accounting issues. This
study also examines the relative effectiveness of explicit guidance and the examples
provided as guidance on the reporting judgments of accountants.
The reduced guidance in IFRS for SMEs aims to relieve accountants from the interpretation
complexities of accounting standards, but the reduced guidance in IFRS for SMEs has the
potential to impair the communication accuracy of the standards, thus weakening reporting
accuracy and consistency. It is argued that the elimination of the detailed implementation
guidance in IFRS for SMEs may lower component complexity because it reduces the
number of directions that accountants need to consider when they make reporting
judgments. However, the absence of specific guidance in IFRS for SMEs could increase
coordinative complexity, since accountants are required to follow a defined hierarchy
(Nelson, 2003). In the absence of specific guidance on particular accounting issues,
paragraph 10.4 of IFRS for SMEs requires management “to use its judgment in developing
an accounting policy that is reliable and results in information that is relevant to the
economic decision-making needs of users” (IASB, 2009a, p. 49). In deciding the
appropriate accounting policy for an entity, paragraph 10.5 of IFRS for SMEs requires that
the following hierarchy is adhered to:
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a) the requirements and guidance in IFRS for SMEs dealing with similar and related issues;
and
b) the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses and the pervasive principles in Section 2 Concepts and Pervasive
Principles. (IASB, 2009a, p. 49)
In the absence of specific guidance, paragraph 10.6 of IFRS for SMEs allows management
to consider the requirements and guidance in full IFRS that deal with similar and related
issues in making judgments.
Critics contend that the latitude inherent in IFRS for SMEs may increase the discretion on
allowable and disallowable accounting treatments (Ahmed, Neel, & Wang, 2013). In the
absence of adequate guidance, some accountants may opt to follow the hierarchy, while
others may comply with the guidance given in IFRS for SMEs. Therefore, this study argues
that great variations in judgments will result when accountants interpret and apply IFRS
for SMEs.
The successful communication of accurate financial information is an important objective

of accounting standards. Nelson (2003) suggests that the communication accuracy of
accounting standards can be enhanced by explicit directions on allowable and disallowable
accounting treatments, or by proven examples and detailed implementation guidance. This
view is debatable, however, due to the fact that voluminous accounting standards would
increase the ‘component complexity’ of the judgment and decision making process as “the
number of decisions to be made and the number of precedents and examples to be
considered increase” (see Nelson, 2003, p. 94). On the other hand, less precise accounting
standards would increase ‘coordinative complexity’, with the result that accountants would
“combine information in complex or unspecified ways in determining whether a standard
is satisfied” (see Nelson, 2003, p. 94). As such, accounting standard setters are confronted
with a trade-off between these two scenarios.
Critics contend that the approach of allowing accountants to follow the hierarchy signifies
the importance of guidance, even though this guidance has been removed from IFRS for
SMEs to reduce the size of the booklet (ICAA, 2012). One of the major drivers of
complexity in principles-based IFRS is the level of judgment needed to apply a standard,
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which requires the provision of implementation guidance (Benston, Bromwich, &
Wagenhofer, 2006). The Singapore Accounting Standards Council (ASC) (2011, p. 2)
points out that as the requirements and guidance in full IFRS may not always be consistent
with those in IFRS for SMEs, applying full IFRS guidance could result in non-compliance
with paragraph 10.5(a) of IFRS for SMEs, and hence the standard itself. As IFRS for SMEs
are based on full IFRS (prior to any future amendments), the Hong Kong Institute of
Certified Public Accountants (HKICPA, 2011) has raised concerns about the inconsistency
created when a new standard is issued on the new principles rather than the old IFRS
principles. This may hinder the consistency of application of the standard.
The application of the hierarchy is likely to be problematic for accountants in countries

that have moved from local generally accepted accounting principles (GAAPs) to IFRS for
SMEs. A lack of familiarity with IFRS, a lack of experience in applying an international
set of financial reporting standards, and the potential knowledge shortfall (ICAEW, 2010)
may make it difficult for those adopters to follow the above-mentioned hierarchy. In
addition, inconsistency in judgments may result in poor quality financial information being
produced by SMEs (Ahmed et al., 2013). These facts support the notion that the reduced
guidance in IFRS for SMEs has become a challenging issue for those who have opted to
adopt IFRS for SMEs.
IFRS for SMEs provide some guidance in the form of examples, but not in the form of
explicit guidance.28 For example, in determining the derecognition of financial assets,
Section 11, Basic Financial Instruments does not provide explicit guidance on the transfer
of risks and rewards of ownership of a financial asset. Instead, the standard provides
examples of the transfer of a financial asset that may or may not qualify for derecognition.
The International Accounting Standards Committee (IASC) Foundation (2010) has also
issued training modules for users of IFRS for SMEs which contain extensive examples,
self-assessment questions, and case studies that describe the accounting requirements of
IFRS for SMEs.
28
In the context of this study, ‘examples’ refer to hypothetical and precedent transactions included in the
accounting standards and ‘explicit guidance’ refers to explanatory text in the accounting standards that
clarifies the principles contained in the accounting standards (IASB, 2009a).
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Prior research suggests that the absence of explicit guidance will have adverse
consequences, as decision makers tend to over-rely on the treatments illustrated by
examples and cases (Clor-Proell & Nelson, 2007).29 Even if written instructions are
provided, users are inclined to read the instructions superficially when other sources of
information (such as examples) are available (LeFevre & Dixon, 1986).30 There is also a
potential risk of misinterpretation when examples are indiscriminately added to a set of
instructions (LeFevre & Dixon, 1986). Clor-Proell and Nelson (2007, p. 702) advocate that
“standard setters may want to consider the directional effect of example-based reasoning
created by the combination of accounting standards and example type included in any
implementation guidance that they provide, particularly if latitude in standards and
implementation guidance increases with a shift towards a more principle-based regime”.
In the absence of explicit guidance in IFRS for SMEs, users of the standards may be overly
dependent on the information in the examples, thus impairing the accuracy of their
judgments.
Critiques on the reduced guidance in IFRS for SMEs are still limited to discussions and
reviews (see ACCA, 2012; ICAA, 2012; HKICPA, 2011; KPMG, 2012) but no empirical
studies have yet been conducted to examine the impact of the reduced guidance in IFRS
for SMEs on the reporting judgments of accountants. It is imperative to empirically
examine this issue, because inadequate guidance may impair judgment accuracy (Ahmed
et al., 2013) and different types of guidance, such as the examples provided in the standard,
may impair judgment consistency (Clor-Proell & Nelson, 2007).
To explore these issues, this study conducted an experiment in which experienced

accountants were placed in a decision context of accounting for investments in associates.
The availability of guidance was manipulated between participants who were either
provided with limited explicit guidance in IFRS for SMEs or detailed explicit guidance in
full IFRS for making their judgments. Example type was manipulated between participants
29
Even though there are many dissimilarities in the examples used in different domains, “examples”
commonly share a fundamental purpose, namely, “to illustrate a principle or pattern” (Atkinson, Derry,
Renkl, & Wortham, 2000, p. 182).
30
The written instructions refer to rules, requirements or guidelines explicitly available to assist in problem
solving and decision-making settings (LeFevre & Dixon, 1986).
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where they were provided with either an affirmative example or a counter example as
guidance in making their judgments.
The first hypothesis examines the effects of the reduced guidance in IFRS for SMEs on the
reporting judgments of accountants. It is expected that there will be differences in the
judgments of accountants who apply the reduced guidance in IFRS for SMEs and
accountants who apply detailed guidance in full IFRS. As expected, accountants who refer
to the reduced guidance in IFRS for SMEs are less likely to choose the accounting
treatment that best reflects the economic substance of a transaction than accountants who
refer to the detailed guidance in full IFRS. The findings generally support the notion that
the reduced guidance in IFRS for SMEs is likely to impair the reporting judgments of
accountants. The second hypothesis examines the likelihood that the examples provided as
guidance bias the reporting judgments of accountants towards the similarities presented in
the examples. The results reveal that accountants tend to overstate the similarities
presented in the examples, thus biasing their judgments towards the treatment illustrated
in the examples. The third hypothesis examines the relative effectiveness of explicit
guidance versus examples. It is hypothesized that accountants receiving explicit guidance
make more accurate judgments than accountants receiving examples as guidance. The
results indicate that explicit guidance is not relatively more effective than examples when
limited explicit guidance is available for making reporting judgments. Rather, explicit
guidance is relatively more effective than examples only when detailed explicit guidance
is available.
This study also proposes in the fourth hypothesis that accountants receiving a combination
of examples and explicit guidance make more accurate judgments than accountants
receiving either examples or explicit guidance alone. The results reveal that accountants
receiving a combination of examples (affirmative and counter) and explicit guidance (IFRS
for SMEs guidance and additional guidance in full IFRS) make significantly more accurate
judgments than accountants receiving either IFRS for SMEs guidance or the examples
alone.
This study contributes to the important debate on whether IFRS for SMEs have the
potential to improve the quality of SME financial reporting. The findings suggest that the
guidance provided in IFRS for SMEs is insufficient for making sound reporting judgments.
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This study suggests that the IASB may need to reconsider the implementation of reduced
disclosure in IFRS for SMEs and retain recognition and measurement principles and
implementation guidance that are identical to full IFRS, i.e. similar to the approach adopted
in developed countries like Australia and New Zealand. This approach may also encourage
other developed countries to adopt IFRS for SMEs. Second, the IASB should be attentive
when supplementing explicit guidance with examples. Therefore, the findings will be of
interest to the IASB in shaping the optimal format for accounting standards, and IFRS for
SMEs in particular.
The remainder of the paper is organized as follows. Section 4.1 provides the background
of the study. Section 4.2 discusses the relevant theory and develops the hypotheses. Section
4.3 describes the experiment used to test the hypotheses. Section 4.4 presents the results
and discussion. Section 4.5 provides a summary and offers the conclusions and
implications of the study.
4.1 BACKGROUND
The controversy over the application of a tiered hierarchy approach in IFRS for SMEs has
been widely discussed during the initial comprehensive review process of IFRS for SMEs,
which was carried out by the IASB in 2012 (ACCA, 2012; KPMG, 2012). The issues
associated with the fallback to full IFRS have gained increased attention, because aligning
IFRS for SMEs in accordance with the periodic updates and amendments of full IFRS has
become a challenging issue for the standard setters (IFRS Foundation, 2013a; ACCA,
2012; KPMG, 2012). For example, several changes have recently been made to the
consolidation guidance in full IFRS by updating IFRS 10 Consolidated Financial
Statements, which replaced International Accounting Standards (IAS) 27 Consolidated
and Separate Financial Statements. IFRS 10 includes additional guidance on applying the
control principle in a number of situations, which could be of significance for SMEs
(ACCA, 2012).
Similarly, paragraph 11.33(b) in Section 11 Basic Financial Instruments of IFRS for

SMEs, which concerns the derecognition of financial assets, does not provide adequate
guidance for making judgments on the transfer of risks and rewards of ownership to
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another party (IASC Foundation, 2010). In such circumstances, the entity may refer to the
guidance provided in paragraph 21 of the IAS 39 Financial Instruments: Recognition and
Measurement of full IFRS.31 In October 2010, the IASB transferred the requirements
related to the derecognition of financial assets from IAS 39 to IFRS 9 Financial
Instruments (IFRS Foundation, 2013a). However, SMEs are not permitted to apply IFRS
9 (IFRS Foundation, 2012c, 2013a).32
Emphasis has been placed on the necessity for concurrent amendments to IFRS for SMEs
to avoid inconsistency in accounting requirements between full IFRS and IFRS for SMEs
(ACCA, 2012; New Zealand Accounting Standards Board, 2012). The IASB issued
proposed amendments to IFRS for SMEs in May 2015, which consist of a limited number
of amendments to the accounting requirements, clarification of the existing requirements
and supporting guidance; however, no amendments have been proposed that will align the
amendments in full IFRS with IFRS for SMEs (IFRS Foundation, 2015a). Thus, the gap
in accounting requirements between full IFRS and IFRS for SMEs is becoming wider. This
divergence may create difficulties in interpretation and inconsistency in reporting
judgments when accountants refer to full IFRS for additional guidance (ACCA, 2012).
The objective of preparing high quality financial information by SMEs will not be achieved
if accountants do not follow the hierarchy appropriately. Due to the lack of guidance, the
interpretation and implementation of IFRS for SMEs require significant IFRS expertise in
some instances. For an example, additional expert consultation may be required to carry
out comprehensive actuarial valuations in Section 28 Employee Benefits (ICAA, 2012;
KPMG, 2010). This may indicate that in practice, it is challenging to accept the simplified
IFRS for SMEs as a stand-alone set of standards, because this action may not simplify the
workload of accountants (ICAA, 2012).
31
IFRS for SMEs currently permit entities to choose to apply the recognition and measurement provisions
of IAS 39, and this is the only time that IFRS for SMEs permit the use of full IFRS.
32
The Basis for the Conclusions of IFRS for SMEs (in Section 11 Q&A paragraph BC1) notes that “allowing
the use of IFRS 9 by SMEs would require a change to IFRS for SMEs” (IFRS Foundation, 2012c, p. 2). After
completing a comprehensive review process of IFRS for SMEs in 2014, the IASB decided to post the latest
version of IAS 39, not updated by IFRS 9 Financial Instruments, to the SME project pages of the IASB
website, with the updated version of IFRS for SMEs referring to this location (IFRS Foundation, 2014b).
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The Securities Exchange Commission (SEC) (2003) indicates that the principles-only
standards may present enforcement difficulties because they provide little guidance or
structure for preparers and auditors to exercise professional judgments. More guidance has
therefore been added in the recently-issued IFRS. As an example, IFRS 10 Consolidated
Financial Statements contains new detailed guidance on the principle of ‘control’. It has
also been suggested that IFRS Interpretation Committee (IFRIC) should include further
guidance in IFRS 2 Share-Based Payments to describe how vesting and non-vesting
conditions have different impacts on the measurement of liability (Deloitte Touch
Tohmatsu, 2014).33 Prior studies that examine the effects of guidance on the reporting
judgments of accountants also substantiate the importance of providing adequate guidance
in principles-based IFRS (see Gill, 2002; Mala & Chand, 2014 for a review). These
findings establish the significance of examining the impact of the reduced guidance in
IFRS for SMEs on the reporting judgments of accountants.
Although theoretical discussions exist, there is no empirical evidence to substantiate the

perception that the reduced guidance in IFRS for SMEs will have adverse consequences
for the reporting judgments of accountants. Further, our understanding of accountants’ use
of guidance (particularly examples as guidance) for exercising reporting judgments
remains limited. This study is important because national regulators in many emerging
economies have opted for reporting under IFRS for SMEs (IFRS Foundation, 2012a) but
are experiencing many challenges in light of the difficulties associated with the
implementation of an international set of standards. The lack of professional competency
in particular is considered to be challenging for the successful implementation of the
accounting requirements for SMEs (Albu, Albu, Bunea, Calu, & Girbina, 2011; ICAA,
2012). Understanding the judgment and decision making behaviour of accountants in the
context of IFRS for SMEs is important, as the IASB is continuing to monitor the
implementation of IFRS for SMEs. The findings of this study may help accounting
regulators to determine suitable ways of minimizing the potentially undesirable outcomes
associated with the simplified IFRS for SMEs.
33
Additionally, the committee has proposed the addition of more examples on cash-settled share-based
payment transactions (Deloitte Touch Tohmatsu, 2014).
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4.2 THEORY AND HYPOTHESES DEVELOPMENT
4.2.1 Effects of availability of guidance on the judgments of decision

makers
Libby and Luft (1993) refer to guidance and support as the ‘technology’—the environment
in which various guidance and technological aid is provided to assist a decision maker to
make their judgments. In an accounting setting, the technical elements in the accounting
standards, such as the accounting principles and the guidelines, have the ability to influence
judgment performance by changing the task requirements and motivation to perform the
task (see Libby & Luft, 1993 for a similar finding in the audit environment).34 The
availability of different forms of guidance increases the motivation to perform the task by
reducing the effort that a decision maker must expend to complete the task. Thus, when
the availability of guidance in the accounting environment varies, the judgment
performance of accountants is influenced by such variations (Libby & Luft, 1993;
McDaniel, 1990). Guidance is therefore considered to be an important element in judgment
and decision making in the accounting context that should not be disregarded (Ahmed et
al., 2013; Messier Jr, Quick, & Vandervelde, 2014; Schipper, 2005).
This study draws upon relevant literature in auditing and accounting contexts which
examines the impact of the availability of guidance on the judgment performance of
accountants in principles-based and rules-based accounting standards contexts. A limited
amount of audit research has investigated auditors’ decision-making behaviour under the
guidance provided in principles-based standards. Quick (2013) notes that the guidance
provided in principles-based standards allows auditors to make decisions that reflect the
economic substance of a transaction, in contrast to the bright-line thresholds in rules-based
standards.
Peytcheva and Wright (2010) and Peytcheva, Wright, and Majoor (2014) provide evidence
that auditors experience greater epistemic motivation under guidance provided in
34
Libby and Luft (1993) note that task requirements are associated with the knowledge, ability and effort the
decision maker must bring to the task to achieve a given level of performance, whereas motivation is
associated with the amount of effort that decision makers are willing to employ to fulfil the requirements.
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principles-based accounting standards than rules-based accounting standards.35 Peytcheva
et al. (2014) conducted an experiment in the audit evidence context to investigate the effect
of rules-based versus principles-based accounting guidance on auditors’ epistemic
motivation and demand for audit evidence. The subjects in their experiment were exposed
to a classification of lease transaction which required them to examine and select additional
evidence. The availability of guidance was manipulated between groups by the provision
of specific criteria for lease classification under principles-based and rules-based
standards. The authors’ findings provide evidence that guidance in principles-based
standards influences auditors’ cognitive motivation by increasing process accountability
and epistemic motivation. The authors conclude that the principles-based environment
stimulates the perception of being accountable, which serves to maintain the quality of the
process in reaching decisions. They further note that the principles-based environment
stimulates epistemic motivation—the willingness of auditors to gain a thorough
understanding of the problem at hand.
Studies in the audit context also document that the lack of authoritative guidance has
adverse consequences for audit decision-making (Ng & Tan, 2003; Salterio, 1996; Salterio
& Koonce, 1997). For example, Salterio and Koonce (1997, p. 574) note that auditors are
often confronted by an accounting problem for which authoritative standards are not
available or do not provide clear guidance. Ng and Tan (2003) provide evidence that the
availability of authoritative guidance influences auditors’ perceptions of negotiation
outcomes, especially in the absence of an effective audit committee. Their findings suggest
that auditors will allow aggressive accounting by the client in the absence of authoritative
guidance, and when the client’s audit committee is weak.
Prior studies also show that the latitude inherent in principles-based accounting standards
and the imprecise nature of the guidance contained in the standards may lead to aggressive
financial reporting (Cuccia, Hackenbrack, & Nelson, 1995; Hackenbrack & Nelson, 1996).
For example, Hackenbrack and Nelson (1996) note that when latitude exists as a result of
the vague language used in the professional standards, auditors tend to validate their
aggressive reporting by applying the professional standards aggressively. However, Cuccia
35
De Dreu, Beersma, Stroebe, and Euwema (2006, p. 298) define epistemic motivation as the desire to
develop and maintain a rich and accurate understanding of the world.
110
et al. (1995) indicate that changing to more precise standards is not an effective approach
to diminishing aggressive reporting decisions when there is an incentive to report
aggressively. Ahmed et al. (2013, p. 1348) note that for some important areas, such as
revenue recognition for multiple deliverables, the absence of implementation guidance
significantly increases discretion and allowable treatments depending upon how standards
are interpreted and implemented. This increase in discretion due to the lack of
implementation guidance is likely to encourage earnings management, thus lowering the
quality of the accounting.
While many of the research studies on the effects of the availability of guidance have been
undertaken in the audit judgment and decision making context, only a few researchers in
the accounting domain have explored the effects of the availability of guidance on the
judgment performance of accountants. A study carried out in IFRS context documents that
the provision of additional guidance in IFRS assists in the reduction of interpretation
complexity and enhances the accuracy of judgments made by accountants (Mala & Chand,
2014). Mala and Chand (2014) conducted an experiment to examine whether additional
guidance provided in IFRS affects the accuracy of judgments made by accountants. In their
experiment, the effect of additional guidance was manipulated between subjects. The
subjects in one group were given relevant paragraphs from IAS 17 Leases and the subjects
in the other group were given additional guidance. All subjects were required to exercise
judgment on whether a leased item indicated in the scenario should be recognized as an
operating lease or a finance lease. Mala and Chand’s (2014) findings provide evidence that
accountants who are equipped with additional guidance make more accurate judgments
than accountants who do not receive additional guidance. The authors suggest that
additional guidance as a decision aid tool enhances judgment accuracy of accountants.
Their findings further support the notion that additional guidance is more supportive when
the perceived complexity of the task is high.
In assessing the complexities of the principles-based IFRS context, researchers have

extensively advocated the importance of providing the detailed and additional guidance
necessary to explain the principles contained in the accounting standards and put them into
practice (see Gill, 2002; Mala & Chand, 2014; Schipper, 2005). Schipper (2005) reports
that as business transactions gradually become more sophisticated, the need for detailed
implementation guidance for the application of IFRS may increase over time. Preparers’
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reliance on other sources of information could also increase in the absence of detailed
guidance, resulting in a loss of comparability in financial information (Benston et al., 2006;
Gill, 2002).
Generally, prior research that has examined the effects of the availability of guidance on
the judgment performance of decision makers shows that the availability of guidance
positively influences the judgment performance of individuals. The motivation for these
prior studies has been driven by the increasing use of judgments in principles-based IFRS.
While the findings from the full IFRS context advocate that guidance must be adequately
provided in the principles-based IFRS context, more empirical evidence is required in the
context of IFRS for SMEs to determine whether, in the absence of guidance in IFRS for
SMEs, allowing accountants to follow a tiered hierarchy will preserve the accuracy and
consistency of the judgments of accountants. In contrast to the prior studies, therefore, the
arguments in this study focus on the issues that may arise when accountants follow the
hierarchy in deciding appropriate accounting policy and treatment.
4.2.2 Effects of the reduced guidance in IFRS for SMEs on the reporting
judgments of accountants (H1)
In the IFRS for SMEs setting, the elimination of the detailed implementation guidance in
IFRS for SMEs possibly lowers component complexity because it reduces the number of
directions that accountants need to consider when making reporting judgments (Nelson,
2003). On the other hand, it can also be argued that the absence of specific guidance in
IFRS for SMEs possibly increases coordinative complexity, since accountants are required
to follow a hierarchy in deciding the appropriate accounting policy and treatment (IASB,
2009a). Accountants will be required to combine the information in a sophisticated way to
ensure compliance with requirements of the standard (Nelson, 2003). It is possible that
some accountants may opt to follow the hierarchy, while others may comply with the
guidance provided in IFRS for SMEs. Thus, the absence of detailed guidance may increase
discretion on allowable and disallowable accounting treatments, depending on how the
standard is interpreted and implemented (Ahmed et al., 2013). It is suggested that the
additional guidance reduces those interpretation complexities and enhances the reporting
accuracy in principles-based accounting (Mala & Chand, 2014; Nelson, 2003). Therefore,
112
this study anticipates that there will be differences in judgments when accountants are
provided with IFRS for SMEs guidance rather than full IFRS guidance.
To examine the impact of the reduced guidance in IFRS for SMEs on the reporting
judgments of accountants, this study selects the accounting for investments in associates
decision context, for which the explicit guidance of IFRS for SMEs has been significantly
reduced. Section 14 Investments in Associates of IFRS for SMEs defines significant
influence as “…the power to participate in the financial and operating policy decisions of
the associate…” (IASB, 2009a, p. 81).
The standard states that significant influence would be presumed if an investor holds 20
percent or more of the voting power of the investee. This presumption is rebuttable because
if the investor can demonstrate that such influence does not exist, the investee is not
classified as an associate. However, in instances where it is unclear whether significant
influence exists, judgment must be exercised to determine its existence, for which more
guidance may be required (IASC Foundation, 2010). For example, if it can be clearly
demonstrated that an investor holding less than 20 percent of the voting power of the
investee exercises significant influence, the investment will be accounted for as an
associate. The IAS 28 Investments in Associates and Joint Venture of full IFRS provides
an additional list of factors that may indicate the existence of significant influence over an
investee; however, this explicit guidance is not included in Section 14 of IFRS for SMEs.
In such a setting, this study expects that accountants will be unlikely to choose the
accounting treatment that best reflects the economic substance of a transaction when
applying the reduced guidance in IFRS for SMEs. This study assumes that the additional
guidance provided in full IFRS will assist accountants to determine the existence of
significant influence more accurately than accountants who refer to the limited guidance
in IFRS for SMEs. Accordingly, the following hypothesis is formulated:
H1: There will be differences in judgments between accountants who are provided with
the reduced guidance in IFRS for SMEs and accountants who are provided with
detailed guidance in full IFRS.
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4.2.3 Effects of examples provided as guidance on the judgments of
decision makers
Examples are generally considered to be abstracts that are not intended to communicate
decision thresholds (Clor-Proell & Nelson, 2007). However, well-designed examples play
a vital role in clarifying or supplementing the instructions (LeFevre & Dixon, 1986). In the
accounting context, examples are considered to describe hypothetical transactions and
scenarios for the purpose of providing the guidance that is necessary to explain and
operationalize the principles contained in accounting standards (IASB, 2009a). Therefore,
examples accompanied by the accounting standards are considered to be important
guidance elements that have the ability to influence judgments.
Prior research in various domains has investigated different aspects of the use of examples
in problem solving and decision-making tasks. Researchers have been interested in
examining how examples help to improve task performance, and have documented that
examples are considered to be an important source that assists in the accurate
understanding and performance of tasks. Wynder and Luckett (1999) show that worked
examples increase task performance by providing task-specific heuristics. Halabi,
Tuovinen, and Farley (2005) find that compared to problem-solving exercises (which
contain only instructions), worked examples ease the learning process by reducing the
cognitive effort that is required to complete the task. Generally, research suggests that
worked examples have the ability to enhance the judgment performance of a decision
maker on similar tasks (Cooper & Sweller, 1987; LeFevre & Dixon, 1986).
This study explores an important aspect of the use of examples—the reliance of decision
makers on the examples. Prior research examining similarity in judgments (Marchant,
1989; Salterio, 1996; Tversky, 1977) and example-based reasoning (Clor-Proell & Nelson,
2007) maintains that accountants rely heavily on treatments illustrated by the examples
and cases, and consider them to be more appropriate to their situation, rather than
validating the underlying facts of their actual situation. In the audit context, researchers
have examined the effects of content and the perceived similarity of precedents on auditors’
accounting policy judgments, and have concluded that auditors rely heavily on precedents
which are perceived to be similar to their situation (Salterio, 1996; Salterio & Koonce,
114
1997).36 For example, Salterio and Koonce (1997) examined auditors’ responses to
precedents in accounting situations in the absence of guidance on the appropriate
accounting treatment of a financial transaction. The authors note that auditors must
consider possible alternative accounting treatments, such as the relevant precedents, when
authoritative guidance is not available or when the accounting standards do not provide
clear guidance. They developed their hypotheses based on the notion that the more similar
the facts in the precedents are to those in the problem situation, the more favorably those
precedents are perceived. The findings of their experiments show that in the absence of
authoritative guidance, auditors use the content of available precedents when making
judgments on appropriate accounting treatments. Importantly, their findings show that
auditors rely more on precedents that are similar to the problem situation rather than
precedents that are dissimilar to the problem situation when they make judgments on the
appropriate accounting treatment of a financial transaction.
Findings from prior research in accounting also suggest that in the absence of explicit
guidance, the directional effect of examples (provided as guidance) biases the judgments
made by the accountants. For example, Clor-Proell and Nelson (2007) provide evidence
on how ‘examples’ as guidance that accompanies accounting standards can result in either
aggressive or conservative application of the standards. Based on a psychological
phenomenon, they hypothesized that accountants provided with affirmative (counter)
examples are more (less) likely to conclude that an accounting treatment is appropriate.37
Using two case conditions (revenue/expenses) and two example conditions
(affirmative/counter), the judgments made by accountants on the appropriateness of
income-statement recognition were tested. The findings provide evidence that the
probability of income-statement recognition by accountants is higher when accountants are
provided with affirmative examples than when they are provided with counter examples.
The findings further indicate that when participants are provided with both affirmative and
counter examples, they respond as if they had only received affirmative examples.
36
Salterio (1996) defines ‘precedents’ in auditing as “prior examples of similar situations encountered in the
firm’s practice documented in internal memorandum or by other audit firms as seen in the published financial
statements disclosures” (p. 467).
37
Clor-Proell and Nelson (2007) developed this argument based on two psychological perspectives. First,
they claimed that there is high likelihood of overstating the similarity of features between the example and
the target case (which they referred to as similarity assessment). Second, they claimed that the evaluative
tone of the outcome specified by the example, (for example, recognition is allowable rather than not
allowable) stimulates the income-increasing behaviour of practitioners (which they referred to as priming).
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The general conclusion derived from much of the prior research is that the elements
contained in examples bias the judgments and decisions of an individual. Further, they
restrain learners from acquiring knowledge and exerting more cognitive effort on decision-
making tasks.
4.2.4 Effects of examples provided in IFRS for SMEs as guidance on the

The purpose of this study is to better understand how well accountants make judgments
based on the examples provided as guidance for situations for which explicit guidance in
IFRS for SMEs does not exist. When designing IFRS for SMEs, standard setters have
attempted to clarify some of the principles contained in the standards using examples rather
than explicit guidance. However, these examples may not adequately communicate
explanations that are explicitly available as guidance in full IFRS.
Section 11 Basic Financial Instruments in IFRS for SMEs, for example, does not provide
explicit guidance on how to make judgments on the derecognition of financial assets to
determine whether an entity has transferred substantially all of the risks and rewards of
ownership to another party. Instead, the standard is accompanied by two examples: a
transfer of financial asset that qualifies for derecognition, and a transfer that does not
qualify for derecognition. The risks and rewards assessment conditions given in the
examples may communicate to preparers that those are the key criteria that entities should
consider when evaluating whether substantially all of the risks and rewards of ownership
of the financial asset have been transferred. However, in some complex cases where the
terms and conditions of the transfer are not clear, the evaluation of risks and rewards is
based on the entity’s exposure before and after the transfer to the variability in the amounts
and timing of net cash flows (IFRS Foundation, 2010). Neither explicit guidance nor
examples for such instances are provided in Section 11 of IFRS for SMEs; however, IAS
39 Financial Instruments: Recognition and Measurement of full IFRS provides explicit
guidance that is relevant for making judgments in such circumstances.
In an actual accounting environment, it is very rare for the hypothetical transactions

prescribed in the examples to coincide perfectly with real accounting problems. Therefore,
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when examples do not cover the transactions in question, or when there is a lack of clarity
in the examples, it is possible that accountants will make inappropriate judgments if they
are over-dependent on the similarities presented in the examples. This effect is expected to
occur because decision makers presume that the similarities evident in examples or
precedents are appropriate to their cases (Clor-Proell & Nelson, 2007; Salterio & Koonce,
1997). As noted by Marchant, Robinson, Anderson, and Schadewald (1993), when
precedents are applied in problem solving tasks, it is important to pay attention to (1) the
similarities and dissimilarities of the precedents to the problem situation, and (2) the
outcome indicated by the precedent.
This study draws on literature from similarity judgments in psychology to establish the
argument of this study.38 Tversky (1977, p. 327) describes similarity as “a feature-
matching process”.39 A contrast model developed by Tversky (1977) notes that the
similarity of objects is expressed as a linear combination, or a contrast of the measures of
their common and distinctive features. When a similarity assessment task is given, subjects
tend to pay more attention to the common (i.e., shared) features. In contrast, when a
dissimilarity assessment task is given, subjects tend to be more attentive to the distinctive
features. Findings from prior research provide further evidence that when the similarity of
the details presented in the precedent to those in the actual problem situation is strong,
decision makers tend to overstate the similarities presented (Marchant, 1989; Salterio &
Koonce, 1997). Prior research also suggests that the directional effects of the example types
provided as guidance in accounting standards will influence the judgments made by
accountants (Clor-Proell & Nelson, 2007).40
In line with the findings of prior research, it is argued that the similarities in details
provided in examples will have a negative influence on judgments if accountants tend to
38
Tversky (1977) views similarity judgments as extensions of similarity statements, that is, statements of the
form “a is like b”. Such a statement is directional; it has a subject, a, and a referent, b, and is not equivalent
in general to the converse similarity statement “b is like a”. In fact, the choice of subject and referent depends,
at least in part, on the relative salience of the objects (p. 328).
39
Tversky (1977) notes that feature matching model can be applied to analyse empirical phenomena such as
“…the role of common and distinctive features, the relations between judgments of similarity and difference,
the presence of asymmetric similarities, and the effects of context on similarities” (p. 329).
40
Clor-Proell and Nelson (2007) refer to examples that provide guidance on acceptable reporting as
“affirmative examples” and examples that provide guidance on unacceptable reporting as “counter
examples”.
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overstate the similarities (Marchant, 1989; Salterio & Koonce, 1997; Tversky, 1977). In
an accounting setting, attention should also be paid to examples accompanying the
accounting standards that indicate the outcome of a hypothetical transaction. Based on the
notion that the directional effects (outcome) of examples influence the judgments made by
accountants, this study argues that the bias towards the similarities presented in examples
varies according to the directional effects of the outcome indicated by the examples
(affirmative and counter examples).
To examine this effect in the context of IFRS for SMEs, this study selects the same decision
context applied for testing H1, the accounting for investments in associates decision
context. This study argues that providing examples that illustrate the existence/non-
existence of significant influence under different circumstances will offer an avenue for
accountants to analyse whether thresholds inferred by examples are consistent/inconsistent
with their situation. Accordingly, this study considers an example that provides guidance
on the existence of significant influence as an ‘affirmative’ example, whereas an example
that provides guidance on the non-existence of significant influence is a ‘counter’ example.
A respondent who receives an example (affirmative/counter) which describes the
existence/non-existence of significant influence may conclude that significant influence
exists/does not exist in the target case if he/she finds a similarity between the threshold
inferred by the example and the target case, even if the target case contains contradictory
information. Consequently, it is expected that judgments made by accountants will be
biased towards the similarities presented in examples, if they tend to over-rely on these
similarities. Accordingly, the following hypothesis is formulated:
H2: It is likely that the examples provided as guidance will bias the professional
judgments of accountants towards the similarities presented in the examples.
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4.2.5 Effects of explicit guidance versus examples in IFRS for SMEs on
the reporting judgments of accountants (H3)
Based on the literature reviewed in the previous section, a prediction was made that
accountants’ reliance on examples will have a negative influence if accountants tend to
over-rely on the similarities presented in the examples. The limited number of studies that
have investigated the accountants’ use of examples as guidance note that the judgments of
accountants are biased towards the similarities presented in the examples (Clor-Proell &
Nelson, 2007). Furthermore, the few prior studies in the accounting context document that
the provision of additional guidance in IFRS reduces interpretation complexity and
enhances judgment accuracy (Mala & Chand, 2014). However, we lack an understanding
of the relative effectiveness of explicit guidance versus examples on judgment accuracy.
Therefore, this study examines the relative effectiveness of the two forms of guidance—
explicit guidance and examples¸ on the reporting judgments of accountants.
A small number of prior studies in different domains have attempted to investigate the
relative effectiveness of worked examples and instructions in decision-making contexts.
Wynder and Luckett (1999) conducted a study to demonstrate the effects of worked
examples and understanding-rules on the knowledge acquisition and task performance of
accountants.41 As the authors showed, worked examples and instructions on how to
understand rules improve the task performance of accountants equally well. However, as
noted by the authors, these two forms of guidance are performed in different ways.
Understanding-rules instructions increase task performance through the acquisition of
procedural knowledge [i.e. “…understanding the appropriate procedures associated with
the task” (p. 178)], whereas, worked examples increase task performance through the
acquisition of task-specific knowledge. Importantly, these findings suggest that worked
examples can only be beneficial when decision makers perform specific tasks similar to
the tasks demonstrated by the worked examples. Consistent with this view, Anderson,
Farrell and Sauers (1984) note that examples that demonstrate similarities to the task
41
Wynder and Luckett (1999) extended the study by Bonner and Walker (1994) that investigated the effects
of alternative forms of instructions (how-to-rules and understanding-rules) and experience on the acquisition
of procedural knowledge and the judgment performance of auditors. Bonner and Walker (1994) define how-
to-rules as instructions that consist of “lists of steps or procedures to be followed in performing a task” (p.
159), and understanding-rules as instructions that provide “explanations with the steps, and possibly,
information about why the steps are performed, how they relate to each other…” (p. 159).
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provide more useful information for constructing a procedure than written instructions.
LeFevre and Dixon (1986) also report that examples are considered to be similar in
appearance to the target problem and therefore more compelling than written instructions.
LeFevre and Dixon (1986) used several experiments to compare the relative effectiveness
of written instructions and examples on an inductive reasoning task. The information
contained in these two sources of information was mutually contradictory. The authors
found strong evidence that subjects rely more heavily on examples than written instructions
in making their decisions. Subjects process the written instructions superficially when they
are also provided with examples, and they make conclusions in accordance with the
examples immediately after evaluating the examples (even if they are provided with
written instructions). LeFevre and Dixon (1986) further note that there is a higher
possibility of misinterpreting the examples than the written instructions.
Based on the arguments presented in this study, the examples will have a negative influence
on the accuracy of reporting judgments if accountants tend to rely too heavily on the
similarities presented in examples (H2). Consistent with the findings of prior studies, this
study also expects that explicit guidance will have a more positive influence on judgment
accuracy than examples. In the decision context of accounting for investments in
associates, it is expected that a respondent who receives an example (affirmative/counter)
which describes the existence/non-existence of significant influence may conclude that the
significant influence exists/does not exist in the target case if he/she finds a similarity
between the threshold inferred by the example and the target case, even if the target case
contains contradictory information. It is also expected that this bias will not exist when
respondents are provided with explicit guidance (IFRS for SMEs/full IFRS guidance),
indicating that explicit guidance is more influential on making sound judgments than
examples. Accordingly, the following hypothesis is formulated:
H3: Accountants receiving explicit guidance will make more accurate judgments than
accountants receiving examples as guidance.
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4.2.6 Effects of explicit guidance and examples in IFRS for SMEs on the
This study investigates the likelihood that accountants make more accurate judgments
when they are provided with both examples and explicit guidance than when they are
provided with either examples or explicit guidance alone. Prior research documents that
the task performance of an individual can be maximized by combining worked examples
with understanding-rules (Wynder & Luckett, 1999). As discussed previously,
understanding-rules improve task performance through the acquisition of procedural
knowledge. Even though procedural knowledge cannot be acquired by worked examples,
it helps to improve task performance by providing task specific heuristics (Wynder &
Luckett, 1999). Research suggests that a combination of task-specific heuristics and
procedural knowledge develops the highest levels of task performance of an individual.
This is because a worked example diverts a decision maker’s attention from the
information provided by the understanding-rules. Thus, a combination of worked examples
and understanding-rules improves the task performance of an individual.
This study expects that if an accountant fails to extract the idea prescribed by the explicit
guidance, examples will be useful in explaining and operationalizing the idea prescribed
by the explicit guidance. On the other hand, explicit guidance will draw accountants’
attention to the similarities with the target case presented in the examples. It is further
assumed that bias towards similarities presented in examples and the directional effects of
the outcomes indicated by the examples can be avoided when accountants are provided
with an equal mix of both affirmative and counter examples (Clor-Proell & Nelson, 2007).
That is, there will be a counterbalance between the similarities in an affirmative example
with the target case and the similarities in a counter example with the target case, such that
the bias towards the similarities presented in examples can be avoided.
In the decision context of accounting for investments in associates, this study expects that
a combination of guidance in IFRS for SMEs, additional guidance in full IFRS and the
examples (Affirmative and Counter) will be more influential in making accurate judgments
than if they are presented independently. Accordingly, the following hypothesis is
formulated:
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H4: Accountants receiving a combination of examples and explicit guidance will make
more accurate judgments than those receiving either examples or explicit guidance
alone.
4.3 EXPERIMENT
4.3.1 Participants and design
For the purpose of this study, it was determined that the research setting should represent
a country that has adopted IFRS for SMEs. Fiji has taken the lead in adopting IFRS for
SMEs in the Asia-Pacific region, and shortly after the standard was issued in 2009, all
entities not identified as ‘listed entities’ were required to comply with IFRS for SMEs for
the reporting period beginning on or after 1st January 2011. The new Fijian equivalents of
IFRS for SMEs is a completely stand-alone set of standards. The financial reporting setting
in Fiji provides an appropriate research setting for the current study.
The participants in the experiment of this study were 148 qualified accountants of the Fiji
Institute of Accountants with an average of 5.07 years of work experience in financial
reporting. The respondents had relevant education, training and experience in dealing with
both the Fijian equivalents of full IFRS and IFRS for SMEs. Because the experiment asks
participants to choose the accounting treatment that best reflects the underlying economics
of transactions for an SME faced with accounting for investments in associates decisions,
it was important to select Fijian-based accountants who had experience in making financial
reporting decisions in the context of IFRS for SMEs.
The experiment took place in a professional workshop of the Fiji Institute of Accountants.
The participants were randomly assigned to one of the five groups, with 28 participants in
IFRS for SMEs guidance group, 29 participants in full IFRS guidance group, 31
participants in the affirmative example group, 29 participants in the counter example group
and 31 participants in the all guidance (explicit guidance and examples) group.
To test the hypotheses, this study conducted the experiment that required participants to
make a decision on accounting for investments in associates for an SME. This study
selected the decision context of accounting for investments in associates to assess whether
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or not significant influence exists over another entity, since the guidance in IFRS for SMEs
is significantly reduced compared to the detailed guidance provided in full IFRS.
The availability of guidance was manipulated between participants, who were either
provided with IFRS for SMEs guidance or full IFRS guidance. The example types were
manipulated between participants, who were either provided with an affirmative example
or a counter example as guidance for making their judgments.
To preserve internal validity and to enable differences in the reporting judgments of

accountants to be attributable to the two variables of interest (availability of guidance and
example types), particular care was taken in designing the scenario. Potentially
confounding variables that could affect the reporting judgments of accountants were
controlled. In the context of this study, no incentives were provided to the accountants to
influence their reporting judgments. For the given scenario, participants were simply
instructed to choose the accounting treatment that best reflected the underlying economics
of transaction for an SME faced with an accounting for investments in associates decision.
4.3.2 Procedures
This study provided the participants with a research instrument comprising two sections
(Appendix 3). The first section required respondents to provide demographic data such as
gender, age, level of formal education, employer details and years of work experience. The
respondents were also asked to indicate their level of familiarity with the Fijian equivalents
of full IFRS and IFRS for SMEs (measured both by how familiar they were with full
IFRS/IFRS for SMEs and how frequently they referred to these standards in their
professional practice).
The second section contained the case scenario. A practical scenario was developed in
which participants had to make a reporting judgment on behalf of the SME. The scenario
was based on accounting for investments in associates. The scenario provided key facts
relating to the transaction in question. These facts were designed in line with Section 14 of
IFRS for SMEs [paragraphs 14.3 (a, b and c) – Significant Influence], and the IAS 28
(paragraphs 6-9) in determining the existence of significant influence over an investee.
123
The hypothetical company is a medium-sized non-listed company which engages in the
wholesale of automotive spare parts to a range of independent retailers. The company
acquires an 18 percent stake (directly and through a subsidiary) in a retail chain in the
automotive spare parts market. The company represents two members of the Board of
Directors of the investee; however, the company’s Board representation is not available
for most of the Board meetings of the investee. There exist some material transactions
between the company and the investee during the financial year. Additionally, the company
offers strong marketing support and a wide range of retail services to its independent
retailer network, including the investee, by providing advice and coaching on marketing
strategy to ensure customer satisfaction. The participants were asked to make their
reporting judgments on behalf of the company as to whether to account for the investment
as an associate.
As the availability of the guidance (IFRS for SMEs guidance and full IFRS guidance) and
example types (affirmative and counter examples) for making reporting judgments were
manipulated between participants, five versions of the instrument were prepared.
4.3.3 Manipulation of guidance
The first two versions of the instrument were prepared to vary the implications of the
availability of guidance on the respondents’ reporting judgments. In the first version, the
participants were provided with the relevant paragraphs of Section 14 of IFRS for SMEs
[paragraphs 14.3 (a, b and c) – Significant Influence], while in the second version, the
participants were provided with additional guidance in IAS 28 (paragraphs 6-9) of full
IFRS to determine the existence of significant influence over an investee.
The additional guidance in IAS 28 provides indicators of the existence of significant

influence by an investor.42 Based on the substance of the relationship in each case, if it can
be clearly demonstrated that an investor holding less than 20 percent of the voting power
42
The existence of significant influence by an entity is usually evidenced in one or more of the following
ways: a) representation on the board of directors or equivalent governing body of the investee; b)
participation in policy-making processes, including participation in decisions about dividends or other
distributions; c) material transactions between the entity and its investee; d) interchange of managerial
personnel; or e) provision of essential technical information (IFRS Foundation, 2001b, p. A931).
124
of the investee exercises significant influence, the investment will be accounted for as an
associate. Because the company holds 18 percent of the voting power of the investee,
judgment must be exercised after considering all the facts and circumstances, as indicated
by the additional guidance. The participants were asked to record their judgment that the
investee could be treated as an associate of the company on a seven-point Likert scale
where 1 denoted ‘strongly disagree’ and 7 denoted ‘strongly agree’.
The manipulation check for the availability of guidance was conducted post-experiment
when participants were asked to indicate the level of help provided by the guidance in
making their judgment by circling the rating choice on a seven-point Likert scale (where 1
denoted ‘not at all helpful’ and 7 denoted ‘extremely helpful’) and the extent to which the
guidance enabled them to make a better judgment by circling the rating choice on a seven-
4.3.4 Manipulation of example
The third and fourth versions of the instrument were prepared to vary the implications of
the similarities presented in examples (affirmative and counter) on the respondents’
reporting judgments. If the investor directly or indirectly holds (through subsidiaries) 20
percent or more of the voting power of the investee, it is presumed that the investor has
significant influence. Therefore, the first key indicator (voting power percentage) was
deliberately kept at 18 percent in all materials (the scenario, the affirmative example and
the counter example) so that the accountants were required to exercise judgments on the
appropriate accounting treatment based on the other three key indicators of the existence
of significant influence by an investor.
In the third version of the instrument, the participants were provided with an affirmative
example as guidance that described a situation in which all three key facts relating to the
scenario supported accounting for the investment as an associate (i.e. significant influence
exists over an investee). In the fourth version, the participants were provided with a counter
example as guidance that described a situation in which all three key facts relating to the
scenario did not support accounting for the investment as an associate (i.e. significant
influence does not exist over an investee). The participants were asked to refer to the
125
example provided as guidance and then record their judgment as to whether the investee
could be treated as an associate of the company on a seven-point Likert scale where 1
denoted ‘strongly disagree’ and 7 denoted ‘strongly agree’.
The manipulation check for example types was conducted post-experiment, and
participants were asked to indicate the level of help the example provided in making their
judgment by circling the rating choice on a seven-point Likert scale (where 1 denoted ‘not
at all helpful’ and 7 denoted ‘extremely helpful’) and to indicate the extent to which the
example enabled them to make a better judgment by circling the rating choice on a seven-
In the fifth version of the instrument, the participants were provided with explicit guidance
(both IFRS for SMEs and full IFRS) and the two examples (affirmative and counter) as
guidance. The participants were asked to refer to the explicit guidance and examples
provided and then record their judgment as to whether the investee could be treated as an
associate of the company on a seven-point Likert scale where 1 denoted ‘strongly disagree’
and 7 denoted ‘strongly agree’.
In addition to providing their judgment on the scenario, respondents were asked to identify
the perceived level of complexity of the scenario by circling the rating choice on a seven-
point Likert scale (where 1 denoted ‘not complex’ and 7 denoted ‘extremely complex’).
Furthermore, the respondents were asked to indicate the level of their familiarity in dealing
with similar scenarios by circling the rating choice on a seven-point Likert scale (where 1
denoted ‘not familiar’ and 7 denoted ‘very familiar’).
4.3.5 Pre-test
To obtain an indication of the accounting treatment that best reflected the underlying
economics of transaction and event in the financial statements (i.e., the most accurate
judgment) on the scenario, this study conducted a pre-test. The research instrument was
pre-tested with five accountants (members of the CPA Australia) and five senior academics
from the host university. Each participant in the pre-test group made their reporting
judgment on the scenario with the help of the guidance provided in both IFRS for SMEs
126
and full IFRS. The mean score of the judgment made by all the participants in the pre-test
is an indication of judgment consensus amongst the participants, and this study uses
consensus in the judgment of experts as a proxy for judgment accuracy in the case (see
Solomon & Shields, 1995).
Section 14 Investments in Associates of IFRS for SMEs provides guidance on how to

identify significant influence. As specified in paragraphs 14.3 a, b and c, if an investor
holds, directly or indirectly (e.g. through subsidiaries), 20 percent or more of the voting
power of the associate, it is presumed that the investor has significant influence, unless it
can be clearly demonstrated that this is not the case. Conversely, if the investor holds,
directly or indirectly (e.g. through subsidiaries), less than 20 percent of the voting power
of the associate, it is presumed that the investor does not have significant influence, unless
such influence can be clearly demonstrated. A substantial or majority ownership by another
investor does not preclude an investor from having significant influence (IASB, 2009a, p.
81).
In addition to the guidance provided in IFRS for SMEs, paragraphs 6 to 9 of IAS 28

Investments in Associates and Joint Ventures of full IFRS provide additional guidance to
determine the existence of significant influence by an investor. According to the
information provided in the given scenario, the evidence on the existence of significant
influence is satisfied. In the given case scenario, the company holds 18 percent of the
voting shares and the company does not always have board representation for most of the
Board meetings. Nevertheless, there is evidence of material transactions between the
company and the investee, and the provision of essential technical information to the
investee. Based on an assessment of all the facts, it appears that the company has significant
influence over the investee. Consequently, the most accurate judgment in this case is that
the investee should be considered as an associate of the company.
The mean score of the judgments made by all the participants in the pre-test was used to
determine whether the company should account for the investment as an associate. The
mean score of the judgments made by all the participants in the pre-test group was 6.7
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(non-tabulated), indicating that the company should account for the investment as an
associate.43
4.4 RESULTS
4.4.1 Demographic details of respondents
148 professional accountants participated in this experiment. As shown in Table 4.1, of the
28 respondents in IFRS for SMEs guidance group, 15 were male and 13 were female; of
the 29 respondents in full IFRS guidance group, 12 were male and 17 were female; of the
31 respondents in the affirmative example group, 15 were male and 16 were female; of the
29 respondents in the counter example group, 14 were male and 15 were female; of the 31
respondents in the all guidance group, 18 were male and 13 were female. The mean age
category of the respondents in each group was 32 years. The average number of years in
formal education was 18 years for the respondents in the affirmative example group and
17 years each for the rest of the groups. The average professional experience level was
4.21 years for IFRS for SMEs guidance group, 4.39 years for full IFRS guidance group,
4.68 years for the affirmative example group, 5.56 years for the counter example group,
and 7.42 years for the all-guidance group.
4.4.2 Tests of hypotheses
4.4.2.1 Effects of the reduced guidance in IFRS for SMEs on the reporting judgments
of accountants (H1)
H1 is tested using one-way Analysis of Variance (ANOVA) where the guidance type (IFRS
for SMEs guidance or full IFRS guidance) is the between-subject independent variable and
the judgment type (strongly agree or strongly disagree) is the within-subject dependent
variable. A seven-point Likert scale is used to test the accuracy of the reporting judgment,
where 1 denotes ‘strongly disagree’ and 7 denotes ‘strongly agree’. ‘Strongly agree’
indicates an accurate judgment in this case.
43
Accountants were asked to record their judgment on whether the company could account for the investment
as an associate. They were asked to provide their judgment on the matter on a seven-point Likert scale (where
1 denoted ‘strongly disagree’ and 7 denoted ‘strongly agree’).
128
H1 predicts that differences in judgments may exist between those accountants who refer
to the reduced guidance in IFRS for SMEs and those accountants who refer to full IFRS
guidance in making their judgments. The ANOVA results reveal that the accountants in
the full IFRS guidance group make accounting for investments in associates decisions that
best reflect the economic substance of a transaction (mean = 4.66) compared to the
accountants in the IFRS for SMEs guidance group (mean = 3.82, F = 4.106, p = 0.048).
The results support H1 and suggest that the accountants’ ability to choose the accounting
treatment that best reflects the economic substance of a transaction is diminished when the
guidance is reduced from IFRS for SMEs. Thus, IFRS for SMEs guidance is insufficient
for making accurate judgments. The results are reported in Table 4.2.
4.4.2.2 Effects of examples provided in IFRS for SMEs as guidance on the reporting
H2 is tested using one-way ANOVA where the example type (affirmative or counter) is
the between-subject independent variable and the judgment type (strongly agree or
strongly disagree) is the within-subject dependent variable.
H2 predicts that examples provided as guidance are likely to bias the reporting judgments
of accountants towards the similarities presented in the examples. The ANOVA results
indicate that judgments made by accountants in the affirmative example group were
significantly different (mean = 4.61) to the judgments made by the accountants in the
counter example group (mean = 3.38, F = 11.190, p = 0.001). The ANOVA results are
reported in Table 4.3.
To explore the associations between the direction of the accounting treatment illustrated in
the examples (affirmative/counter) and the judgments of accountants, Pearson correlation
analysis was conducted. It is expected that the direction of the examples and the judgments
of accountants are positively correlated.44 Consistent with the expectation, correlation
between the two variables is significant and the two variables are positively correlated
(Pearson correlation coefficient = 0.402, 2-tailed p = 0.001) indicating that the judgments
44
A lower value ‘1’ was assigned for a counter example and a higher value ‘2’ was assigned for an affirmative
example, with the expectation that judgments would be biased towards ‘strongly disagree’ (lower value in
Likert scale) when provided with a counter example, whereas judgments would be biased towards ‘strongly
agree’(higher value in Likert scale) when provided with an affirmative example.
129
of the accountants who were provided with affirmative examples were biased towards
recognizing the investment as an associate, whereas the judgments of the accountants who
were provided with counter examples were biased towards not recognizing the investment
as an associate. The follow-up non-parametric correlation tests also show that correlation
between the two variables is highly significant and is positively correlated (Kendall’s
correlation coefficient is 0.341, 2-tailed p = 0.003 and Spearman’s correlation coefficient
is 0.382, 2-tailed p = 0.003). The results of the correlation analyses are reported in Table
4.4. The results in Tables 4.3 and 4.4 provide strong support for H2 by indicating that
accountants’ reporting judgments are biased towards the similarities presented in
examples, as they tend to map the relationships between similar features in the examples
and their own decision contexts.
4.4.2.3 Effects of explicit guidance versus examples in IFRS for SMEs on the
H3 is tested using one-way ANOVA where the explicit guidance (IFRS for SMEs or full
IFRS) and example type (affirmative or counter) are the between-subject independent
variables and the judgment type (strongly agree or strongly disagree) is the within-subject
dependent variable.
H3 predicts that accountants receiving explicit guidance are likely to make more accurate
judgments than those receiving examples as guidance. The mean judgments indicate that
the most accurate judgment was made by the accountants in the explicit guidance group
(those who refer to full IFRS guidance) with a mean of 4.66. The ANOVA results indicate
that judgments made by the accountants in the examples group were significantly different
(mean = 4.02) to the judgments made by the accountants in full IFRS guidance group
(mean = 4.66, F = 3.698, p = 0.058), whereas judgments made by the accountants in the
examples group were not significantly different (mean = 4.02) to the judgments made by
the accountants in IFRS for SMEs guidance group (mean = 3.82, F = 0.276, p = 0.601).
These results in Table 4.5 provide support for H3 by indicating that explicit guidance is
relatively more effective than examples, but only when detailed explicit guidance is
available.
130
4.4.2.4 Effects of explicit guidance and examples in IFRS for SMEs on the reporting
H4 is tested using one-way ANOVA where the explicit guidance (IFRS for SMEs or full
IFRS) and example type (affirmative or counter) are the between-subject independent
variables and the judgment type (strongly agree or strongly disagree) is the within-subject
dependent variable.
H4 predicts that accountants receiving a combination of examples and explicit guidance

will make more accurate judgments than those receiving either examples or explicit
guidance alone. The mean likelihood judgments indicate that the most accurate judgment
was made by the all-guidance group (a combination of examples and explicit guidance)
with a mean of 4.68. The ANOVA results indicate that the judgments made by the
accountants in the all-guidance group were significantly different (mean = 4.68) to the
judgments made by the accountants in the examples group (mean = 4.02, F = 4.971, p =
0.028). This result suggests that bias towards the similarities presented in examples can be
avoided by combining the examples with explicit guidance.
The ANOVA results further indicate that the judgments made by the accountants in the
all-guidance group were significantly different (mean = 4.68) to the judgments made by
the accountants in IFRS for SMEs group (mean = 3.82, F = 5.858, p = 0.019). This result
suggests that limited guidance in IFRS for SMEs is insufficient for making accurate
judgments—this argument is also supported by H1. However, the ANOVA results indicate
that the judgments made by the accountants in the all-guidance group were not significantly
different (mean = 4.68) to the judgments made by the accountants in full IFRS guidance
group (mean = 4.66, F = 0.007, p = 0.936). The ANOVA results are provided in Table 4.6.
While the findings support H4, these results confirm overall the idea that detailed explicit
guidance is sufficient for influencing judgments, but that the examples are too influential
in making judgments—this argument is supported by H2.
Most countries have moved towards adopting IFRS for SMEs in the belief that this stand-
alone set of standards will improve the quality of their SME financial reporting. This study
131
provides novel evidence from a country that has adopted IFRS for SMEs on the
effectiveness of this set of standards in guiding accounting choices. This study reports the
results of an experiment investigating the impact of the reduced guidance in IFRS for
SMEs on the reporting judgments of accountants. Furthermore, this study explores whether
the IASB’s objectives of improving the comparability and reporting quality of SME
financial reporting are achieved by the simplified IFRS for SMEs.
By providing explicit directions on allowable and disallowable accounting treatments, the

standard setters/regulators anticipate that accounting standards and guidelines will
appropriately communicate the underlying principles; hence, accountants should make
similar judgments in identical accounting circumstances. The findings of this study reveal
that accountants who refer to the reduced guidance in IFRS for SMEs are unlikely to
choose the accounting treatment that best reflects the economic substance of a transaction
compared to those who refer to detailed guidance in full IFRS.
The findings of this study also reveal that accountants tend to overstate the similarities
presented in examples, thus biasing their judgments towards the treatment illustrated in the
examples. The findings also indicate that the relative effectiveness of explicit guidance
versus examples varies between the types of explicit guidance provided (IFRS for SMEs
and full IFRS). The results reveal that accountants receiving explicit guidance are likely to
make more accurate judgments than those receiving examples as guidance only when
detailed explicit guidance (full IFRS guidance) is provided. The study further reveals that
accountants receiving a combination of examples (affirmative and counter) and explicit
guidance (IFRS for SMEs guidance and additional guidance in full IFRS) make
significantly more accurate judgments than those receiving IFRS for SMEs guidance or
examples alone. However, the study finds no significant differences in judgments between
the accountants receiving a combination of examples (affirmative and counter) and explicit
guidance (IFRS for SMEs guidance and additional guidance in full IFRS), and those
receiving full IFRS guidance alone. Overall, the findings confirm that the guidance
provided in IFRS for SMEs is insufficient for making sound judgments and may impair
the accuracy of reporting judgments. Further, the directional effects of examples
potentially influence the accuracy of judgments; as such, examples cannot be considered
as effective guidance when they are presented alone.
132
Since IFRS for SMEs are gaining global prominence, this study provides important
empirical evidence on the effectiveness of IFRS for SMEs. Generally, the findings stress
that IFRS for SMEs with reduced guidance are likely to weaken the reporting judgments
of accountants, thereby impairing the comparability of SME financial reporting. Enhanced
comparability and better quality financial reporting for SMEs have been promoted as the
major benefits of adopting IFRS for SMEs. The ability of accountants to apply the
principles in IFRS for SMEs to specific accounting issues using the reduced guidance is
crucial to achieving high quality reporting and consistent judgment outcomes. The findings
suggest that comparability can be improved by providing sufficient guidance on
appropriate accounting treatments. This is one of the reasons why many accounting
regulatory bodies worldwide have emphasized the need to align the two sets of standards
(IFRS for SMEs and full IFRS) during the comprehensive review process of IFRS for
SMEs.
The findings of this study have important implications for accounting regulators. The
IASB’s objective of introducing IFRS for SMEs is centred on a new paradigm of enhancing
decision usefulness and reducing the information asymmetry of the financial information
provided by SMEs across the globe. The findings from this study have two important
implications for the IASB in achieving these objectives. First, the IASB may need to
reconsider the implementation of reduced disclosure in IFRS for SMEs and retain
recognition and measurement principles and implementation guidance that are identical to
full IFRS, i.e. similar to the approach adopted in developed countries like Australia and
New Zealand. This approach may also attract other developed countries to adopt IFRS for
SMEs. Second, the IASB should be attentive when supplementing explicit guidance with
examples. Therefore, the findings will be of interest to the IASB when shaping the optimal
format for accounting standards—IFRS for SMEs in particular. The findings are also
important to the broader international accounting community who have already adopted or
intend to adopt IFRS for SMEs in their individual jurisdictions, particularly those
regulatory bodies who intend to minimise the complications inherent in adopting two
different versions of accounting standards in the same jurisdiction.
It is important to note that the experiment of this study focuses on a setting in which the
impact of the reduced guidance on the reporting judgment of accountants is examined
across one decision context, i.e. recognition of investments as an associate. To broaden the
133
generalizability of the results, future studies could explore the impact of reduced guidance
on the reporting decisions of financial statement preparers in other contexts where the
guidance of IFRS for SMEs is significantly reduced compared to full IFRS guidance. The
findings of this study could also be usefully extended in further research by the introduction
of personal traits/skills variables (e.g. professional expertise) and task complexity variables
to investigate the interactive effects of those variables and guidance on the reporting
judgments of accountants. While this study provided no incentives to the accountants to
influence their reporting judgments, future studies could examine the bias towards
similarities in the examples when accountants are presented with explicit incentives for
accurate reporting. Future studies could also explore other ways in which the bias towards
similarities in examples could be avoided, to preserve the accuracy of the reporting
judgments.
134
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Demographic IFRS for Full IFRS Affirmative Counter All-Guidance

Data SME Guidance Example Example Group
Guidance Group Group Group
Group
Sample Size 28 29 31 29 31
Gender Male Female Male Female Male Female Male Female Male Female
15 13 12 17 15 16 14 15 18 13
Age (mean) 32 32 32 32 32
Level of
formal
17 17 18 17 17
education in
years (mean)
Level of
professional
4.21 4.39 4.68 5.56 7.42
experience in
years (mean)
Table 4.2: Descriptive statistics and ANOVA results for effects of the reduced guidance
in IFRS for SMEs on the reporting judgments of accountants
Guidance Type Mean Standard F p-value

Deviation
IFRS for SMEs guidance group 3.82 1.786
n = 28
4.106 0.048**
Full IFRS guidance group 4.66 1.289
n = 29
**Significant at p < 0.05
Table 4.3: Descriptive statistics and ANOVA results for effects of example types
provided as guidance on the reporting judgments of accountants
Example Type Mean Standard F p-value

Deviation
Affirmative example group 4.61 1.564
n = 31
11.190 0.001***
Counter example group 3.38 1.265
n = 29
140
Table 4.4: Correlation analysis between the example type and the judgments of
accountants
Source Example type Judgment

Example type Pearson Correlation 1.000 0.402
Sig. (2-tailed) 0.001***
Judgment Pearson Correlation 0.402 1.000
Sig. (2-tailed) 0.001***
n 60 60
Example type Kendall's tau_b correlation coefficient 1.000 0.341
Sig. (2-tailed) 0.003***
Judgment Kendall's tau_b correlation coefficient 0.341 1.000
Sig. (2-tailed) 0.003***
n 60 60
Example type Spearman's rho correlation coefficient 1.000 0.382
Sig. (2-tailed) 0.003***
Judgment Spearman's rho correlation coefficient 0.382 1.000
Sig. (2-tailed) 0.003***
n 60 60
Table 4.5: Descriptive statistics and ANOVA results for the effect of explicit guidance
versus examples on the reporting judgments of accountants

Deviation
n = 29 3.698 0.058*
Examples group
n = 60 4.02 1.546
IFRS for SMEs guidance 3.82 1.786
n = 28 0.276 0.601
Examples group
n = 60 4.02 1.546
*Significant at p < 0.10
141
Table 4.6: Descriptive statistics and ANOVA results for the effect of explicit guidance
and examples on the reporting judgments of accountants

Deviation
All-guidance group 4.68 0.791
n = 31 4.971 0.028**
Examples group
n = 60 4.02 1.546
n = 31 5.858 0.019**
IFRS for SMEs guidance 3.82 1.786
group
n = 28
n = 31 0.007 0.936
n = 29
**Significant at p < 0.05
142
CHAPTER 5
(PAPER 4)
User Perceptions of the Decision Usefulness of Financial Statements

Prepared in Compliance with International Financial Reporting Standards
(IFRS) for Small and Medium-Sized Enterprises (SMEs)
143
ABSTRACT
The International Accounting Standards Board (IASB) has attempted to justify the
simplification of International Financial Reporting Standards (IFRS) for Small and
Medium-Sized Enterprises (SMEs) in several ways, but no effective justification for this
simplification has been made on the basis of the information needs of users. This study
aims to provide empirical evidence of the decision usefulness of IFRS for SMEs from one
of the main user groups of SME financial statements, namely, the banks. Using a
questionnaire survey and follow-up interviews with senior commercial bank lending
officers, this study examines the decision usefulness of the disclosure requirements and
simplified recognition and measurement requirements of IFRS for SMEs. The findings of
the study demonstrate that the reduced disclosure requirements of IFRS for SMEs are
useful for bank lending decisions. The findings also indicate that bank lending officers
have no major issues with the simplification of recognition and measurement principles,
but they do not consider that such simplification significantly improves their lending
decisions. These findings will be of great interest to accounting regulators, including the
IASB, for evaluating the successful implementation of IFRS for SMEs, particularly when
future amendments are made to IFRS for SMEs.
Keywords: Bank lending officers, decision usefulness, disclosure, IFRS, SMEs, SME
lending
144
5.0 INTRODUCTION
Given the perceived burden of full International Financial Reporting Standards (IFRS) for
small and medium-sized enterprises (SMEs), a clear need arose for a simplified set of
standards for SMEs that would fulfil the cost-benefit requirements of preparers and users
of SME financial reports (IASB, 2009a). IFRS for SMEs is a simplified version of full
IFRS issued by the International Accounting Standards Board (IASB) in July 2009. The
full set of IFRS was designed primarily to meet the financial information needs of equity
investors in companies that trade securities in public capital markets. However, the user
groups of non-publicly accountable entities, particularly SMEs, are different from the user
groups of publicly accountable entities. Users of the financial statements of SMEs are
considered to be tax authorities, banks, creditors, government agencies and owner-
managers (Dang-Duc, 2011; Son, Marriott, & Marriott, 2006).
The IASB reports that the objective of SME financial statements is to provide financial
information that is beneficial to a variety of users for economic decision making. The IASB
(2009b) points out that the differences between full IFRS and IFRS for SMEs should be
established based on the accounting information needs of users and cost-benefit
considerations. Such views show that the accounting information needs of users have
become an important benchmark in the differential reporting framework introduced by the
IASB. The global convergence of the standards encourages SMEs to prepare their financial
statements using IFRS for SMEs. The demand for high quality financial statements should
be driven by the decision usefulness of the users, which in turn, will benefit SMEs in
numerous ways, such as increasing their access to global competitive finance (IASB,
2009b).
Even though the simplification of IFRS for SMEs has been justified by the IASB in several
ways (IASB, 2009b), no effective justification has been made for this simplification on the
basis of the information needs of users. For instance, the Basis of Conclusion of IFRS for
SMEs provides several explanations for the simplification of accounting treatments that
mainly reflect cost-benefit reasons from the preparer’s perspective rather than the user’s
perspective. The disclosure requirements of IFRS for SMEs have also been criticised by
some accounting practitioners on the grounds that their inclusion may increase accounting
and audit costs, yielding no real benefit to SMEs (ICAA, 2012). Schiebel (2008)
145
demonstrates that the IASB has provided little opportunity for user participation in the
consultation process during the development of IFRS for SMEs; instead, the major
commentators have been auditors, accountants and standard setters. Further, the IFRS
Foundation (2015a) acknowledges that the IASB received no comment letters from users
of SME financial statements on the Exposure Draft for proposed amendments to IFRS for
SMEs during its initial comprehensive review process. As other participants do not
adequately represent the interests of users, the inadequate user involvement in the
accounting standard setting process may impair the decision usefulness of accounting
information for users (Durocher, Fortin, & Côté, 2007; Harding & Mckinnon, 1997).
The American Institute of Certified Public Accountants (AICPA) recommends that “the
same measurement principles should be applied to the general purpose financial statements
(GPFSs) of all entities, because the measurement process should be independent of the
nature of the users and their interest in the resulting measures” (AICPA, 1976, p. 8).
However, AICPA also notes that the disclosure requirements of the standards may vary
depending on the accounting information needs of user groups. Therefore, it is
questionable whether the divergence of full IFRS and IFRS for SMEs truly benefits the
information needs of users.
The Basis for the Conclusion of IFRS for SMEs notes that one of the main groups of
external users of SME financial information is represented by the banks, which provide
loans to SMEs (IASB, 2009b, p. 28). The banking sector is a major actor in the credit
market in many developed and developing economies, and they play an important role in
creating a suitable enabling environment and easy access to credit for many SMEs. Many
commercial banks are currently deviating from traditional lending systems such as
collateral-based lending and are modernising their lending systems, based primarily on
cash flow and project viability. Thus, the need for high quality accounting information has
increased as the utilisation of financial data to assess company performance has grown
(Kwok, 2002). On the other hand, critics contend that the need for high quality financial
information and the international comparison of SME financial statements are of no use to
SMEs. With regard to bank lending in particular, banks are in a position to demand the
information they require, and therefore such a need does not necessarily arise.
146
Extant literature points out that little is known about real users and their information needs
in relation to SME financial statements (see Dang-Duc, 2011; Evans et al., 2005; Sian &
Roberts, 2006; Son et al., 2006). Even within the limited available literature, there is
inconsistency in the findings on users and the information they require from SME financial
statements, and these issues remain unaddressed (see Son et al., 2006).
Successful implementation of IFRS for SMEs and the need for improvement cannot be
envisaged if user perceptions of the decision usefulness of IFRS for SMEs are not well
understood. This study aims to provide empirical evidence about the decision usefulness
of SME financial statements prepared in compliance with IFRS for SMEs on bank lending
decisions. The decision usefulness of IFRS for SMEs was evaluated from two aspects of
the standard: the decision usefulness of the reduced disclosure requirements of IFRS for
SMEs, and the decision usefulness of the simplified recognition and measurement
requirements of IFRS for SMEs. 45
To address these issues, a survey was conducted in which 43 bank lending officers
participated, and follow-up interviews with 19 senior bank lending officers were also
conducted. The questionnaire survey was designed to understand the perception of bank
lending officers about the decision usefulness of the reduced disclosure requirements of
IFRS for SMEs on SME lending decisions. The follow-up interviews were conducted to
gain in-depth insights into the appropriateness and economic consequences of the
simplification of recognition and measurements requirements of IFRS for SMEs on bank
lending decisions.
The results show that most of the disclosure requirements of IFRS for SMEs are found to
be useful for bank lending decisions. However, bank lending officers did not consider all
the disclosure requirements presented to them to be equally important for their lending
decisions. In particular, disclosure items pertaining to the historical trends of profit and
loss, interest coverage, short-term cash flow, liquidity and balance sheet were regarded as
being of most use for their lending decisions. With regard to the simplification of
recognition and measurement requirements, the findings indicate that bank lending officers
45
McCaslin and Stanga (1986) note that the information needs of users of financial statements are a function
of user measurement and disclosure needs.
147
have no major issues with the simplification of recognition and measurement principles,
but they do not consider that such simplification significantly improves their lending
decisions.
This paper contributes to the accounting literature in several ways. First, this is a pioneer
study that examines the decision usefulness of simplified IFRS for SMEs on a major group
of external users of SME financial statements – the banks. The findings provide insights
into the debate on the differential reporting framework introduced by the IASB. The
findings also indicate the need for users to be involved in the standard setting process. The
findings will be of great interest to accounting regulators, including the IASB, for
evaluating the successful implementation of IFRS for SMEs and when planning the next
review of IFRS for SMEs. The study also highlights the need to enhance public awareness
of the simplified IFRS for SMEs at the individual jurisdiction level. The findings of this
study will help to fill a gap in the existing accounting literature, as much of the existing
research into the accounting information needs of users is broadly investor-oriented.
The remainder of the paper is organised as follows. Section 5.1 discusses the relevant
literature, and Section 5.2 outlines the theoretical framework used in this study. Section
5.3 describes the research methods. Section 5.4 presents the results from the survey, and
Section 5.5 discusses the findings from the semi-structured interviews. Section 5.6
provides a summary and presents the conclusions and implications of the study.
5.1 RELEVANT LITERATURE
5.1.1 Users and their accounting information needs
Since the early 1980s, researchers have been interested in discovering whether the
accounting information needs of diverse user groups of financial statements differ
significantly. An ongoing debate on user groups of financial statements highlights that
users of financial statements are not a homogeneous group. For example, based on the
assumption that the ability of a company to generate favourable cash flow is the central
interest of both investors and creditors, McCaslin and Stanga (1986) conducted a study to
investigate whether the accounting measurement needs between financial analysts and loan
officers are similar. They conducted a questionnaire survey with financial analysts and
148
chief commercial loan officers in the context of common stock investment decisions and
term loan decisions respectively. Their findings reveal that the accounting measurement
needs of the two user groups are generally similar.
Stanga and Tiller (1983) conducted a study to compare the informational needs of bank
loan officers in relation to large public companies and small private companies
respectively. Their study was based on the assumption that the accounting information
needs of users of the financial statements of small companies differ from the accounting
information needs of users of the financial statements of large companies. A questionnaire
survey of chief commercial loan officers provided evidence that there are no substantial
differences between large public companies and small private companies in respect of
accounting information needs for making lending decisions. Some accounting information,
however, such as lease capitalisation, was found to be less important to smaller companies
than it is to large companies. Street and Stanga (1989) conducted a survey to examine the
relevance of a segment cash flow statement in the lending decisions of commercial bank
loan officers on the assumption that segment cash flow statements would help to build
confidence in decision makers about a company’s ability to generate future cash flows.
The results reveal that commercial bank loan officers consider that segment cash flow
statements, if available, are relevant for their lending decisions, therefore the disclosure of
segment cash flow statements is considered to be an important factor that may affect
lending decisions.
With the growing significance of cash flow statements (Jones & Ratnatunga, 1997),
researchers have been extensively interested in investigating the importance of cash flow
information in bank lending decisions and have found evidence that bank lending officers
consider the information conveyed by the cash flow statements to be most useful for their
lending decisions (Billings & Morton, 2002; Jones, Romano, & Smyrnios, 1995; Kwok,
2002; Yap, 1997). Jones et al. (1995) conducted a survey in the Australian context to obtain
managerial perceptions about the decision usefulness of cash flow statements. The study
provides evidence that cash flow statements are perceived to be useful in a wide range of
internal and external decision contexts; nevertheless, Yap (1997) raised concerns about the
findings of Jones et al. (1995) and argued that the usefulness of cash flow statements must
be measured against the responses of external users who actually use financial statements.
Accordingly, Yap (1997) employed a sample of respondents from the Australian finance
149
industry to investigate the usefulness of cash flow statements on investment and lending
decisions. The findings confirm that cash flow statements are useful for making decisions,
especially with regard to evaluations of liquidity, solvency and financial flexibility.
Billings and Morton (2002) examined the relevance of disclosing operating cash flow to
creditors. Their findings provide evidence that operating cash flow is considered to be an
important determinant of credit risk, measured by a firm’s debt rating.
Prior research also provides mixed evidence about the decision usefulness of annual
financial statements, including cash flow statements, in lending decisions (Allen & Cote,
2005; Kitindi, Magembe, & Sethibe, 2007; Kwok, 2002). For example, Kwok (2002)
conducted an experiment with four user groups of financial statements: bank lending
officers, auditors, financial analysts and accounting academics, to investigate the use of
cash flow information in lending decisions. The findings of the study demonstrate that the
respondents used cash flow information when making lending decisions, but that the
information was obtained from notes to the balance sheet and other reports rather than from
the cash flow statement.
Allen and Cote (2005) in their experiment provided evidence that creditor reliance on
earnings is high, relative to operating cash flow, in the assessment of creditworthiness.
Allen and Cote (2005) also noted that decision-making behaviour is similar for both
creditors and investors. Similarly, Kitindi et al. (2007) found evidence that income
statement information is the most useful information source because lenders consider
profitability to be an indicator of the borrower’s future prospects and ability to service the
loan, rather than the liquidity and net worth conveyed in the balance sheet and cash flow
statements. Abu-Nassar and Rutherford (1996) provided similar evidence in the context of
a less developed country, Jordan. Their study provides evidence that bank loan officers use
the information in the balance sheet and income statements more extensively than other
sections of the financial statements.
Prior studies have also attempted to establish the usefulness of accounting information
from audited reports and accounting standards. There is wide-spread agreement among
users that the accounting information in financial statements is more reliable when it is
audited and prepared in compliance with accounting standards or Generally Accepted
150
Accounting Principles (GAAP) (Abu-Nassar & Rutherford, 1996; Baker & Cunningham,
1993; Gómez‐Guillamón, 2003; Kent & Munro, 1999; Kitindi et al., 2007).
Baker and Cunningham (1993) examined the perceptions and behaviours of loan officers
faced with financial statements prepared on different accounting bases and service levels.46
A survey of bank loan officers revealed that the decision to grant a loan is not affected by
the accounting base or service level. The authors found that interest rate perception is not
a function of the accounting basis; however, their findings reveal that loan officers have
more confidence in the audited financial reports if they have been prepared using GAAP,
and they have more confidence in income tax basis statements if they have been reviewed.
The findings indicate that “…the interaction of accounting basis and service level did affect
respondents’ perceptions of confidence that the financial report reflected the financial
position of the prospective borrower” (p. 474).
Similarly, Gómez‐Guillamón (2003) argues that bank officers ensure the accuracy of
financial information by requiring their clients to provide audited reports. Gómez‐
Guillamón (2003) investigated the opinions of bank officers (and auditors in particular)
about the usefulness of audited reports for making financing decisions. A survey of credit
institutions revealed that these institutions regard the information in the auditor’s report as
relevant and useful, and it impacts their decisions on whether or not to grant a loan, as well
as being a factor in the amount of loan to be granted. The author additionally finds similar
evidence from the investors’ perspective.
Abu-Nassar and Rutherford (1996) provided evidence that in contrast to developed

countries, user groups in less developed countries such as Jordan place greater importance
on the information contained in the auditors’ report. The authors indicated that this
difference is mainly due to the weak regulatory financial reporting environment in less
developed countries. In the absence of a strong legal backing for financial reporting,
preparers are only required to maintain accurate accounting records in accordance with
46
Baker and Cunningham (1993) regarded GAAP and income tax basis as ‘accounting bases’ and audited
and reviewed financial statements as ‘service levels’. While an audited report provides assurance that “an
organization’s financial statements are free from material misstatements”, a reviewed report provides limited
assurance (based on an accountant’s review) that “no material modifications to the financial statements are
necessary” (AICPA, 2010, p. 1).
151
GAAP. The reliability of the information disclosed in audited reports in such cases
increases significantly.
Kent and Munro (1999) conducted an experiment with loan officers from major Australian
banks to investigate the impact of differential reporting on bank lending officers’ decisions
on borrower repayment ability. Their results reveal that the assessment of a borrower’s
repayment ability is not affected by the presentation of GAAP or non-GAAP financial
reports. However, loan officers tend to request additional information when non-GAAP
reports are presented to reduce uncertainty and enhance reliability.
5.2 THEORETICAL FRAMEWORK
5.2.1 Decision usefulness of accounting information
The theoretical framework of this study utilises decision-usefulness theory.47 This theory,
instigated by Staubus (2000, p. v), contends that “the key to the decision-usefulness theory
is the decision-usefulness objective”. The decision-usefulness approach assumes that the
basic objective of accounting is to aid the decision-making process of certain ‘users’ of
accounting reports by providing useful, or relevant, accounting data (Godfrey, Hodgson,
Tarca, Hamilton, & Holmes, 2010, p. 24).
As noted by Staubus (1975), the intended economic consequence of the decision-

usefulness objective of accounting is to improve the economic decision making of users.
The IASB (2009b) asserts that the objective of financial statements is to provide
information about the financial position, financial performance, and cash flow of an entity
that is useful to a wide range of users in making economic decisions. Generally, the term
‘economic’ refers to a situation involving scarce resources in which a choice must be made.
The resource providers are the investors and creditors. In its conceptual framework for
financial reporting, the IASB specifies that economic decisions may include whether a user
should hold or sell their investments in the entity; however, this statement is favourably
oriented towards the investor (IFRS Foundation, 2013b).
47
Many prior studies have been conducted within the decision usefulness framework to assess the usefulness
of the information in financial reports (see Gassen & Schwedler, 2010; Hitz, 2007; Hooks & van Staden,
2004 for a review).
152
From a bank lending perspective, the implication of lending decisions is such that the
recovery of loan funds must be managed efficiently to guarantee the liquidity position of
the bank to protect the interest of depositors. Decisions on the allocation of resources or
funds may include whether or not to proceed with advancing a loan, thus the decision
usefulness of bank lending can be established on the basis of the bank’s ability to accurately
evaluate a borrower’s creditworthiness and the bank’s credit risk. Creditworthiness
assesses the likelihood of a borrower defaulting on their debt obligations. Credit risk is the
risk of loss of principal or loss of a financial reward stemming from a borrower’s failure
to repay a loan or otherwise meet a contractual obligation.
McCaslin and Stanga (1986) note that the decision usefulness of SME accounting
information for bank lending decisions must be evaluated in terms of both the measurement
needs and disclosure needs of bank lending officers. IFRS for SMEs are simplified in
measurement and recognition requirements, and in disclosure requirements. Claims made
by the IASB articulate that accounting standard setting is based on the decision usefulness
of accounting information. For example, the IASB (2009b) states that the differences
between full IFRS and IFRS for SMEs should be established based on the accounting
information needs of users and cost-benefit considerations. Such views show that the
decision usefulness of accounting information has been an important benchmark in the
differential reporting framework introduced by the IASB. Thus, it is expected that IFRS
for SMEs will be particularly responsive to the information needs of users.
This study anticipates that bank lending officers will perceive the reduced disclosures and
simplified recognition and measurement concepts in IFRS for SMEs as being particularly
useful for assessing creditworthiness and credit risk when making their lending decisions
for SMEs. Accordingly, the decision usefulness of IFRS for SMEs on bank lending
decisions is measured from two aspects in this study: (1) the decision-usefulness of reduced
disclosure requirements of IFRS for SMEs, and (2) the decision-usefulness of simplified
measurement concepts and recognition requirements of IFRS for SMEs (see Figure 5.1).
153
5.3 RESEARCH APPROACH
5.3.1 Research setting
For the purpose of this study, it was determined that the research setting should represent
a country that has adopted IFRS for SMEs. Sri Lanka has taken the lead in adopting IFRS
for SMEs in the South Asia region, and shortly after the Standard was issued in 2009,
required all entities not identified as ‘listed entities’ to comply with IFRS for SMEs for the
reporting period beginning on or after 1st January 2012. The new Sri Lankan equivalents
of IFRS for SMEs is a completely stand-alone set of standards. More than 18,000
companies currently operate in Sri Lanka, of which approximately 91% are SMEs (World
Bank, 2011). Therefore, the financial reporting setting and the vibrant SME sector in Sri
Lanka provides an appropriate research setting for the current study.
This study was conducted in licenced commercial banks (LCBs) in Sri Lanka. The loan
composition of LCBs indicates that the largest customer segment of LCBs is the
corporates, which also includes SMEs and accounts for 57% of the total number of LCB
loans (Fitch Ratings Sri Lanka, 2012). Corporate loans focus more on accounting
information which better serves the objective of this study. Thus, this study focuses only
on commercial lending decisions and excludes personal, housing, pawning and credit card
loans.
There are 24 licenced commercial banks (LCBs) operating in Sri Lanka, of which eight are
privately-owned local commercial banks, four are state-owned commercial banks and 12
are foreign bank branches (Central Bank of Sri Lanka, 2014). Of the eight privately-owned
local LCBs, the four largest LCBs participated in this study. These four largest LCBs hold
about 34% of market share by loans (Fitch Ratings Sri Lanka, 2012). The lending schemes
of state-owned banks for SMEs are mostly supported by various project schemes, therefore
their loan approval decision process is different from that of privately-owned LCBs. State-
owned LCBs, foreign bank branches and small LCBs were therefore excluded from this
study.
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5.3.2 Research method
This study uses a mixed-method approach to address the research questions. First, a survey
was conducted on commercial bank lending officers to assess the usefulness of different
disclosure items included in the SME financial statements, which are prepared in
accordance with IFRS for SMEs. Second, semi-structured interviews were conducted with
commercial bank lending officers to gain an in-depth insight into the appropriateness and
economic consequences of the simplification of the recognition and measurements
requirements of IFRS for SMEs on their lending decisions.
5.3.2.1 Participants
Senior bank lending officers from the four largest LCBs in Colombo, Sri Lanka were
chosen as the participants in the survey. The questionnaire was distributed among 70 senior
bank lending officers. 43 valid responses were received, yielding a usable response rate of
61%. The sample was limited to the four largest commercial banks to increase the
likelihood that the lending officers surveyed would rely on the published accounting
information of SMEs when making their lending decisions. It was important to select Sri
Lankan-based bank lending officers who had experience in making lending decisions for
SMEs, because the survey asked participants to choose accounting information that was
considered to be useful for their SME lending decisions.
At the end of the questionnaire, participants were invited to indicate their interest in
participating in a follow-up interview. Over 80% of respondents (32) indicated that they
would like to participate in a follow-up interview. To ensure a representative sample of
bank lending officers from each banks, the stratified sampling procedure was used to
randomly choose 19 participants for the follow-up interviews.
5.3.2.2 Survey questionnaire
In the first part of the survey questionnaire, respondents were required to provide
demographic data such as gender, age, level of formal education, education qualifications
and years of experience in SME lending (Appendix 4). The respondents were also asked
to indicate their level of familiarity with the Sri Lankan equivalents of IFRS for SMEs
155
(measured on a five point Likert scale where 1 denoted ‘not familiar’, and 5 denoted ‘very
familiar’).
The second part of the survey questionnaire comprised two sections. The first section
contained four questions. The first two questions were designed to assess the importance
that the participants placed on different sources of information when evaluating a loan
application by SMEs. The second two questions were designed to evaluate participants’
opinions on the usefulness of different accounting measurement concepts of assets and
liabilities when making a term-loan decision. The survey instrument developed by Gassen
and Schwedler (2010), which investigates the decision usefulness of different accounting
measurement concepts for investment decisions, was used as a guide in designing these
questions, which were appropriately customised to reflect the opinions of bank lending
decisions. All questions required the participants to give their opinion on a five-point Likert
scale.
The second section of the questionnaire consisted of a set of information items that are
considered to be useful when making a term-loan decision for SMEs. Accounting
information items that would be relevant for users in their decision making were selected
for this study, and these information items were generally based on the IFRS for SMEs
presentation and disclosure checklist (IASB, 2009c). This section consisted of 56
accounting information items. Of the 56 information items in the questionnaire, 18 items
pertained to the statement of financial position (balance sheet), seven items pertained to
the sub-classifications in the balance sheet or in the notes, 14 items pertained to the income
statement and the statement of comprehensive income, four items pertained to the
statement of changes in equity and the statement of income and retained earnings, nine
items pertained to the cash flow statement and four items pertained to the notes to the
financial statements. Respondents were asked to evaluate the usefulness of each item on a
five-point Likert scale (where 1 denoted ‘not useful’ and 5 denoted ‘extremely useful’).
The number of information items in each classification is reported in Table 5.1.
The respondents were instructed to evaluate each information item independently in the
context of making a typical term-loan decision for an SME. The respondents were also
asked to assume that they were dealing with a typical new customer. All the instructions
were provided in the questionnaire to establish an appropriate decision context.
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5.3.2.3 Validity of the survey questionnaire
Cronbach’s alpha test was conducted to verify the internal validity and consistency of the
56 accounting information items in the questionnaire. The alpha coefficient obtained for
the 56 accounting items is 0.931, suggesting that the items have high internal consistency
(Cronbach, 1951), which verifies the reliability of the survey questionnaire.
5.3.2.4 Semi-structured interviews
Semi-structured interviews were conducted with senior commercial bank lending officers
in the four largest private licenced commercial banks (LCBs) in Sri Lanka. A total of 19
interviews were conducted. The interviews were conducted at the bank premises of the
interviewees. One interview was conducted via telephone due to the unavailability of the
interviewee at the scheduled interview times. All interviewees were required to read and
sign the participant information and consent form before responding to the interviews
(Appendix 5). To assure anonymity and promote consistent and reliable responses, all
interviewees were informed that the identity of the respondent and the bank would remain
anonymous. All the interviews were audio recorded with the permission of the
interviewees. The audio files were then transcribed using NVivo 10 software and copies
of the transcriptions were emailed to each interviewee for verification and validation. The
duration of the interviews ranged from 30 minutes to one hour.
An interview guide was prepared which addressed three objectives (Appendix 4). The main
objective was to understand the perception of bank lending officers on the usefulness of
simplified recognition and measurement requirements in IFRS for SMEs in relation to their
lending decisions. The semi-structured questions were mainly based on the issues raised
during the initial comprehensive review of IFRS for SMEs carried out by the IASB in
2012.48 The questions targeting the perceptions of the simplified measurement and
recognition requirements of IFRS for SMEs focused on the prohibition of the revaluation
policy option on property, plant and equipment, recognition of research and development
costs as expenses when incurred, the usefulness of fair values for certain asset classes, and
recognition of deferred tax accounting. Interviewees were asked to comment on the
48
The objective of the Request for Information during the comprehensive review was to seek public views
on whether there is a need to make amendments to IFRS for SMEs.
157
appropriateness and the economic consequences of this simplification to recognition and
measurement requirements on their lending decisions. The perceptions of bank lending
officers on the impact of certain topics omitted from IFRS for SMEs on their lending
decisions were also obtained in the interviews.
Semi-structured questions were also designed to understand the general perception of bank
lending officers on the role of accounting information on SME lending decisions, and their
overall perception of the usefulness of financial statements prepared in compliance with
IFRS for SMEs.
5.4 RESULTS AND DISCUSSION – THE SURVEY
5.4.1 Demographic details of the survey respondents
As indicated in Section 5.3, a questionnaire survey was carried out with 43 senior bank
lending officers. Of the 43 participants in this survey, 81% were qualified members of the
Institute of Bankers of Sri Lanka (IBSL)49, of which 42% held a Diploma in Banking &
Finance qualification and 35% held a Certificate in Banking & Finance qualification. The
respondents had relevant education, training and experience in dealing with lending
decisions for SMEs. As shown in Table 5.2, 29 of the 43 respondents in the survey group
were male and 14 were female. The mean age category of the respondents was 37 years.
The average number of years in formal education was 17 years. The average experience of
SME lending was 8.65 years. The respondents were generally familiar with the Sri Lankan
equivalents of IFRS for SMEs, as indicated by the mean response of 3.40.
5.4.2 Decision-making process of SME lending
To gather opinions about the decision making process applied by commercial bank lending
officers when evaluating SME loan applications, two questions (Q1 and Q2) were designed
that describe (1) lending practices banks use to evaluate SME loan applications, and (2)
49
The IBSL is the only authorised professional body to offer banking qualifications in Sri Lanka (IBSL,
2015).
158
the usefulness of different sources of information when evaluating loan applications by
SMEs.
The respondents were provided with four statements (Q1.1 – Q1.4), which describe four
different practices for evaluating an SME loan application. The respondents were asked to
rate whether the statements correctly described their practices for evaluating an SME loan
application on a five-point Likert scale, where 1 denoted ‘strongly disagree’ and 5 denoted
‘strongly agree’. The mean responses for each of the four statements are reported in Table
5.3. Overall, the mean values reveal that the respondents assigned the highest agreement
(mean = 3.93) to the statement “My method of analysis differs according to the respective
client/company”. The statement with the second highest agreement (mean = 3.60) is “My
lending decision is based on accounting information of the company”, followed by the
statements “My lending decision is based on non-accounting information of the company”
(mean = 3.53) and “My lending decision is based on first-hand information and impression
of management quality” (mean = 3.47).
This analysis indicates that bank lending officers assign considerable weight to financial
accounting information as a fundamental approach for evaluating SME loan applications.
Thus, the initial analysis of this study provides an indication of the significance of assessing
the usefulness of the accounting information needs of bank lending officers.
Question 2 was designed to gather the general perceptions of bank lending officers on the
usefulness of accounting information sources compared to alternative sources of available
information when making a term-loan decision for an SME. Altogether, fifteen sources of
information were provided, including seven financial statement items. The respondents
were asked to evaluate the usefulness of different sources of information on a five-point
Likert scale where 1 denoted ‘not useful’ and 5 denoted ‘extremely useful’. The mean
values reveal that of the annual financial statement items provided, bank lending officers
view cash flow statement as the most useful information source (mean = 4.88), followed
by income statement, balance sheet, statement of changes in equity and income & retained
earnings and notes to the annual financial statements. Related party disclosures (mean =
3.67) and statement of accounting policies (mean = 3.51) are rated as less useful compared
to the other financial statement items. Other than the annual financial statements, bank
lending officers considered legal documents to be the most useful source of information
159
(mean = 4.74), followed by general information about the client and business, business
credit report, business plan, collateral documents, bank statements and list of guarantees
proposed. Income tax returns were rated as least useful (mean = 3.35). The mean values
are reported in Table 5.4.
5.4.3 Familiarity and attitude of bank lending officers to accounting

measurement concepts
Two questions (Q3 and Q4) of the questionnaire survey were designed to capture the
familiarity of bank lending officers with different accounting measurement concepts, and
their general attitude towards these concepts when evaluating financial statements for SME
lending decisions.
Question 3 was designed to capture the familiarity of bank lending officers with different
accounting measurement concepts. The respondents were provided with four types of
accounting measurement concepts and were asked to indicate their familiarity with each
concept on a five-point Likert scale, where 1 denoted ‘not familiar’ and 5 denoted ‘very
familiar’. Ranked by overall familiarity, the lower of cost or market concept was rated as
the most familiar concept (mean = 4.05), followed by fair value (mean = 3.77) and
historical cost concepts (mean = 3.56). The value-in-use measurement concept was rated
as the least familiar concept (mean = 3.51). Overall, the lower of cost or market appears to
be the most influential accounting measurement concept. The mean values are reported in
Table 5.5.
In Question 4, five statements were included to seek the preferences of bank lending
officers in respect of measurement concepts for reporting assets and liabilities in SME
financial reports. Three statements sought opinion on whether assets and liabilities should
be reported: (1) following the same measurement concept, (2) following different
measurement concepts, or (3) by permitting companies to choose between alternative
measurement concepts. Another two statements sought the opinions of bank lending
officers on the reporting preferences between historical cost and fair value for assets and
liabilities. Respondents were asked to give their opinions on these five statements on a
160
five-point Likert scale where 1 denoted ‘strongly disagree’ and 5 denoted ‘strongly agree’.
The mean values are reported in Table 5.6.
The mean values reported on each statement reveal that bank lending officers favour all
assets and liabilities being reported according to the same measurement concept (mean =
4.12). The least mean value (mean = 2.93) indicates that bank lending officers are not in
favour of firms having freedom to choose appropriate measurement concepts for different
classes of assets or liabilities at their discretion. Given a choice between historical cost and
fair values as the measurement concepts of valuing assets and liabilities, bank lending
officers prefer fair values to be reported (mean = 3.63). The general conclusion derived
from this finding is that bank lending officers prefer the use of fair values as a measurement
concept in financial reporting. This finding is compatible with Gassen and Schwedler
(2010), suggesting that measurement concept requirements between bank lending officers
and investors are similar. The reasons why bank lending officers prefer fair value rather
than historical cost is revealed by the semi-structured interviews conducted with bank
lending officers, which will be discussed in Section 5.5.
5.4.4 Perceptions of bank lending officers on the usefulness of

disclosure requirements of IFRS for SMEs on lending decisions
The first objective of this survey was to assess the opinions of bank lending officers on the
usefulness of the disclosure requirements of IFRS for SMEs on their SME lending
decisions. As mentioned earlier, 56 disclosure requirements were identified under six
categories of financial statements.
Pearson’s Chi-square goodness-of-fit test was performed for each of the 56 accounting
information items.50 The Chi-square test values summarise the usefulness attributed by the
50
For the purpose of analysis, the survey observations were combined and reclassified into new categories
to ensure the adequacy of expected frequencies for computing the X2 statistics (Benjamin & Stanga, 1977).
Respondents who circled 4 and 5 on the five-point Likert scale (where 1 denoted ‘not useful’ and 5 denoted
‘extremely useful’) were reclassified, because they agreed that the information items were ‘useful’ for
making their lending decisions (new value 3 was assigned). Respondents who circled 3 on the five-point
Likert scale were reclassified because they agreed that the information items were neither useful nor not
useful (‘neutral’) for making their lending decisions (new value 2 was assigned). Respondents circled 1 or 2
on the five-point Likert scale were reclassified because they agreed that the information items were ‘not
useful’ for making their lending decisions (new value 1 was assigned). The frequency percentages of the
perceived usefulness were then obtained for each of the 56 information items.
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survey respondents to each disclosure requirement. The larger the Chi-square values, the
closer the p-values are to zero, suggesting that there are statistically significant differences
between respondents in the perceived usefulness of each of the disclosure items.
5.4.4.1 Decision usefulness of disclosure requirements of the statement of financial

position (Balance sheet)
The information items 1 to 18 sought to establish the decision usefulness of the disclosure
requirements of balance sheet items. The Chi-square test results show that there are
statistically significant differences between respondents in the perceived usefulness of
twelve disclosure items, with more bank lending officers perceiving the balance sheet
items as ‘useful’, and fewer bank lending officers perceiving the information as either ‘not
useful’ or ‘neutral’. The disclosure of trade and other payables had a relatively high
perceived usefulness (Q12): X2 = 39.1, p = 0.000 (97.7% of respondents), trade and other
receivables (Q2): X2 = 74.4, p = 0.000 (95.4% of respondents), financial liabilities (Q13):
X2 = 25.3, p = 0.000 (88.4% of respondents), financial assets (Q3): X2 = 50.0, p = 0.000
(83.7% of respondents), cash and cash equivalents (Q1): X2 = 42.2, p = 0.000 (79.1% of
respondents), inventories (Q4): X2 = 31.3, p = 0.000 (72% of respondents), provisions
(Q16): X2 = 21.3, p = 0.000 (65.1% of respondents), investments in associates carried at
fair value through profit or loss (Q10): X2 = 16.0, p = 0.000 (60.5% of respondents), equity
attributable to the owners of the parent (Q18): X2 = 16.0, p = 0.000 (60.5% of respondents)
and investment property carried at fair value through profit or loss (Q6): X2 = 14.7, p =
0.001 (53.5% of respondents). Disclosure items such as property, plant and equipment
measured at historical cost (Q5) and intangible assets (Q7) were regarded as useful by only
53.3% of respondents (X2 = 9.1, p = 0.010) and 53.5% of respondents (X2 = 8.4, p = 0.015)
respectively, however, 46.7% and 46.5% of respondents respectively also regarded these
two disclosures as either ‘not useful’ or ‘neutral’.
The Chi-square test results, on the other hand, show that there are statistically significant
differences between respondents in the perceived usefulness of three disclosure items, with
more bank lending officers perceiving the information as either ‘not useful’ or ‘neutral’
and fewer bank lending officers perceiving the information as ‘useful’. Relatively less
perceived usefulness was found in disclosure items pertaining to non-controlling interest
(Q17): X2 = 19.0, p = 0.000 (72.1% of respondents), deferred tax assets and liabilities
162
(Q15): X2 = 6.2, p = 0.045 (62.8% of respondents) and liabilities and assets for current tax
(Q14): X2 = 5.6, p = 0.060 (58.1% of respondents), suggesting that the majority of bank
lending officers did not consider this information to be useful for their lending decisions.
The Chi-square test results further show that there are no statistically significant
differences between respondents in the perceived usefulness in disclosure requirements of
investments in jointly controlled entities carried at fair values (Q11): X2 = 4.2, p = 0.120,
biological assets carried at cost less accumulated depreciation and impairment (Q8): X2 =
3.5, p = 0.171 and biological assets carried at fair values through profit or loss (Q9): X2 =
2.4, p = 0.298. The results suggest that while some bank lending officers perceived these
information items to be useful, others held a neutral opinion, and some bank lending
officers found no usefulness in these items for their lending decisions. The Chi-square test
results are reported in Table 5.7 and the percentage of frequency distribution of the
responses is reported in Table 5.8.
These results indicate that bank lending officers agreed that 12 out of 18 disclosure
requirements of the balance sheet were useful, although they were neutral about the six
other disclosure requirements, or regarded them as not useful. The findings in Section 5.4.3
reveal that given a choice between historical cost and fair values as a measurement concept
of valuing assets and liabilities, bank lending officers prefer fair values to be reported. This
is further evidenced by the findings that 46.7% of bank lending officers held either a neutral
opinion about the usefulness of the information about property, plant and equipment
measured at historical cost or felt that it was not useful. However, the findings also indicate
that the majority of bank lending officers are neutral about the usefulness of fair value
information relating to investments in jointly controlled entities and biological assets. The
majority of bank lending officers considered neither the historical cost value nor the fair
value of biological assets as useful for their lending decisions. As far as agricultural
accounting practices are concerned, farmers are reluctant to prepare financial statements;
instead, accounts are prepared as a requirement of complying with tax regulations
(Vazakidis, Stergios, & Laskaridou, 2010). Moreover, the valuation of biological assets is
regarded as difficult and controversial for SMEs (ACCA, 2012). For these reasons, it can
be assumed that bank lending officers may not have encountered agricultural accounting
information very often and thus do not consider that this information is useful.
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Information items 19 to 25 sought to examine the usefulness of the disclosure requirements
of the sub-classification of certain balance sheet items. The Chi-square test results show
that there are statistically significant differences between respondents in the perceived
usefulness of five disclosure items, with more bank lending officers perceiving those sub-
classifications as ‘useful’, and fewer bank lending officers perceiving them as either ‘not
useful’ or ‘neutral’. The sub-classifications pertaining to trade and other receivables (Q20):
X2 = 69.0, p = 0.000 (93% of respondents), trade and other payables (Q22): X2 = 28.5, p =
0.000 (90.7% of respondents), classes of equity such as paid-in capital, share premium,
retained earnings and items of income and expense (Q24): X2 = 37.0, p = 0.000 (76.7% of
respondents), property, plant and equipment (Q19): X2 = 27.4, p = 0.000 (69.7% of
respondents) and inventories (Q21): X2 = 20.8, p = 0.000 (58.2% of respondents) are
considered to be useful for their lending decisions.
The Chi-square test results also show that there are statistically significant differences
between respondents in the perceived usefulness of two disclosure items, with more bank
lending officers perceiving the sub-classifications as either ‘not useful’ or ‘neutral’ and
fewer bank lending officers perceiving the information as ‘useful’. The disclosure
requirements of classifications for classes of share capital (Q25): X2 = 7.6, p = 0.023
(53.5% of respondents) and provisions for employee benefits and other provisions (Q23):
X2 = 13.6, p = 0.001 (51.2% of respondents) are perceived by the majority of bank lending
officers as being less useful.
These results indicate that bank lending officers agree that five out of seven of the
disclosure requirements of the balance sheet sub-classifications are useful, although they
are neutral about the other two sub-classifications. The Chi-square test results are reported
in Table 5.7 and the percentage of frequency distribution of the responses is reported in
Table 5.9.
5.4.4.2 Decision usefulness of disclosure requirements of income statement and

statement of comprehensive income
Information items 26 to 39 sought to examine the usefulness of the disclosure requirements

of the income statement and statement of comprehensive income. All bank lending officers
agreed that revenue (Q26) is the most useful decision item in the income statement. The
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Chi-square test results show that there are statistically significant differences between
respondents in the perceived usefulness of other income statement disclosure items, with
more bank lending officers perceiving disclosure items as ‘useful’, and fewer bank lending
officers perceiving them as either ‘not useful’ or ‘neutral’. Higher perceived usefulness is
found in disclosures of profit and loss (Q32): X2 = 39.1, p = 0.000 (97.7% of respondents),
finance cost (Q27): X2 = 31.8, p = 0.000 (93% of respondents), share of the profit or loss
of investments in associates (Q28): X2 = 53.9, p = 0.000 (86% of respondents), share of
profit or loss of jointly controlled entities accounted for using the equity method (Q29): X2
= 46.0, p = 0.000 (81.4% of respondents), analysis of expenses using classification based
on the nature of expenses (Q38): X2 = 12.3, p = 0.000 (76.7% of respondents) and analysis
of expenses using classification based on the function of expenses (Q39): X2 = 8.4, p =
0.004 (72.1% of respondents). Disclosure items such as discontinued operations (Q31): X2
= 26.6, p = 0.000 and tax expenses (Q30): X2 = 24.7, p = 0.000 were regarded as useful by
69.8% and 67.4% of respondents, respectively.
With regard to the disclosure items in the statement of comprehensive income, total
comprehensive income (Q35): X2 = 31.8, p = 0.000 (93% of respondents) and other
comprehensive income classified by nature (Q33): X2 = 25.3, p = 0.000 (88.4% of
respondents) were regarded as useful for making lending decisions by the majority of the
bank lending officers. While 62.8% of respondents regarded the disclosure of other
comprehensive income of associates and jointly controlled entities (Q34) as useful: X2 =
2.8, p = 0.093, 37.2% held a neutral opinion. Disclosures of profit or loss attributable to
non-controlling interest and owners of the parent (Q36): X2 = 17.6, p = 0.000, and total
comprehensive income for the period attributable to non-controlling interest and owners
of the parent (Q37): X2 = 14.0, p = 0.001 in the income statement and statement of
comprehensive income were regarded as useful by only 55.8% of respondents. 44.2% of
respondents considered these two information items not useful, or held a neutral opinion.
The Chi-square test results are reported in Table 5.7 and the percentage of frequency
distribution of the responses is reported in Table 5.10.
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5.4.4.3 Decision usefulness of disclosure requirements of statement of changes in
equity and retained earnings
Information items 40 to 43 sought to examine the usefulness of disclosure requirements of

statements of change in equity. The Chi-square test results show that there are statistically
significant differences between respondents in the perceived usefulness of disclosure
items, with more bank lending officers perceiving the disclosure items as ‘useful’, and
fewer bank lending officers perceiving them as either ‘not useful’ or ‘neutral’. The majority
of bank lending officers agreed that disclosures of details about retained earnings at the
beginning and end of the reporting period (Q43): X2 = 41.3, p = 0.000, (79% of the
respondents) and total comprehensive income for the period (Q40): X2 = 44.7, p = 0.000
(81.4% of respondents) are useful for their lending decisions. 67.5% of respondents agreed
that a reconciliation between carrying amounts at the beginning and end of the period for
each equity component (Q42): X2 = 23.1, p = 0.000 is useful. While 53.5% of respondents
regarded the effects of retrospective restatement recognised for each component of equity
(Q41): X2 = 14.7, p = 0.001 as useful, 39.5% of respondents held a neutral opinion. The
Chi-square test results are reported in Table 5.7 and the percentage of frequency
distribution of the responses is reported in Table 5.11.
5.4.4.4 Decision usefulness of disclosure requirements of cash flow statement

the cash flow statement. The Chi-square test results show that there are statistically
items, with more bank lending officers perceiving the disclosure of cash flow items as
‘useful’, and fewer bank lending officers perceiving them as either ‘not useful’ or ‘neutral’.
The results show that overall, 90.6% of respondents strongly agreed that cash flows for a
reporting period classified by operating, investing and financing activities (Q44): X2 =
63.7, p = 0.000 are useful for their lending decisions. The bank lending officers are strongly
of the view that cash flows arising from operating activities are very useful for their lending
decisions, but the majority preferred cash flows from operating activities to be disclosed
using the indirect method (Q45): X2 = 33.5, p = 0.000 (74.4% of respondents) rather than
the direct method (Q46): X2 = 24.7, p = 0.000 (67.4% of respondents). The Chi-square test
results also show that 83.7% of respondents agreed that disclosures of major classes of
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gross cash receipts and gross cash payments arising from financing activities (Q48): X2 =
49.2, p = 0.000 are very useful, while only 65.1% of respondents agreed that major classes
of gross cash receipts and gross cash payments arising from investing activities (Q47): X2
= 22.4, p = 0.000 are very useful. Another 27.9% of respondents held a neutral opinion on
the usefulness of cash flows from investing activities.
Disclosure items such as cash flows arising from income tax (Q51) and the amount of
significant cash and cash equivalent balances held by the entity that are not available for
use by the entity (Q52) were regarded as useful: X2 = 19.9, p = 0.000 by 65.1% of
respondents, while 34.9% of respondents held a not useful or neutral opinion. Only 60.5%
of respondents agreed that cash flows arising from transactions in a foreign currency (Q49)
are useful: X2 = 16.0, p = 0.000, while 39.5% of the respondents held a not useful or neutral
opinion. 60.5% of respondents considered cash flows from interest and dividends received
and paid (Q50) as useful: X2 = 17.1, p = 0.000, while 39.5% held a not useful or neutral
opinion. The Chi-square test results are reported in Table 5.7 and the percentage of
frequency distribution of the responses is reported in Table 5.12.
As discussed in Section 5.4.2, the study first requested the bank lending officers to assess
the usefulness of accounting information sources for their lending decisions. Ranked by
the mean values, the bank lending officers chose cash flow statement as the most useful
accounting information source. However, inconsistent with this finding, the bank lending
officers assigned relatively higher weight to the information items in the income
statement—profit and loss (mean = 4.81) and revenue (mean = 4.74)—than to the
information about cash flows classified by operating, investing and financing activities
(mean = 4.47) (see Table 5.7). This inconsistency is nevertheless justified by the findings
of Kwok (2002) which indicate that bank loan officers consider the cash flow statement to
be a more useful information source than other financial statements, yet they sought this
information from accrual-based financial statements, not necessarily from the cash flow
statement. This finding is also consistent with Yap (1997), who found that accounting data
such as future prospects and level of profits are regarded as being as important as cash
flows in making investment and lending decisions. In some situations, it might be
challenging for creditors to identify the most influential accounting information, because
all types of major accounting information is considered to be important for their lending
decisions.
167
The results also show that cash flows for a reporting period classified by operating and
financing activities are significantly more important for lending decisions than cash flows
classified by investing activities. Prior research has established that cash flows arising from
operating activities are more important than cash flows arising from financing and
investing activities (Allen & Cote, 2005). In contrast to the findings of prior research, this
study reveals that bank lending officers consider cash flows arising from both operating
activities and financing activities to be equally important for their lending decisions.
Generally, cash flow information is an important source of information for assessing a
borrower’s creditworthiness (Allen & Cote, 2005). While the operating cash flow confirms
positive earnings, it also provides strong indications about the future performance of the
company, which is of great interest to creditors to ensure the company’s repayment ability
(Allen & Cote, 2005). Section 7 Statement of Cash Flows of IFRS for SMEs defines
financing activities as “activities that result in changes in the size and composition of the
contributed equity and borrowings of an entity” (IASB, 2009a, p. 37). While positive cash
flows from financing activities are indicative of the company’s ability to raise cash for
future expansion, negative cash flows from financing activities are an indication of the use
of surplus cash for the repayment of debts, etc. This information is important for bank
lending officers, particularly to assess the company’s liquidity position (Yap, 1997). As
such, there are reasonable grounds to admit that operating and financing cash flows are
equally important for bank lending decisions.
5.4.4.5 Decision usefulness of disclosure requirements of notes to the financial

statement

notes to the financial statements. The Chi-square test results show that there are statistically
items, with more bank lending officers perceiving disclosure items as ‘useful’, and fewer
bank lending officers perceiving those as either ‘not useful’ or ‘neutral’. The results show
that 90.7% of respondents strongly agreed (X2 = 28.5, p = 0.000) that a statement indicating
that the financial statements have been prepared in compliance with IFRS for SMEs (Q53)
would enhance their decision usefulness. 81.4% of respondents strongly agreed (X2 = 17.0,
p = 0.000) that the judgments that management has made in the process of applying
accounting policies (Q55) are useful. Further, 79.1% of respondents agreed (X2 = 14.5, p
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= 0.000) that the key assumptions made by the management (Q56) are useful, whereas a
summary of the significant accounting policies applied (Q54) was also rated as useful (X2
= 8.4, p = 0.004) by 72.1% of respondents. The Chi-square test results are reported in Table
5.7 and the percentage of frequency distribution of the responses is reported in Table 5.13.
Quantitative data analysis of the first part of the study indicates that most of the accounting
disclosure items in IFRS for SMEs appear to be useful for the lending decisions of SMEs.
Accordingly, it can be concluded that the development of IFRS for SMEs pertaining to the
disclosure requirements is particularly responsive to the information needs of bank lending
officers. Explanations of why certain accounting disclosure items were regarded as useful
or less useful were traced in the interviews. The survey questionnaire investigated the
usefulness of the accounting disclosure items of IFRS for SMEs, and the triangulation of
these results with data collected from the interviews with bank lending officers allowed to
carry out an in-depth analysis of the usefulness of the information provided by financial
reports prepared in accordance with IFRS for SMEs.
5.5 RESULTS AND DISCUSSION – THE SEMI-STRUCTURED INTERVIEWS
5.5.1 Demographic details of the interviewees
As mentioned earlier, 19 interviews were conducted in total with senior bank lending
officers, representing the four major LCBs in Sri Lanka. As shown in Table 5.2, 14 of the
19 participants were male and five were female. The mean age of the respondents was 42
years. The average number of years of formal education was 17 years. Of the 19
participants, 16 were qualified members of the Institute of Bankers of Sri Lanka (IBSL);
ten held a Diploma in Banking & Finance qualification and six held a Certificate in
Banking & Finance qualification. Three of the participants also held professional
accounting qualifications (Certified Institute of Management Accountants – CIMA
qualification) and four participants held a Master of Business Administration (MBA)
degree. The participants had an average of 9.31 years of work experience in SME lending,
and were generally familiar with the Sri Lankan equivalents of IFRS for SMEs, as indicated
by the mean response of 3.47. The interviewees’ profiles are reported in Table 5.14.
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5.5.2 Perception of bank lending officers on the usefulness of simplified
recognition and measurement requirements of IFRS for SMEs on
lending decisions
The second objective of this study was to assess the opinion of bank lending officers on
the usefulness of the simplified recognition and measurement requirements of IFRS for
SMEs on their SME lending decisions. As mentioned earlier, the semi-structured
interviews were based on three key themes to ascertain the perceptions of bank lending
officers on the usefulness of (1) the simplified measurement and recognition requirements
of IFRS for SMEs, (2) accounting information on SME lending decisions, and (3) financial
statements prepared in compliance with IFRS for SMEs
The questions targeting the perceptions of the simplified measurement and recognition
requirements of IFRS for SMEs focused on the prohibition of the revaluation policy option
on property, plant and equipment; the recognition of research and development costs as
expenses when incurred; the usefulness of fair values for certain asset classes such as
investments in associates, investments in jointly controlled entities; and recognition of
deferred tax accounting. Interviewees were asked to comment on the appropriateness and
economic consequences of the simplification of recognition and measurement
requirements on their lending decisions.51
NVivo 10 software was used for coding and analysing the transcribed interviews. The
coding process was initiated with the key themes developed and three main nodes were
constructed. An in-depth inductive sub-coding process was then employed to further
expose and identify the patterns or themes evolving under each main node. This coding
process helped with summarising the meaning (rather than the keywords) of each piece of
information conveyed by the transcribed data (Miles, Huberman, & Saldaña, 2013; Son et
al., 2006; Sormunen, 2014), and constructing a thematic node hierarchy (Appendix 6). This
51
The IASB has made a limited number of amendments to IFRS for SMEs following the completion of the
initial comprehensive review in May 2015. For example, the standard now permits SMEs to use the
revaluation policy option for property, plant and equipment, and has aligned the main recognition and
measurement requirements for deferred tax with full IFRS with effect from the annual period beginning on
or after 1 January 2017 (IFRS Foundation, 2015a). As this study was conducted prior to these proposed
amendments, the perceptions of the bank lending officers on these issues were also sought.
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thematic node hierarchy is a hierarchical structure that integrates the main nodes and all
the sub-nodes (theme nodes) constructed in the inductive coding process.
Analytical techniques such as framework matrices were used to summarise the coded data
in a grid format (where rows represent case nodes and columns represent theme nodes)
(QSR International, 2014). Each cell was inspected carefully to identify the interactions of
cases and themes. Tree maps of nodes were created where necessary to compare the
number of coding references.52 A detailed analysis and interpretation of the themes arising
from the coding process are discussed in the following section.
5.5.2.1 Revaluation of property, plant and equipment
A major simplification in IFRS for SMEs is the omission of the revaluation policy option
from Section 17 Property, Plant and Equipment. Without this ability to revalue property,
plant and equipment (PPE), all PPE must be measured “at cost less any accumulated
depreciation and any accumulated impairment losses” (cost model) (IASB, 2009a, p. 94).
The revaluation of PPE has been regarded as “one of the complex accounting policy
options in full IFRS” (IFRS Foundation, 2012d, p. 22) and the IASB believes that the
objectives of comparability and simplification of IFRS for SMEs can be achieved with the
elimination of this revaluation option (IASB, 2009b).
Despite the omission of the revaluation policy option, revaluation of PPE has been a
common practice among listed and non-listed entities in many jurisdictions (ACCA, 2012).
The opinions expressed by bank lending officers indicate that recognition and
measurement principles should be the same across all entities, regardless of the size and
listed nature of the entities. Notably, the bank lending officers had limited awareness of
the divergence in some recognition and measurement principles in IFRS for SMEs. For
example, one interviewee commented that:
Actually I came across this once and I got confused. I did not know that it is been treated in
two different ways. I came to know that SMEs do not recognise revaluation values in their
52
A tree map is a diagrammatic analytical tool in NVivo 10 which shows the hierarchical data as a set of
nested rectangles of varying sizes (QSR International, 2014). A node with a higher number of coding
references is symbolised by a large rectangle, and a node with a smaller number of coding references is
symbolised by a small rectangle.
171
financial statements. I was then thinking why should there not be one standard for everybody?
This divergence may complicate our evaluations. (Interviewee 17, p. 3)
Nevertheless, bank lending officers prefer PPE to be measured at fair values, for instance
where assets are pledged as security for collateral purposes. Bank lending officers
explained their preference as follows:
If the company is required to pledge certain assets/properties, then a valuation conducted

showing the present value would definitely be required for our lending decisions. (Interviewee
12, p. 3)
This was also evidenced by the bank lending officers’ responses to the questionnaire
survey, since they held a neutral opinion on the usefulness of information about PPE
measured at historical cost for their lending decisions. However, discussions with bank
lending officers also revealed that even though they prefer PPE to be measured at fair
values, banks do not necessarily rely on the valuation figures reported by clients. It is a
common practice in the banking industry that the assets to be pledged have to be valued
by panel valuers at the bank level. This was confirmed by many interviewees, who said:
…even if the revaluations are recognised in the Profit and Loss statement, we do an
independent valuation. We do not normally rely on the valuation that is being placed on the
accounts. We have our own panel of valuers. We do it on our own. (Interviewee 15, p. 3)
However, the bank lending officers revealed that the cost of valuation has to be met by the
customer. For example, one interviewee commented that:
The customer has to bear the cost of valuation. It is an additional cost for the customer. Because
we charge it to the customer. (Interviewee 15, p. 3)
If SME clients are required to bear the associated cost of valuation, the complexity
associated with measuring the fair values of assets will be reduced but the costs associated
with valuations will increase, resulting in a trade-off between costs and benefits.
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In contrast to the cost model proposed in IFRS for SMEs, the IAS 16 Property, Plant and
Equipment in full IFRS permits entities to opt for a revaluation model for all its PPE
classes. As prescribed by IAS 16, “after recognition as an asset, an item of PPE whose fair
value can be measured reliably is carried at a revalued amount—its fair value at the date
of the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses” (IFRS Foundation, 2014c, p. 889).
IAS 16 indicates that “if the carrying amount is increased as a result of a revaluation, the
increases have to be recognised in other comprehensive income and accumulated in equity
under the heading of revaluation surplus” (IFRS Foundation, 2014c, p. 891), unless an
increase reverses a previous revaluation decrease recognised in profit or loss for the same
asset (IFRS Foundation, 2012d, p. 22). Revaluation decreases that are in excess of prior
increases are recognised in profit or loss. The IFRS Foundation (2012) further specifies
that revaluations must be made with sufficient regularity to ensure that the carrying amount
does not differ materially from the amount that would be determined using fair value at the
end of the reporting period (p. 22). As such, bank lending officers are of the view that a
substantial enhancement in revaluations would embellish the books of SMEs by making
the earnings appear to be more attractive than they are. As the present values are clearly
higher than the historical cost, bank lending officers consider historical cost to be more
prudent than the revalued value of assets. Taking these facts into consideration, the
omission of a revaluation option from IFRS for SMEs appears to be attractive for bank
loan evaluations, as illustrated by the following quote:
Our decision is based more on profit and loss that is justified by cash flows. Revaluation will
not bring in cash flows. So even in the earlier system, we would discount a profit and loss that
has been overstated by revaluations. So therefore, this new principle works fine by bankers
because we are looking at hard cash available at the end of the day for re-payment. (Interviewee
5, p. 3)
In summary, the decision usefulness of the measurement of PPE on bank lending decisions
can be established in the following way. As mentioned previously, the primary concern of
lending is to ensure the borrower’s ability to repay the loan. Therefore, assessment of the
creditworthiness of the borrower is of utmost importance. The findings of this study reveal
that profit and loss information, justified by cash flows, is the primary concern of bank
173
lending officers thus, recognition of PPE on historical cost basis would better serve the
bank’s need to assess a borrower’s repayment ability. On the other hand, details of PPE
measured at fair value are required to secure the loan repayment (to dilute the bank’s risk)
in the event that a borrower were to incur unforeseen events that would hinder their ability
to repay the loan.
The IASB asserts that the degree of difference between full IFRS and IFRS for SMEs must
be determined on the basis of user need and cost-benefit considerations. In conclusion, as
stressed by the IASB, if the simplification of IFRS for SMEs is determined on the basis of
the banks’ needs, then PPE measured on a historical cost basis is justifiable.
Another simplification associated with PPE is that IFRS for SMEs do not require an annual
review of the useful life, residual value, and depreciation or amortisation method for
property, plant and equipment and intangible assets. Instead, a review is required only if
there is an indication of significant change since the last annual reporting date. IAS 16 and
IAS 38 Intangible Assets require reviews at least at each financial year-end (IASB, 2009a,
p. 44). Discussions with bank lending officers revealed that the general rule of thumb used
by the licensed commercial banks (LCBs) is that property, plant and equipment held by an
SME must be valued at least every fourth year (Interviewee 17, p. 3). This simplification
appears to have no impact on disclosure, and the simplification is therefore justified.
5.5.2.2 Capitalisation of development costs
IFRS for SMEs require that all research and development costs be charged “to expense
when it is incurred unless it forms part of the cost of another asset that meets the recognition
criteria in IFRS for SMEs” (IASB, 2009a, p. 100). Difficulty in measuring the commercial
viability of the project due to a lack of resources has been regarded as the key reason for
proposing this simplification (IFRS Foundation, 2012d). According to the criteria
prescribed by IAS 38 Intangible Assets in full IFRS, all research costs and some
development costs must be charged to expense. If the entity is able to demonstrate that the
development has produced an asset with future economic benefits, then the development
cost must be capitalised (IFRS Foundation, 2014c).
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The interviewees held multiple views about the capitalisation of development cost. Many
bank lending officers were of the view that information about capitalised development
costs was insignificant and added little value; they therefore ignored such costs when
making their lending decisions. For example, one lending officer mentioned that:
Actually, we will not go down cost by cost, administration or marketing, etc. If there were a
higher variation, we would then go cost by cost, but we would not go to see whether research
and development cost has been accrued into or not and that is up to them. We would see how
the business progresses. (Interviewee 6, p. 4)
A number of bank lending officers critiqued the IASB’s initiative due to the fact that
development costs as a substantial element for many SMEs would have a major impact on
their financial statements, especially for newly created business ventures in the phase of
development and research for new products and markets. By charging the research and
development cost to the profit and loss account as an expense, the true position of the
company could be significantly falsified by the current requirement of IFRS for SMEs. In
contrast to this view, one lending officer indicated that this approach is better for the banks:
If the company has incurred research and development cost, it has to be shown in the profit
and loss account as an expense. If it is a cash outflow, it impacts the loan re-payment capacity
of the client. Therefore, we would, as bankers, prefer it in this way. (Interviewee 5, p. 4)
Despite this inconsistency in the views on research and development costs to be charged
as expense, the majority of interviewees held the view that information such as research
and development costs adds little or no value to their lending decisions. However, the
findings do not justify the assertion that research and development cost has to be expensed,
thus this simplification could not be justified on the basis of user need.
5.5.2.3 Accounting for deferred income tax
Section 29 Income Tax of IFRS for SMEs requires that deferred income tax has to be
recognised using the temporary difference method (IFRS Foundation, 2012d).53 This
53
The temporary difference method bases deferred taxes on the difference between the tax basis of an asset
or liability and its carrying amount (IASB, 2009a; IFRS Foundation, 2012d).
175
requirement was debated extensively and accounting regulatory bodies and institutions
from different jurisdictions hold different views about this recognition. A number of
regulators are in favour of this requirement and assert that SMEs should recognise deferred
income taxes, and judge that the temporary difference method is appropriate, while several
hold the view that the application of the temporary difference method is too complex for
SMEs and propose that the temporary difference method should be replaced with the
timing difference method.54 Others hold the view that “SMEs should recognise deferred
taxes only for timing differences” (IFRS Foundation, 2012d, pp. 27-28), which is also
called the ‘liability method’. There are some regulators who hold the view that “SMEs
should not recognise any deferred taxes at all” (IFRS Foundation, 2012d, p. 28), which is
also called the ‘tax payable method’.
Although disagreements exist among the regulators and accounting institutions with regard
to the appropriate method of recognising deferred income taxes, it is apparent that there is
a lack of interest among bank lending officers in deferred tax disclosures by SMEs for loan
evaluation decisions.
I think it is important, but again, we will not place too much emphasis on that area, if the risk
grading and the acceptability of that company is OK for us. (Interviewee 19, p. 6)
Some bank lending officers were of the view that the emphasis applied to deferred tax
information would vary depending on the nature of the business and size of SMEs.
The weight we would give to this type of information will vary depending on the nature of
their business. For very small entities, we do not give much weight for this information. But
for SMEs on a large scale, we assign a good weight for deferred tax accounting information.
(Interviewee 2, p. 4)
Indeed, the opinions of bank lending officers also indicate that the taxes payable method
would be reasonable if the expected effective tax rates were disclosed. One lending officer
described his opinion as follows:
54
The timing difference method bases deferred taxes on the difference between when an item of income or
expense is recognised for tax purposes and when it is recognised in profit or loss (IASB, 2009a; IFRS
Foundation, 2012d).
176
One key thing would be, that in a position of their hierarchy of payments that need to go out,
tax is one of the first items that they need to pay out. Having information on their liabilities on
deferred tax is quite important because even though they may have cash, that cash may be
required to settle other liabilities before they can settle any other bank liabilities. So, that is a
key ingredient but it is not one of the most key ingredients that we will look at. It is a secondary
thing that we will look at. (Interviewee 5, p. 4)
Even though some interviewees were in favour of deferred tax accounting disclosures, the
majority of interviewees held the view that this information fails to provide much
assistance for their lending decisions. Therefore, the recognition method of deferred tax is
not very important to them.
5.5.2.4 Fair value measurements in financial and non-financial assets
Section 14 Investments in Associates of IFRS for SMEs specifies that an investor (SME)
has an accounting policy choice in its consolidated financial statements to account for
investments in associates and jointly controlled entities using (1) the cost model, (2) the
equity method, or (3) the fair value model (IASB, 2009a). In respect to investments for
which a market price is available, “the standard is unclear as to whether measurement at
fair value through profit or loss is mandatory, irrespective of the SME’s accounting choice
for investees or only if the cost model is chosen” (KPMG, 2010, p. 14).
The bank lending officers indicated that the decision usefulness of the fair value
measurement concept varies between different asset classes. In particular, the bank lending
officers who take interest in certain asset classes, such as non-financial assets—
investments in associates and jointly controlled entities—generally rate fair values as the
most decision useful measurement concept. The discussions with interviewees revealed
that they preferred investments to be measured at mark-to-market fair values, as reflected
by the following quote:
For investments, especially those that are quoted investments, the fair value method is
appropriate. If it is mark-to-market for quoted investments, we know that there is a certain
price that is available today. So, in this sense, mark-to-market value, especially for those items,
would be better for the purpose of lending because we would know what the market would be
willing to pay for that asset now. Whereas if fair value is a judgment call made by the directors,
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it is not dependent on mark-to-market or on market conditions; it is only an opinion of some
people for lending purposes. Mark-to-market is what we would look for, if possible.
Several bank lending officers pointed out that most SMEs do not have investments in
associates and that fair value measurements are fairly important with regard to investments
in financial instruments.
Fair values of the companies which I am handling have financial investments. In such cases,
fair value is fairly important. But many of the companies do not have any associates. Also, in
that respect, fair value is important in terms of financial investments mainly. (Interviewee 17,
p. 3)
A number of bank lending officers revealed that the importance of fair value measurements
varies depending on the size and scale of their lending: “We do consider fair value as
important, especially for medium and large-scale lending” (Interviewee 1, p. 3).
The opinions expressed by the bank lending officers suggest that although they believe fair
value to be useful for their lending decisions, they are concerned about how fair value is
determined. That is, they distinguish between the concepts of mark-to-market fair values
and judgment-based fair values, especially when companies employ models to determine
fair value in the absence of existing market prices. This finding is consistent with Gassen
and Schwedler (2010), who found that professional investors and advisors consider mark-
to-market fair values to be more decision useful than mark-to-model fair values. This is
because mark-to-market fair values are based on current market prices or similar assets and
liabilities, which are considered to be more reliable than subjective judgment-based models
(PWC, 2008). Therefore, it is apparent that bank lending officers are more confident with
mark-to-market fair values for their lending decisions. As such, disclosures of fair values
signal the impact of market liquidity on the company, which is useful for the decision
makers.
178
5.5.2.5 The perception of bank lending officers on the impact of topics omitted
from IFRS for SMEs on their lending decisions
IFRS for SMEs do not address the presentation of earnings per share, interim financial
reporting, and segment reporting (IASB, 2009b). This study is also interested in
investigating the opinions of bank lending officers on whether the absence of this
information has an impact on their lending decisions. The discussions with bank lending
officers revealed that information about earnings per share and segment reporting adds no
value to their lending decisions and the IASB’s initiative to detach these topics from IFRS
for SMEs is justified. For an example, a lending officer stated:
We would look at earnings per share only if we are looking at the value of the company. It is
not something very important for our decisions unless we are doing something like an
acquisition or a merger, where the value of the share is the key factor. (Interviewee 5, p. 5)
The discussions with bank lending officers further revealed that while they do consider
interim reporting to be useful, the absence of an IFRS requirement for interim reporting
does not necessarily impact their lending decisions. Unlike investors, who cannot usually
request information directly from firms, banks as users of financial statements have the
ability to request the additional information they need from their clients to make their
lending decisions. Bank lending officers revealed that banks usually request interim
financial statements—the management accounts—in audited format, but not necessarily
the audited interim reports. In the banking industry, the term ‘management accounts’ refers
to the accounts prepared by the company for management purposes.
If it is a listed company, definitely we will look at their financials each quarter. Even for non-
listed companies, we would ask them to submit management accounts at least every half-year.
So, even though it may not be an IFRS requirement, we would definitely ask them to submit it
to us. To help our decisions, we want information which is as current as possible. For example,
if we are lending in December, we would not look at just the March figures, we would also
look at the September figures. (Interviewee 5, p. 5)
Interim financial statements do not usually have to be audited; however, there are some
instances in which a bank definitely requires audited interim financial statements. In this
179
respect, bank lending officers are concerned about the discontinuation of the interim
reporting requirement by IFRS for SMEs.
For some clients, we might ask for quarterly audited financials. If a client encounters financial
difficulties with negative net worth and declining turnover, in such situations, we might call
for regular management accounts but for some specific occasions, we might call for audited
interim financials as well. In addition, we might need to call for audited interims if a new
customer comes to us for a facility in between a financial period, so we might need to get an
interim account audited to get the latest financial position, the latest available. In such
instances, there might be an impact on the discontinuation of interim reporting. (Interviewee
17, p. 3)
Discussions with the interviewees revealed that for most clients, it is a constitutional
requirement of the bank’s letter of offer (or the lender’s agreement) to submit interim
financial reports (usually quarterly financial statements).
5.5.3 Additional analysis
During the interviews, bank lending officers were asked to indicate their general perception
of the role of accounting information on SME lending decisions, and their overall
perception of the usefulness of financial statements prepared in compliance with IFRS for
SMEs.
5.5.3.1 Role of accounting information on SME lending
In the current lending environment, banks are experiencing difficulties in collecting

accurate financial information that portrays a true picture of a business. The discussions
with interviewees revealed that the formation and adoption of IFRS for SMEs enables bank
lending officers to access accurate accounting information with more ease than was
previously possible. Bank lending officers are of the view that if SMEs follow common
accounting and reporting rules that define how business transactions should be recorded
and reported, and what information a company should disclose in its financial statements,
comparability will be enhanced. A number of bank lending officers revealed that their
credit score-based evaluation process would be easier to apply and rationalise, and the
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formation of industry benchmarks for evaluations would be possible, if all SMEs were to
prepare their financial statements in a uniform manner. For example, a lending officer cited
that:
The new standards are streamlined. So, if all companies prepare their financial statements
according to these standards, we know that we are evaluating apples with apples. If they use
different policies or a different set of standards, comparisons between the companies would
not be possible. But if every company is reporting in a uniform way, we can establish some
industry benchmarks for certain ratios and it would be the same for everyone. So having a
uniform procedure is very important. (Interviewee 5, p. 2)
Most commercial banks have recently developed rating systems to determine the
creditworthiness of a borrower and the credit risk (Blöchlinger & Leippold, 2006). Under
this system, a credit score is produced for the prospective borrower, who is ranked
accordingly. Bank lending officers commented that this is the main metric used by the
banks to determine whether a borrower is worthy of a favourable rate. Both financial and
non-financial information is fed into this system to derive this metric. The system weights
five characteristics of the borrower (i.e. character, capacity, capital, collateral and
condition—most commonly referred to as the Five Cs) and attempts to gauge the likelihood
of default. For example, Interviewee 11 revealed that in their credit rating evaluation
process, the bank assigns a weight of 40% for management character, 20% for financial
capacity, 20% for business risk (market share, competition), and 20% for industry
condition (impact of government policies, technological dependency, environmental
effects55, infrastructure facilities, etc.).
Accounting information is mostly used for measuring the financial capacity of the
borrower. A weighted average ratio is calculated based on such ratios as weighted average
sales growth, average net profit, average debt service cover, current ratio, weighted average
operating cash flows, gearing, and financial risk. The availability of assets and extent of
liabilities is also considered to determine the probability of default. A weight will also be
assigned to accounting quality (measured by the reliability of the financial statements).
55
With sustainability practices coming into effect, banks prefer to lend for environmentally responsible
projects.
181
The reliability of an audited financial statement is considered to be high, whereas the
reliability of a draft report is considered to be low.
If financial statements are presented in a uniform manner in accordance with IFRS for
SMEs, the information provided will supplement the information needs of banks.
However, the discussions revealed that banks also need other financial information that is
not ordinarily presented in financial statements; for example, information such as financial
information forecasts—that is, an extrapolation of the existing financials to what
companies believe they will achieve in the next three to five years. Income statement and
cash flow projections are also important for their lending decisions, and banks may also
request an age analysis of the debtors, or an age analysis of inventories for situations in
which debtors or inventories are used as collateral (Interviewee 15, p. 2).
Bank lending officers nevertheless revealed that the intensive competition between
commercial banks drives commercial lending to be extremely competitive. As such, if
companies are required to disclose information that is too costly to provide, clients may
seek other lending sources or a more competitive bank. Because of this information cost,
bank lending officers are sometimes reluctant to request greater disclosure. Even if a client
is unable to provide a complete set of financial reports, they would still be entitled to the
grant of a loan if their creditworthiness can be proven by sources of information other than
financials. As long as they are confident of the client’s capacity to repay and the bank’s
ability to recover the loans granted, banks are unconcerned about every piece of
information in SME financial statements.
5.5.3.2 Overall perception of bank lending officers on the usefulness of financial

statements prepared in compliance with IFRS for SMEs
The IASB warrants that SMEs will benefit from preparing financial statements using a
common set of accounting standards and makes a claim that “bankers rely on financial
statements in making lending decisions and in establishing terms and interest rates” (IASB,
2009b, p. 16). During the interviews, bank lending officers expressed their opinions on
whether a complete set of financial statements prepared in compliance with IFRS for SMEs
helps to lower a borrower’s cost of capital. The majority held the view that their current
lending decisions were not purely financial information-oriented. As such, pricing was not
182
merely driven by the financial standing of the borrower, but was instead more relationship-
oriented. For example, one interviewee expressed the view that:
Well ideally it should. If the financial position of a customer is satisfactory, we charge a low
risk premium. Right now, there is no risk-based pricing system in place, but it is more on
relationship-based I suppose. There is certain weightage given to lowering of the risk by having
good financials. But it is not a key criterion in deciding on the pricing. (Interviewee 5, p. 3)
The findings of this analysis can be combined with prior research which shows that bank
loan officers are oriented towards ‘relationship lending practices’ (Boot, 2000; Trönnberg
& Hemlin, 2014) and ‘transactional lending practices’ (Thomas, 2000; Trönnberg &
Hemlin, 2014). While relationship lending focuses more on the personal relationship
between the loan officer and the loan applicant (which some researchers defined as non-
financial information or soft information) (Uchida, Udell, & Yamori, 2012), transactional
lending is based more on the financial information of the company (also defined as hard
information) (Uchida et al., 2012). The findings of prior research stress that both of these
lending practices influence the assessment of a borrower’s creditworthiness (Trönnberg &
Hemlin, 2014). However, the findings of this study indicate that financial information is
directly associated with assessing the creditworthiness of a borrower and thereby lowering
risk, while the relationship with the bank or bank lending officers is highly influential in
the pricing decision.
The bank’s required margin and market competition and the customer’s background (e.g.
caliber of the customer, length of acquaintance) and bargaining power, as well as the
prevailing market interest rate, are at the top of the hierarchy in relation to the
establishment of interest rates. However, the bargaining power of the customer also
depends on the customer’s financial viability. Customers with high bargaining power, in
particular, might put relentless pressure on a bank to lower the interest rate. Bank lending
officers expressed the view that accounting standards might strengthen a customer’s
financial standing, and in that sense, accounting standards might be an advantage for
obtaining a better interest rate. However, as noted by Baker and Cunningham (1993), the
interest rate is not a function of the basis on which accounts are prepared. For example, a
credit officer expressed his opinion that:
183
I believe that if financial statements are prepared in a way that strength is reflected this may be
in compliance with IFRS and is a bit of an advantage for obtaining a fair price. But it depends
more on how strong the customer is and how great is the fear that a competitor may grab our
customers. The strength may be reflected in proper financials. (Interviewee 18, p. 3)
However, the extent to which financial statements prepared in compliance with accounting
standards contribute to the determination of loan pricing is not clear from the discussions.
5.5.3.3 Audited financial statements and IFRS for SMEs
This study also sought to determine the general perception of bank lending officers on
audited financial statements as well as the impact of ‘compliance’ with IFRS for SMEs on
bank lending decisions. Prior research demonstrates that the accounting information in
financial statements is more reliable when it is prepared in compliance with accounting
standards or GAAP and audited (Abu-Nassar & Rutherford, 1996; Baker & Cunningham,
1993; Gómez‐Guillamón, 2003; Kent & Munro, 1999; Kitindi et al., 2007). In line with
the findings of prior studies, bank lending officers expressed their opinion that audited
reports enhanced the reliability of the financial information provided by clients. Most of
them preferred the financial statements to be audited by reputable audit firms. Further,
most bank lending officers stressed that producing audited financial statements is essential,
especially for medium and large scale SME lending.
Definitely our reliability goes up with the audited financial statements. We, in fact, insist that
all our clients provide audited financials within 6 months of the closure of the financial year.
Audited financial accounting information represents a fundamental source of credible

information, therefore bank lending officers assign a good weight to audited financial
statements in their credit scoring systems and customers are advantaged by producing
audited financial statements. For example, a credit officer cited that:
Definitely, we give priority when it is audited. Our assessments are based on a credit score
system. We will assign a higher value if the financial reports are audited. (Interviewee 3, p. 2)
184
However, bank lending officers also explained that customers are not penalised for not
producing audited financial statements. Some customers (small scale SMEs in particular)
produce management accounts, accounts prepared for tax purposes, or draft accounts. In
such cases, bank lending officers request additional information from their clients. The
additional information is mostly non-financial information to establish the
credibility/trustworthiness of the borrower, such as guarantees, security, etc. This finding
conforms with the observations of Kent and Munro (1999).
Bank lending officers expressed their opinion on the usefulness of SME financial reports
that are prepared in compliance with IFRS for SMEs. Loan officers emphasised that their
confidence is increased when financial statements are prepared in accordance with
accounting standards (i.e. IFRS for SMEs).
The bank lending officers also agreed that SME financial information is more reliable if it
is prepared in accordance with the criteria prescribed by IFRS for SMEs. However, they
are of the view that deviation by an SME client from IFRS for SMEs, or the accounting
standards they otherwise apply, does not necessarily affect a bank lending officer’s
assessment of the borrower’s repayment ability or the creditworthiness of the client. In
particular, bank lending officers do not distinguish between audited reports and reports
prepared in compliance with IFRS for SMEs, but they are more confident in having audited
reports in general to make their decisions. For example, a lending officer expressed the
opinion that:
I do not particularly consider compliance with accounting standards because I am sure that the
auditors will do their job according to the guidelines prescribed by the accounting standards.
Overall, the findings from the additional analysis reveal that in assessing the
creditworthiness of a borrower, banks assign a high value through the credit scoring system
to financial statements that have been audited, which improves the credit score of an SME.
However, under their present credit scoring system, banks do not assign a specific value
for compliance with the accounting standards.
185
The aim of this study has been to understand the perception of users on the decision
usefulness of financial statements prepared in compliance with IFRS for SMEs. The
empirical analysis was based on a questionnaire survey and follow-up interviews carried
out with the senior lending officers of commercial banks. The decision usefulness of IFRS
for SMEs was evaluated from two aspects of the standard: the decision usefulness of the
reduced disclosure requirements of IFRS for SMEs, and the decision usefulness of the
simplified recognition and measurement requirements of IFRS for SMEs.
The results show that most of the disclosure requirements of IFRS for SMEs are found to
be useful for lending decisions. However, bank lending officers did not consider all
disclosure requirements presented to them as equally important for their lending decisions.
Information items that could help to establish a borrower’s repayment ability and secure
the repayment of a loan, and items that support risk assessment, were regarded as being
most useful. The primary concern of a creditor is to accurately assess a borrower’s
creditworthiness or repayment ability. As such, most of the income statement disclosure
items such as revenue, and profit and loss justified by cash flow were regarded as being
very useful for making lending decisions. The results revealed that bank lending officers
do not consider information from a comprehensive income statement to be very useful for
their lending decisions. In consolidated financial statements especially, information about
profit or loss and comprehensive income attributable to non-controlling interest and the
owners of the parent company were regarded as being less useful.
The results reveal that bank lending officers consider that the cash flow generated by both
operating activities and financing activities are equally important for their lending
decisions. Operating cash flow information is useful for assessing a borrower’s repayment
ability, while financing cash flow information is important for assessing a company’s
liquidity position. Additionally, bank lending officers prefer cash flow from operating
activities to be disclosed using the indirect method rather than the direct method.
The details of assets and liabilities presented in the statement of financial position (balance
sheet) were regarded as being important only for certain classes of assets and liabilities.
Information about assets and liabilities, such as trade and other receivables/payables,
186
financial assets/liabilities, cash and cash equivalents and inventories, were regarded as very
useful for lending decisions. This information is important for the banks to enable them to
identify the liquidity position of a company by comparing short term assets and short term
liabilities. However, information about property, plant and equipment measured at
historical cost was found to be moderately useful for their lending decisions. Tax-related
information, such as deferred tax assets and liabilities, and liabilities and assets for current
tax were regarded as less useful. Importantly, most of the bank lending officers held a
neutral opinion of the usefulness of information concerning biological assets. Certain
disclosure requirements that come under the statement of changes in equity were also
considered to be moderately useful.
The results reveal that bank lending officers are familiar with fair value and historical cost
measurement concepts. With regard to the simplification of the measurement of property,
plant and equipment, bank lending officers are optimistic about the withdrawal of the
revaluation option, especially with regard to their assessments of a borrower’s repayment
ability. However, bank lending officers consider PPE measured at fair value to be
important for securing loan repayment. Bank lending officers who take an interest in
certain asset classes such as non-financial assets—investments in associates and jointly
controlled entities—generally rate fair values as the most useful measurement concept.
Moreover, the findings reveal that bankers distinguish between the concepts of mark-to-
market fair values and judgment-based fair values, especially when companies employ
models to determine fair value in the absence of existing market prices. The results show
that mark-to-market fair values are more useful than judgment-based fair values.
Bank lending officers hold a neutral opinion of the decision usefulness of simplification in
the recognition of the development cost component, because bank lending officers view
that information such as research and development cost adds little or no value to their
lending decisions. They also demonstrate a lack of interest in deferred tax disclosures and
their recognition; however, they view the taxes payable method as more reasonable than
the temporary difference and timing difference methods in the recognition of deferred tax.
On the topics omitted from IFRS for SMEs, bank lending officers agreed that information
such as earnings per share and segment reporting provide no useful information for their
lending decisions. However, the results show that the discontinuation of interim reporting
187
may have an impact on the lending decisions of banks. It is a constitutional requirement of
most banks to require their clients to submit interim reports.
The findings suggest that bank lending officers prefer recognition and measurement
principles to be the same across all entities, regardless of the size and listed nature of the
entities, to minimise confusion and increase comparability across all entities. When the
proposed amendments in IFRS for SMEs become effective in January 2017, it can be
expected that some of the confusion that has been caused by the withdrawal of the
revaluation option for PPE, recognition of deferred tax and so on will be minimised.
Overall, the findings indicate that the reduced disclosure requirements of IFRS for SMEs
are useful for bank lending decisions. In particular, the disclosures that are used to generate
credit scoring for evaluating the credit risk and the creditworthiness of a borrower are
regarded as being the most decision-useful. Bank lending officers do not see any major
issues with the simplification of the recognition and measurement requirements of IFRS
for SMEs. This is because, generally speaking, banks are in a position to demand the
information they need. The findings suggest that bank lending officers have limited interest
in information such as the accounting basis on which the financial statements are prepared.
With IFRS for SMEs being a new standard, banks have limited awareness or experience
of the application of these standards by SMEs. However, as IFRS for SMEs are applied
extensively by SMEs, bank lending officers believe that the adoption of IFRS for SMEs
will enable banks to access accurate and comparable accounting information with greater
ease, and that this will improve the efficiency of their lending processes.
By providing empirical evidence from a country that has adopted IFRS for SMEs, the
findings of this study give rich and deep insights into the decision usefulness of IFRS for
SMEs. The IASB received no comment letters from users of financial statements during
the initial comprehensive review process of IFRS for SMEs, and as such, the IASB was
unable to acquire information about the perceptions of the users on the proposed
amendments to IFRS for SMEs (IFRS Foundation, 2015c). The findings of this study will
be of particular interest to accounting regulators, including the IASB, for evaluating the
successful implementation of IFRS for SMEs and in planning the next review of IFRS for
SMEs. The IASB and SME Implementation Group (SMEIG) are presently considering
ways to increase user involvement for the next review of IFRS for SMEs, and the findings
188
of this study signify the need for user involvement in the standard setting process,
particularly when future amendments are made to the standard.
The findings of this study also encourage the accounting regulatory bodies and accounting
professionals at individual jurisdiction level to enhance public awareness of the simplified
IFRS for SMEs, particularly among different user groups of SME financial statements. The
findings will also be useful for the preparers of SME financial statements. Understanding
the information needs of bank lending officers and the extent to which they rely on the
accounting information produced by SMEs is important to the preparers of SME financial
statements wanting to increase their access to external funds. The existing accounting
literature calls for more research attention to be focused on the information needs of the
users of SME financial statements. As such, the findings of this study will help to fill a gap
in the existing accounting literature.
The scope of this study is limited to one user group of SME financial statements—bank
lending officers. To broaden the findings of this study, future research could empirically
explore the perceptions of other stakeholders, such as creditors and tax authorities, on the
decision usefulness of IFRS for SMEs. The sample size used in questionnaire survey was
relatively small. For this reason, the study limits the generalizability of the findings. It is
important to note that the semi-structured interviews were mainly based on a number of
major issues raised during the initial comprehensive review of the simplified recognition
and measurement requirements of IFRS for SMEs. The IASB is still uncertain about
whether to incorporate recent changes in consolidated financial statements, business
combinations, and employee benefits of full IFRS to reflect the information needs of users
of SMEs, but these issues have not been addressed in the current study. Future studies
could usefully explore these issues to broaden the understanding of user perceptions of the
simplification of IFRS for SMEs. Further research could also explore how the accounting
information needs of bank lending officers vary between SMEs and public companies by
taking into account the divergence between IFRS for SMEs and full IFRS.
189
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194
Table 5.1: Classification of accounting information items
Category Number of information

items
Statement of Financial Position (Balance Sheet) 18
Sub-Classification of the items disclosed in the Statement of 7
Financial Position (Balance Sheet) or in the Notes
Income Statement and Statement of Comprehensive Income 14
Statement of Changes in Equity and Statement of Income &
Retained Earnings 4
Statement of Cash Flows 9
Notes to the Financial Statements 4

Total 56
Demographic Data Survey Interview

Group Group
Sample Size 43 19
Gender Male Female Male Female
29 14 14 5
Age (Mean) 37 42
Level of formal education in years (Mean) 17 17
Level of experience in SME lending in years (Mean) 8.65 9.31
Level of familiarity with the Sri Lankan equivalents of
3.40 3.47
IFRS for SMEs (Mean)
Table 5.3: Bank lending officers’ approach for evaluating SME loan applications
Variable Mean SD
My lending decision is based on first-hand information and
3.47 0.984
impression of management quality
My lending decision is based on accounting information of the
3.60 0.979
company
My lending decision is based on non-accounting information of the
3.53 1.008
company
My method of analysis differs according to the respective
3.93 0.961
client/company
195
Table 5.4: Bank lending officers’ opinion on the usefulness of information sources
Variable Mean SD
General information about the client and business 4.58 0.663
Income Statement 4.56 0.734
Balance Sheet 4.51 0.736
Cash Flow Statement 4.88 0.587
Statement of Changes in Equity and Income & Retained Earnings 4.26 0.693
Statement of Accounting Policies 3.51 0.883
Related Party Disclosures 3.67 0.778
Notes to the Annual Financial Statements 4.23 0.649
Business Plan 4.26 0.828
Business Credit Report 4.40 0.767
Income Tax Returns 3.35 1.066
Bank Statements 3.95 1.045
Collateral Documents 4.40 0.791
List of Guarantees Proposed 3.91 1.065
Legal Documents 4.74 0.658
Table 5.5: Bank lending officers’ familiarity with accounting measurement concepts
Measurement concept Mean SD

Historical cost 3.56 1.333
Lower of cost or market value 4.05 1.045
Value in use 3.51 1.298
Fair value 3.77 1.130
Table 5.6: Bank lending officers’ preference for accounting measurement concepts
Measurement concept Mean SD

All assets and liabilities should be reported following the same
measurement concept 4.12 1.051
All assets and liabilities should be reported at fair value, with
historical cost information presented in the notes 3.63 1.155
All assets and liabilities should be reported at historical cost, with fair
value information presented in the notes 3.33 1.107
Assets and liabilities should be reported following different
measurement concepts, with the relevant measurement concept 3.00 1.175
depending on the nature of the asset or liability
Companies should be permitted to choose between alternative
2.93 1.242
measurement concepts for different classes of assets and/or liabilities
196
Table 5.7: Usefulness of accounting disclosure items in IFRS for SMEs
Chi- df Asymp.
No. Information Item Mean SD
Square a Sig.
Items 1-18: Statement of financial position (Balance Sheet)
1 Cash and cash equivalents 42.186 2 0.000*** 4.21 0.833
2 Trade and other receivables 74.419 2 0.000*** 4.49 0.668
3 Financial assets 50.000 2 0.000*** 4.16 0.754
4 Inventories 31.302 2 0.000*** 3.93 0.910
5 Property, plant and equipment measured at historical cost 9.116 2 0.010** 3.51 1.142
6 Investment property carried at fair value through profit or loss 14.698 2 0.001*** 3.53 0.984
7 Intangible assets 8.419 2 0.015** 3.53 1.202
8 Biological assets carried at cost less accumulated depreciation and impairment 3.535 2 0.171 3.16 1.194
9 Biological assets carried at fair value through profit or loss 2.419 2 0.298 3.16 1.045
10 Investments in associates carried at fair value through profit or loss 15.953 2 0.000*** 3.60 1.003
11 Investments in jointly controlled entities carried at fair value through profit or loss 4.233 2 0.120 3.30 1.013
12 Trade and other payables 39.093 1 0.000*** 4.40 0.541
13 Financial liabilities (except trade & other payables and provisions) 25.326 1 0.000*** 4.47 0.702
14 Liabilities and assets for current tax 5.628 2 0.060* 3.44 1.119
15 Deferred tax liabilities and deferred tax assets 6.186 2 0.045** 3.26 0.954
16 Provisions 21.256 2 0.000*** 3.72 1.008
17 Non-controlling interests, presented within equity separately from equity attributable to
19.023 2 0.000*** 3.16 0.754
the owners of the parent
18 Equity attributable to the owners of the parent 15.953 2 0.000*** 3.53 1.008
Items 19-25: Sub-classification of statement of financial position (Balance Sheet)
19 Property, plant and equipment in classifications appropriate to the entity 27.395 2 0.000*** 4.02 1.035
20 Trade and other receivables showing separately amounts due from related parties,
amounts due from other parties, and receivables arising from accrued income not yet 68.977 2 0.000*** 4.30 0.741
billed
21 Inventories, showing separately amounts of inventories:
a) held for sale in the ordinary course of business
b) in the process of production for such sale
20.837 2 0.000*** 3.60 0.623
c) in the form of materials or supplies to be consumed in the production
process or in the rendering of services
22 Trade and other payables, showing separately amounts payable to trade suppliers, payable
28.488 1 0.000*** 4.23 0.611
to related parties, deferred income and accruals
23 Provisions for employee benefits and other provisions 13.581 2 0.001*** 3.60 0.877
197
24 Classes of equity, such as paid-in capital, share premium, retained earnings and items of
37.023 2 0.000*** 3.93 0.985
income and expense
25 An entity with share capital, for each class of share capital:
a) the number of shares authorised
b) the number of shares issued and fully paid, and issued but not fully paid
c) par value per share, or that the shares have no par value
d) a reconciliation of the number of shares outstanding at the beginning and at
the end of the period 7.581 2 0.023** 3.47 1.054
e) the rights, preferences and restrictions attaching to that class including
restrictions on the distribution of dividends and the repayment of capital
f) shares in the entity held by the entity or by its subsidiaries or associates
g) shares reserved for issue under options and contracts for the sale of shares,
including the terms and amounts
Items 26-39: Income statement and statement of comprehensive income
26 Revenueb - - - 4.74 0.441
27 Finance costs 31.837 1 0.000*** 4.65 0.613
28 Share of the profit or loss of investments in associates 53.907 2 0.000*** 4.19 0.794
29 Share of the profit or loss of jointly controlled entities accounted for using the equity
45.953 2 0.000*** 3.88 1.028
method
30 Tax expense 24.744 2 0.000*** 3.81 1.006
31 A single amount comprising the total of:
a) the post-tax profit or loss of a discontinued operation, and
b) the post-tax gain or loss recognised on the measurement to fair value less 26.558 2 0.000*** 3.84 0.898
costs to sell or on the disposal of the net assets constituting the discontinued
operation
32 Profit or loss 39.093 1 0.000*** 4.81 0.450
33 Each item of other comprehensive income classified by nature 25.326 1 0.000*** 4.30 0.674
34 Share of the other comprehensive income of associates and jointly controlled entities
2.814 1 0.093* 3.77 0.684
accounted for by the equity method
35 Total comprehensive income 31.837 1 0.000*** 4.23 0.571
36 Profit or loss for the period attributable to:
a) non-controlling interest 17.628 2 0.000*** 3.65 0.783
b) owners of the parent
37 Total comprehensive income for the period attributable to:
a) non-controlling interest 14.000 2 0.001*** 3.53 0.767
198
38 An analysis of expenses using a classification based on the nature of expenses (e.g.
depreciation, purchases of materials, transport costs, employee benefits and advertising 12.302 1 0.000*** 4.16 0.785
costs) within the entity
39 An analysis of expenses using a classification based on the function of expenses (e.g. cost
8.395 1 0.004*** 4.07 0.799
of sales, cost of distribution or administrative activities) within the entity
Items 40-43: Statement of changes in equity and retained earnings
40 Total comprehensive income for the period, showing separately the total amounts
44.698 2 0.000*** 3.88 0.793
attributable to owners of the parent and to non-controlling interests
41 For each component of equity, the effects of retrospective application or retrospective
14.698 2 0.001*** 3.65 0.870
restatement recognised
42 For each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, separately disclosing changes resulting from:
a) profit or loss
b) each item of other comprehensive income
23.070 2 0.000*** 3.91 1.019
c) the amounts of investments by, and dividends and other distributions to,
owners, showing separately issues of shares, treasury share transactions,
dividends and other distributions to owners, and changes in ownership
interests in subsidiaries that do not result in a loss of control
43 In the statement of income and retained earnings:

a) retained earnings at the beginning of the reporting period
b) dividends declared and paid or payable during the period
41.349 2 0.000*** 4.09 0.840
c) restatements of retained earnings for corrections of prior period errors
d) restatements of retained earnings for changes in accounting policy
e) retained earnings at the end of the reporting period
Items 44-52: Cash flow statement

44 Cash flows for a reporting period classified by operating activities, investing activities and
63.674 2 0.000*** 4.47 0.797
financing activities
45 Cash flows from operating activities using: the indirect method, whereby profit or loss is
adjusted for the effects of non-cash transactions, any deferrals or accruals of past or future
33.535 2 0.000*** 4.19 0.982
operating cash receipts or payments, and items of income or expense associated with
investing or financing cash flows
46 Cash flows from operating activities using: the direct method, whereby major classes of
24.744 2 0.000*** 3.98 0.963
gross cash receipts and gross cash payments are disclosed
47 Major classes of gross cash receipts and gross cash payments arising from investing
22.372 2 0.000*** 3.98 0.988
activities
199
48 Major classes of gross cash receipts and gross cash payments arising from financing
49.163 2 0.000*** 4.26 0.902
activities
49 Cash flows arising from transactions in a foreign currency 15.953 2 0.000*** 3.72 1.098
50 Cash flows from interest and dividends received and paid 17.070 2 0.000*** 3.81 0.982
51 Cash flows arising from income tax 19.860 2 0.000*** 3.72 1.098
52 The amount of significant cash and cash equivalent balances held by the entity that are not
available for use by the entity (because of foreign exchange controls or legal restrictions, 19.860 2 0.000*** 3.79 1.013
etc.)
Items 53-56: Notes to the financial statements
53 A statement that the financial statements have been prepared in compliance with the
28.488 1 0.000*** 4.26 0.621
SLFRS for SMEs
54 A summary of significant accounting policies applied:
a) the measurement basis (or bases) used in preparing the financial
statements 8.395 1 0.004*** 3.91 0.684
b) the other accounting policies used that are relevant to an understanding
of the financial statements
55 The judgments, apart from those involving estimations, that management has made in the
process of applying the entity’s accounting policies and that have the most significant 16.953 1 0.000*** 4.12 0.697
effect on the amounts recognised in the financial statements
56 The key assumptions concerning the future, and other key sources of estimation
uncertainty at the reporting date, that have a significant risk of causing a material 14.535 1 0.000*** 4.14 0.743
adjustment to the carrying amounts of assets and liabilities within the next financial year
* Significant at p < 0.10, ** Significant at p < 0.05, ***Significant at p < 0.01
a
The obtained observations were reclassified as follows:
Value on Likert Scale New value assigned

1-2 1 Not Useful
3 2 Neutral
4-5 3 Useful
b
As this variable is constant (see Table 5.10, Q26), Chi-square test cannot be performed.
200
Table 5.8: The frequency percentage of responses on usefulness of accounting
disclosure items in Balance Sheet
Scalea Frequency Percent

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17 Q18
1 2.3 2.3 2.3 4.7 16.5 7 18.6 34.9 30.2 11.6 18.6 0 0 16.3 16.3 9.3 9.3 11.6
2 18.6 2.3 14 23.3 30.2 39.5 27.9 20.9 25.6 27.9 39.5 2.3 11.6 41.8 46.5 25.6 62.8 27.9
3 79.1 95.4 83.7 72 53.3 53.5 53.5 44.2 44.2 60.5 41.9 97.7 88.4 41.9 37.2 65.1 27.9 60.5
Total 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

disclosure items in Balance Sheet Sub-Classifications
Q19 Q20 Q21 Q22 Q23 Q24 Q25
1 7 4.7 2.3 0 7 7 14
2 23.3 2.3 39.5 9.3 44.2 16.3 39.5
3 69.7 93 58.2 90.7 48.8 76.7 46.5
Total 100 100 100 100 100 100 100

disclosure items in Income Statement and Comprehensive Income
Q26 Q27 Q28 Q29 Q30 Q31 Q32 Q33 Q34 Q35 Q36 Q37 Q38 Q39
1 0 0 4.7 16.3 7 9.3 0 0 0 0 4.7 9.3 0 0
2 0 7 9.3 2.3 25.6 20.9 2.3 11.6 37.2 7 39.5 34.9 23.3 27.9
3 100 93 86 81.4 67.4 69.8 97.7 88.4 62.8 93 55.8 55.8 76.7 72.1
Total 100 100 100 100 100 100 100 100 100 100 100 100 100 100

disclosure items in Statement of Changes in Equity and Retained Earnings
Q40 Q41 Q42 Q43
1 9.3 7 11.6 4.7
2 9.3 39.5 20.9 16.3
3 81.4 53.5 67.5 79
Total 100 100 100 100
201
disclosure items in Cash Flow Statement
Q44 Q45 Q46 Q47 Q48 Q49 Q50 Q51 Q52
1 4.7 7 7 7 7 11.6 9.3 14 14
2 4.7 18.6 25.6 27.9 9.3 27.9 30.2 20.9 20.9
3 90.6 74.4 67.4 65.1 83.7 60.5 60.5 65.1 65.1
Total 100 100 100 100 100 100 100 100 100

disclosure items in Notes to the Financial Statements
Q53 Q54 Q55 Q56
1 0 0 0 0
2 9.3 27.9 18.6 20.9
3 90.7 72.1 81.4 79.1
Total 100 100 100 100
Table 5.14: Profile of the interviewees
Bank Number of Average Age (mean)

Interviewees Experience in SME
Lending (in years)
A 4 10.20 45
B 6 9.67 37
C 4 10.75 45
D 5 7 45
Total 19 9.31 42
Figure 5.1: Conceptual framework for assessing the decision-usefulness of IFRS for SMEs
on bank lending decisions
Disclosure Perspective
Reduced Disclosure
Requirements
Decision Usefulness for Bank

IFRS FOR SMEs SME Financial Lending
Statements Borrowers’ Creditworthiness
Banks’ Credit Risk
Measurement Perspective
Simplified Measurement
Concepts and Recognition
Requirements
202
CHAPTER 6
Summary and Conclusions
203
6.0 INTRODUCTION
The aim of this thesis was to undertake a comprehensive examination of some controversial
issues challenging the adoption of IFRS for SMEs and suggest possible ways to address
these issues. In particular, four research projects were undertaken to address the four
objectives of this thesis. Paper 1 presented extensive insights on the adoption of IFRS for
SMEs, including the development and implementation process of the standard. Paper 2
provided empirical evidence on how well accountants are able to distinguish between the
recognition and measurement principles of full IFRS and IFRS for SMEs, independent of
their prior understanding of full IFRS when they interpret and apply IFRS for SMEs. Paper
3 provided empirical evidence on whether the reduced guidance in IFRS for SMEs has a
significant impact on the judgments of accountants when they interpret and apply these
standards. Paper 4 provided empirical evidence on bank lending officers’ perceptions of
the decision usefulness of financial statements prepared in compliance with IFRS for SMEs
on their lending decisions.
This chapter is organized as follows. Section 6.1 presents the summary and implications
of each of the four papers. Section 6.2 summarises the overall conclusions and implications
drawn from the entire thesis. Section 6.3 outlines the limitations of this thesis together with
the suggestions for future research.
6.1 SUMMARIES AND IMPLICATIONS OF THE INDIVIDUAL STUDIES
Paper 1: Issues in the Adoption of International Financial Reporting Standards (IFRS)

for Small and Medium-Sized Enterprises (SMEs)
The objective of this study was to carry out a comprehensive examination of the adoption
of IFRS for SMEs, including the development and implementation processes of the
standard. The study indicated that IFRS for SMEs have been a challenge for non-publicly
accountable entities to adopt due to several conceptual and practical issues pertaining to
IFRS for SMEs. The investigations on the development process of the standard revealed
that the IASB has not adequately addressed the user orientation during the standard setting
process of IFRS for SMEs. The study showed that the inadequate user involvement in the
204
accounting standard process may impair the decision usefulness of accounting information
for users.
The study revealed numerous implementation issues pertaining to the standard as denoted
by the countries which have adopted and those which are opposed to the adoption of IFRS
for SMEs. The study showed that countries opposed to the adoption have identified many
problems with IFRS for SMEs, including the perceived burden for small and micro-
entities, inconsistency with reporting frameworks at national level and difficulties in the
adoption process. The study indicated that the inconsistency between the IASB definition
of SMEs and different definitions adopted by countries to define SMEs poses difficulties
in implementing the standard. Furthermore, technical difficulties inherent in certain
sections of IFRS for SMEs and their potential complexity in the preparation of financial
statements were also evidenced. Especially, the study revealed that the lack of availability
of capital market information and differences in the liquidity of capital markets are
challenging when applying the fair value measurement requirements in IFRS for SMEs.
The study further revealed that the simplification in recognition and measurement
requirements of IFRS for SMEs, such as the requirement to expense all borrowing costs to
a profit and loss account significantly impact the financial performance of SMEs.
The study showed that the requirement to fall back to full IFRS in the absence of adequate
guidance in IFRS for SMEs may result in inconsistent application of the standard. The
analysis further showed that the differential reporting framework may create inconsistency
in the true and fair view principle among entities in the same jurisdiction. Overall, the study
stresses that the exaggeration on the simplification of accounting principles and difficulties
involved in the implementation of the standard may hinder achieving the IASB’s objective
of enhancing international access to finance through high quality and comparable financial
information, and the expected benefits may not transfer effectively to the SMEs.
The analyses and insights provided by this study will have implications for the revision of
IFRS for SMEs, especially when the IASB carries out the next review of IFRS for SMEs
and formulates future amendments to the standard. The findings will also assist in avoiding
or minimising future complications in the adoption of IFRS for SMEs. The analyses also
provide important insights for prospective countries that are planning to adopt an
international set of standards in their jurisdictions.
205
Paper 2: Confirmation Bias in the Reporting Judgments of Accountants When Applying
International Financial Reporting Standards (IFRS) For Small and Medium-
Sized Enterprises (SMEs)
This study investigated one of the perceived complications associated with the simplified
recognition and measurement principles of IFRS for SMEs. Employing a behavioural
experimental approach with a sample of accountants from a country that has adopted IFRS
for SMEs, the primary objective of this study was to investigate the effect of confirmation
bias arising from prior knowledge and beliefs about full IFRS on the reporting judgments
of accountants when applying IFRS for SMEs. Additionally, the study examined the role
that judgment justification requirements and the availability of decision aids play in
mitigating the confirmation bias that arises from prior knowledge and beliefs on full IFRS.
The results substantiate the notion that accountants who have a tendency to confirm prior
knowledge and beliefs about full IFRS are unlikely to choose the accounting treatment that
best reflects the economic substance of a transaction when applying IFRS for SMEs. The
results further demonstrate that (1) inducing a form of justification requirement and (2)
providing an appropriately designed decision aid that makes a clear distinction between
the recognition and measurements principles of full IFRS and IFRS for SMEs can
eliminate the confirmation bias associated with prior knowledge and beliefs about full
IFRS. Overall, the study concludes that SMEs will reap the benefits of compliance with
IFRS for SMEs only when the financial statement preparer’s mindset shifts and they accept
IFRS for SMEs as a stand-alone set of standards.
This study contributes to a wide range of the accounting community in several ways. The
findings of this study indicate that applying two different versions of accounting standards
in the same jurisdiction (i.e., the differential reporting framework) may lead to
inconsistency in the application of IFRS for SMEs, thus hindering the comparability of
financial information across entities. The study suggests the need to enhance accountants’
awareness of the differences between full IFRS and IFRS for SMEs to overcome biases in
judgments and to enhance the reporting quality and the comparability of accounting
information. Such findings will be of interest to the accounting standard setters and
regulatory bodies who wish to minimise these complications in the future. The findings of
this study also encourage additional investments in accounting education and training to
206
increase accountants’ knowledge, understanding and expertise in the application of IFRS
for SMEs which will be of interest to the accounting policy makers and accounting
educators in countries adopting IFRS for SMEs.
Paper 3: The Impact of the Reduced Guidance in International Financial Reporting

This study investigated the impact of the reduced guidance in IFRS for SMEs on the
reporting judgments of accountants. Using an experiment with a sample of accountants
from a country that has adopted IFRS for SMEs, this study primarily explored whether the
reduced guidance provided in IFRS for SMEs is adequate for making accurate reporting
judgments for SMEs. The study further investigated the effectiveness of examples
provided as guidance on the reporting judgments of accountants. The relative effectiveness
of explicit guidance and the examples for making accurate reporting judgments was also
examined.
The results substantiate the notion that accountants who refer to the reduced guidance in
IFRS for SMEs are unlikely to choose the accounting treatment that best reflects the
economic substance of a transaction than accountants who refer to detailed guidance in full
IFRS. The findings further reveal that accountants tend to overstate the similarities
presented in the examples, biasing their judgments towards the treatment illustrated in the
examples. The results indicate that explicit guidance is not relatively more effective than
examples when limited explicit guidance is available for making reporting judgments. The
study further reveals that accountants receiving a combination of examples and explicit
guidance make significantly more accurate judgments than accountants receiving IFRS for
SMEs guidance or examples alone. Overall, the study stresses that the guidance provided
in IFRS for SMEs is insufficient for making sound reporting judgments and impairs the
accuracy of the reporting judgments of accountants. In line with prior research, the study
confirms that the directional effects of examples potentially influence the accuracy of the
judgments. As such, the study concludes that examples cannot be considered as effective
guidance when presented alone.
207
The findings of the study suggest that the IASB’s objective of comparability of SME
financial information can be improved by providing sufficient guidance on appropriate
accounting treatments in IFRS for SMEs. The additional implementation guidance has to
be provided in order to avoid confusion and complications in applying IFRS for SMEs.
The findings also suggest that the IASB may need to reconsider the inclusion of similar
accounting measurement and recognition principles of full IFRS in IFRS for SMEs to
improve the comparability of SME financial information. The study also brings to the
attention that particular care has to be taken when incorporating examples in the accounting
standards. Overall, the findings of this study will be of interest to the IASB when shaping
the optimal format of accounting standards.
Paper 4: User Perceptions of the Decision Usefulness of Financial Statements prepared

in compliance with International Financial Reporting Standards (IFRS) for
This study examined bank lending officers’ perceptions of the decision usefulness of
financial statements prepared in compliance with IFRS for SMEs on SME lending
decisions. The focus of the study was mainly on two aspects of the simplification of IFRS
for SMEs: (1) the decision usefulness of the reduced disclosure requirements of IFRS for
SMEs and (2) the decision usefulness of the simplified recognition and measurement
requirements of IFRS for SMEs.
The study provides evidence that the disclosure requirements of IFRS for SMEs are useful
for lending decisions for SMEs. The study also provides evidence that bank lending
officers do not consider that the simplification in the recognition and measurement
requirements of IFRS for SMEs significantly improves their lending decisions. The
findings make it apparent that banks, as one of the major user groups of SME financial
information, are in a position to demand the information they need, thus they do not see
any major issues with the simplification in recognition and measurement requirements.
Further, the findings indicate that as IFRS for SMEs is a new standard, banks have limited
awareness and experience in interpreting IFRS for SMEs-based financial reports. In
general, the findings suggest that bank lending officers have limited interest in information,
such as accounting basis, on which the financial statements are prepared.
208
The findings of this study provide important insights to the accounting regulators,
including the IASB, for evaluating the successful implementation of IFRS for SMEs and
planning the next review of IFRS for SMEs. Further, the findings signify the need for user
involvement in the standard setting process, particularly when future amendments are
made to the standard. The findings further brought to attention that raising awareness
among the different user groups of SME financial statements about the accounting
standards and their simplifications is timely and essential. This study also contributes to
the limited literature on the accounting information needs of the users of SME financial
statements.
6.2 OVERALL CONCLUSIONS AND FURTHER IMPLICATIONS
Motivated by the growing demand for empirical evidence on the adoption and
implementation of IFRS for SME, this thesis conducted a comprehensive examination of
controversial issues pertaining to the adoption of IFRS for SMEs. Exploring empirical
evidence from countries that have adopted IFRS for SMEs, this thesis provided evidence
that IFRS for SMEs in its present state poses intense challenges for the consistent
interpretation and application of the standard.
The IASB’s primary intention of the simplified stand-alone set of standards was to reduce
the SME financial reporting burden associated with compliance with full IFRS. The IASB
has also placed great emphasis on enhancing the comparability of SME financial
information with the adoption of IFRS for SMEs. The findings of this thesis suggest that
the overemphasis given to simplification in recognition and measurement requirements
and guidance are perceived to be challenging for SMEs, particularly when accountants
exercise professional judgment. As the principles-based IFRS require extensive application
of professional judgment, the differential reporting framework has led to complications in
interpretation and application of the standard. Particularly, the findings of this thesis
revealed that the preparers’ judgments under IFRS for SMEs requirements are vulnerable
to judgmental biases and inconsistent application of the standards, which may hinder the
objective of comparability of financial information across the SMEs, and impair the
financial reporting quality. Overall, from the perspective of preparers of SME financial
209
statements, this thesis concludes that preparers are unable to perceive IFRS for SMEs as a
stand-alone set of standards.
From the user perspective of IFRS for SMEs, the findings of this thesis indicate that IFRS
for SMEs generally satisfy the accounting information needs of users. Even though the
simplification in IFRS for SMEs is not appealing to a great extent, users prefer that all
SMEs prepare their financial statements in a uniform way, therefore, users perceive IFRS
for SMEs as a positive step towards improving the accounting information needs of the
users.
A number of policy implications derived from this thesis will be of interest to the IASB,
accounting regulators, policy makers and accounting educators in countries adopting IFRS
for SMEs. First, because of the principles-based nature and increasing application of
professional judgment in IFRS for SMEs, the findings of this thesis stress the need to
increase preparers’ awareness of IFRS for SMEs in order to ensure effective
communication of the standard. High quality financial reporting is essential for reducing
information asymmetry and enhancing greater transparency in the economics of an
organization. More specifically, the findings of this thesis foster investments in accounting
education and training to improve accountants’ knowledge and expertise in the effective
application of IFRS for SMEs. Such investments may help overcome judgmental bias and
the interpretation difficulties associated with IFRS for SMEs. Second, the findings
concerning the reduced guidance in IFRS for SMEs have potential implications when the
IASB contemplates future amendments to the standard and when shaping the optimal
format of IFRS for SMEs. The implication of this for accounting educators is the
importance of helping students to learn reasoning and the application of unbiased
judgment, and applying the guidelines of IFRS for SMEs appropriately.
Third, the findings relating to user perceptions of the decision usefulness of IFRS for SMEs
suggest to the accounting standards setters and accounting regulatory bodies at the
individual jurisdiction level to increase users’ awareness of simplified IFRS for SMEs. For
accounting information to be decision useful, it must be clear, concise and comparable
across entities. Increasing awareness of the differences in the recognition and measurement
requirements of full IFRS and in IFRS for SMEs may avoid confusion and improve users’
decision-making processes by enhancing users’ confidence about the allocation of
210
resources (particularly on investment and lending decisions). Such benefits will eventually
pass on to the SMEs, and ultimately, this will help in strengthening the economic output
of many economies.
Fourth, the findings concerning users’ preference for the application of the same
measurement principles across all entities indicates that the measurement principles should
be independent of the nature of the entities and their users. Such findings substantiate the
need for user involvement in the standard setting process. User involvement in the standard
setting process would help to gauge the responses of the user groups, their interests and
their eventual acceptance of the standard. Even though user involvement in the accounting
standard process has been an on-going debate since IFRS for SMEs came into effect, the
IASB’s attempt to increase user involvement for the next review of IFRS for SMEs also
indicates that an appropriate level of user representation is needed for accounting standard
setting. Such attempts may accomplish the decision-usefulness objective of accounting by
providing useful and relevant accounting information for the economic decision making of
users.
Overall, the outcomes of this thesis give some indication that IFRS for SMEs in its present
state have been unable to convey the benefits to SMEs as anticipated by the IASB. The
findings of this thesis encourage the implementation of the reduced disclosure regime,
allowing financial reporting of SMEs to be less complex by providing certain exemptions
from the disclosures but retaining similar recognition and measurement principles that are
contained in the full set of IFRS. This approach will move all listed and non-listed entities
towards the preparation of general purpose financial statements by increasing consistency
and transparency whilst upholding the relevance of the financial statements to the users.
This approach may also spread the adoption of IFRS for SMEs further by attracting many
developed and developing countries which regarded the differences in the simplification
of accounting policies and principles in full IFRS and IFRS for SMEs as a significant
barrier to its adoption.
211
6.3 LIMITATIONS AND SUGGESSIONS FOR FUTURE RESEARCH
This thesis has some limitations and the findings of this study should be evaluated in light
of these limitations. This study has used both exploratory and experimental research
approaches to examine the issues in the adoption of IFRS for SMEs. While there are
numerous benefits of using these approaches in research, certain drawbacks also need to
be acknowledged.
First, the use of the exploratory research approach has its own limitations. In analysing the
findings on the issues in the adoption of IFRS for SMEs (Chapter 2), the study was limited
to prior studies that reported on the transformation of the full set of IFRS, IFRS for SMEs,
and recent information published by the IFRS Foundation and prominent professional
accounting bodies on the implementation of IFRS for SMEs. The use of secondary research
sources, such as prior literature and discussions, may be susceptible to interpreter bias and
limit generalizability. However, attempts were made to overcome certain drawbacks by
collecting as many relevant materials as possible and using theoretical frameworks to
interpret the data. In order to enhance generalizability, future research could be undertaken
in various jurisdictions to reveal the actual implementation difficulties and issues
encountered at the country and/or regional level in the adoption of IFRS for SMEs. From
the perspective of those countries that have already adopted the new standard, future
studies could also investigate the cost-benefit considerations of IFRS for SMEs.
Second, even though experimental research provides robust causal interpretational

evidence (Libby, Bloomfield, & Nelson, 2002), the simulated results may not be
generalized into real-world situations. In an actual accounting environment, accountants
have incentives for vigilant information processing and their behaviour is not observed as
in the experimental setting. Additionally, the experimental research designs are usually
contrived scenarios that do not absolutely represent the events and incidents that happen
in the real world, and also experiments usually have to be limited to one situation or
condition. In this thesis, the experiment on confirmation bias in reporting judgments was
examined across the recognition of revenues decision context (Chapter 3), and the impact
of the reduced guidance on the reporting judgment of accountants was examined across
the recognition of investments in an associate decision context (Chapter 4). However, in
212
this thesis, numerous steps were followed to ensure valid research outcomes and to enhance
the generalizability of the findings, such as (1) the application of psychological theories to
predict the outcomes of the effects, (2) attempting to design scenarios that mimic actual
accounting incidences, (3) extensive pilot testing of the research instruments, (4) careful
selection of relevant samples and sample sizes and (5) the use of appropriate statistical
techniques for data analysis. To broaden the generalizability of the results of this thesis,
future studies could explore the impact of simplified recognition and measurement
requirements and the reduced guidance of IFRS for SMEs in other decision contexts and
their impact on the reporting decisions of financial statement preparers.
Third, this thesis only considered judgment justification and decision aids as the factors
moderating confirmation bias in reporting judgments. Future research could also explore
other factors and alternative decision aids, such as worked examples on improving
judgment and decision making performance of accountants. Future studies could also
examine why there are varying levels of confirmation bias among the preparers of financial
statements and how this relates to the different cognitive strategies preparers may develop
in the context of applying IFRS for SMEs. Additionally, the findings of this thesis call for
further empirical research to explore the reasons why the preparers of financial statements
are not yet prepared to accept IFRS for SMEs as a stand-alone set of standards. Fourth,
the accountants who participated in the experiments of this thesis received no incentives
to influence their reporting judgments. Future studies could examine how judgmental bias
could be avoided when accountants are presented with explicit incentives for accurate
reporting.
Fifth, evaluating the user perceptions of the decision usefulness of IFRS for SMEs from
one user group of SME financial statements will not represent the perceptions of different
user groups, thus limiting the generalizability of the findings. The findings of this thesis
provide an avenue for future research to investigate the perceptions of other stakeholders,
such as creditors and tax authorities, on the decision usefulness of IFRS for SMEs.
Finally, the empirical studies of this thesis were carried out only at two jurisdictions (Fiji
and Sri Lanka) that have adopted IFRS for SMEs. For this reason, the findings cannot be
generalized to the broader community based on this thesis alone. As the IASB continues
monitoring the implementation experience and the need to make amendments to the
213
standard, the findings of this thesis warrant future research that could attempt to replicate
the findings with respect to other countries that have adopted or opted for the adoption of
IFRS for SMEs.
214
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232

APPENDIX 1

Ethics Approval Letters
233
234
9/25/2015 Macquarie University Student Email and Calendar Mail - Approved - 5201300592
KALUTHANTHRIGE PERERA <kaluthanthrige.perera@students.mq.edu.au>
Approved 5201300592
Mrs Yanru Ouyang <yanru.ouyang@mq.edu.au> Fri, Sep 27, 2013 at 8:49 AM
To: Mr Parmod Chand <parmod.chand@mq.edu.au>
Cc: Dr Rajni Mala <rajni.mala@mq.edu.au>, Mrs Dinuja Dona Dinuja Perera
<kaluthanthrige.perera@students.mq.edu.au>
Dear Mr Chand,
Re: 'Factors affecting professional judgment of accountants.'
Reference No.: 5201300592
Thank you for your recent correspondence. Your response has addressed the
issues raised by the Faculty of Business & Economics Human Research Ethics
Sub Committee. Approval of the above application is granted, effective
"27/09/2013". This email constitutes ethical approval only.
This research meets the requirements of the National Statement on Ethical
Conduct in Human Research (2007). The National Statement is available at
the following web site:
http://www.nhmrc.gov.au/_files_nhmrc/publications/attachments/e72.pdf.
The following personnel are authorised to conduct this research:
Dr Rajni Mala
Mr Parmod Chand
Mrs Dinuja Dona Dinuja Perera
NB. STUDENTS: IT IS YOUR RESPONSIBILITY TO KEEP A COPY OF THIS APPROVAL
EMAIL TO SUBMIT WITH YOUR THESIS.
Please note the following standard requirements of approval:
1. The approval of this project is conditional upon your continuing
compliance with the National Statement on Ethical Conduct in Human Research
(2007).
2. Approval will be for a period of five (5) years subject to the provision
of annual reports.
Progress Report 1 Due: 27th Sep. 2014
Final Report Due: 27th Sep. 2018
NB. If you complete the work earlier than you had planned you must submit
a Final Report as soon as the work is completed. If the project has been
discontinued or not commenced for any reason, you are also required to
submit a Final Report for the project.
Progress reports and Final Reports are available at the following website:
http://www.research.mq.edu.au/for/researchers/how_to_obtain_ethics_approval/
human_research_ethics/forms
3. If the project has run for more than five (5) years you cannot renew
235
https://mail.google.com/mail/u/2/?ui=2&ik=5e520d4e2b&view=pt&q=yanru&qs=true&search=query&msg=1415c76c1890c4dc&siml=1415c76c1890c4dc 1/2
approval for the project. You will need to complete and submit a Final
Report and submit a new application for the project. (The five year limit
on renewal of approvals allows the Committee to fully re-review research in
an environment where legislation, guidelines and requirements are
continually changing, for example, new child protection and privacy laws).
4. All amendments to the project must be reviewed and approved by the
Committee before implementation. Please complete and submit a Request for
Amendment Form available at the following website:
5. Please notify the Committee immediately in the event of any adverse
effects on participants or of any unforeseen events that affect the
continued ethical acceptability of the project.
6. At all times you are responsible for the ethical conduct of your
research in accordance with the guidelines established by the University.
This information is available at the following websites:
http://www.mq.edu.au/policy/
human_research_ethics/policy
If you will be applying for or have applied for internal or external
funding for the above project it is your responsibility to provide the
Macquarie University's Research Grants Management Assistant with a copy of
this email as soon as possible. Internal and External funding agencies will
not be informed that you have approval for your project and funds will not
be released until the Research Grants Management Assistant has received a
copy of this email.
If you need to provide a hard copy letter of approval to an external
organisation as evidence that you have approval, please do not hesitate to
contact the FBE Ethics Committee Secretariat, via fbe-ethics@mq.edu.au or
9850 4826.
Please retain a copy of this email as this is your official notification of
ethics approval.
Yours sincerely,
Parmod Chand
Chair, Faculty of Business and Economics Ethics Sub-Committee
Faculty of Business and Economics
Level 7, E4A Building
Macquarie University
NSW 2109 Australia
T: +61 2 9850 4826
F: +61 2 9850 6140
www.businessandeconomics.mq.edu.au/
236
https://mail.google.com/mail/u/2/?ui=2&ik=5e520d4e2b&view=pt&q=yanru&qs=true&search=query&msg=1415c76c1890c4dc&siml=1415c76c1890c4dc 2/2
Approved 5201400850
Mrs Yanru Ouyang <fbe-ethics@mq.edu.au> Fri, Sep 26, 2014 at 10:05 AM
Cc: Mrs Rajni Mala <rajni.mala@mq.edu.au>, Mrs Dinuja Dona Dinuja Perera
Dear Mr Chand,
Re: 'The Impact of Reduced Guidance in International Financial Reporting
Professional Judgments of Accountants.'
Thank you for your recent correspondence. Approval of the above application
is granted, effective "26/09/2014". This email constitutes ethical approval
only.
Mr Parmod Chand
Mrs Rajni Mala
(2007).
of annual reports.
Progress Report 1 Due: 26 September 2015
Final Report Due: 26 September 2019
237
https://mail.google.com/mail/u/2/?ui=2&ik=5e520d4e2b&view=pt&q=yanru&qs=true&search=query&msg=148af46e7c97b0e0&siml=148af46e7c97b0e0 1/2
copy of this email.
9850 4826.
ethics approval.
Yours sincerely,
Nikola Balnave
ActingChair, Faculty of Business and Economics Ethics Sub-Committee
NSW 2109 Australia
T: +61 2 9850 4826
F: +61 2 9850 6140
238
https://mail.google.com/mail/u/2/?ui=2&ik=5e520d4e2b&view=pt&q=yanru&qs=true&search=query&msg=148af46e7c97b0e0&siml=148af46e7c97b0e0 2/2
Approved 5201401179
Mrs Yanru Ouyang <fbe-ethics@mq.edu.au> Tue, Dec 9, 2014 at 11:35 AM
Cc: Mrs Rajni Mala <rajni.mala@mq.edu.au>, Mrs Dinuja Dona Dinuja Perera
Dear Mr Chand,
Re: 'Users' Perceptions on the Decision Usefulness of the Financial
Statements prepared under International Financial Reporting Standards
(IFRS) for Small and Medium-Sized Enterprises (SMEs).'
Thank you for your recent correspondence. Your response has addressed the
issues raised by the Faculty of Business & Economics Human Research Ethics
Sub Committee. Approval of the above application is granted, effective
"9/12/2014". This email constitutes ethical approval only.
Mr Parmod Chand
Mrs Rajni Mala
(2007).
of annual reports.
Progress Report 1 Due: 9th Dec 2015
Final Report Due: 9th Dec 2019
239
https://mail.google.com/mail/u/2/?ui=2&ik=5e520d4e2b&view=pt&q=yanru&qs=true&search=query&msg=14a2c78d403e3aa4&siml=14a2c78d403e3aa4 1/2
copy of this email.
9850 4826.
ethics approval.
Yours sincerely,
Parmod Chand
Chair, Faculty of Business and Economics Ethics Sub-Committee
NSW 2109 Australia
T: +61 2 9850 4826
F: +61 2 9850 6140
240
https://mail.google.com/mail/u/2/?ui=2&ik=5e520d4e2b&view=pt&q=yanru&qs=true&search=query&msg=14a2c78d403e3aa4&siml=14a2c78d403e3aa4 2/2
APPENDIX 2

Research Instrument – Paper 2

(Version 1 – No Justification Requirement and No Guidance)
241
242
Department of Accounting and Corporate Governance
Macquarie University NSW 2109
Phone: +61 2 9850 6137
Fax: +61 2 9850 8497
Email: parmod.chand@mq.edu.au
Supervisors: Dr Parmod Chand and Dr Rajni Mala
You are invited to participate in a study of judgment in accounting. The purpose of this study is to examine the
factors affecting professional judgment of accountants when they interpret and apply the Sri Lankan Financial
Reporting Standards (SLFRS) for Small and Medium-Sized Enterprises (SMEs), the equivalent of International
Financial Reporting Standards (IFRS) for SMEs.
The study is being conducted by Dinuja Perera [Department of Accounting and Corporate Governance,
dinuja.perera@mq.edu.au, Ph: (61) 414 729 623]. It is being conducted to meet the requirements of Doctor of
Philosophy in Accounting and Corporate Governance under the supervision of Dr Parmod Chand
[parmod.chand@mq.edu.au, Ph: (612) 9850 6137] and Dr Rajni Mala [rajni.mala@mq.edu.au, Ph: (612) 9850 8530]
of the Department of Accounting and Corporate Governance, Macquarie University, NSW, Australia.
If you decide to participate, you will be asked to complete the questionnaire. The questionnaire is in two parts. Part
one collects demographic data about the respondents. Part two consists of a small case study, and you are asked to
provide your judgment on a scenario concerning a problem regarding appropriate financial reporting. It will take
approximately 20-25 minutes to complete the questionnaire.
It is not expected in this study to gather information that represents your views about your work organization or
institution, hence, you are not considered as a representative of your work organization or institution. Any
information or personal details gathered in the course of the study are confidential, except as required by law. No
individual will be identified in any publication of the results. Data will be analysed in aggregate form, held and
accessed solely by the researchers (Dr Parmod Chand, Dr Rajni Mala and Dinuja Perera) and will not be used for any
other purpose. The results of this study will be incorporated into Dinuja Perera’s PhD thesis, which will be available
at the Macquarie University Library for public access. A summary of the results of the data can be made available to
you on request by emails to the researchers.
It would be greatly appreciated if you could please complete the attached questionnaire. Your time and co-operation
in this study will be greatly appreciated. Participation in this survey is entirely voluntary and if you do not wish to
participate you may simply not return the questionnaire. Completion and return of the questionnaire will be regarded
as consent to use the information for research purposes.1 You may contact Mr Chaminda Ruwan Thilakarathne [Ph:
(94) 112 903 654] in relation to any ethical concerns about this study.
Please answer all questions. Your response is very important for the research which will contribute to
understanding factors affecting professional judgment of accountants when interpreting and applying IFRS for
SMEs.
1
The ethical aspects of this study have been approved by the Macquarie University Human Research Ethics
Committee. If you have any complaints or reservations about any ethical aspect of your participation in this
research, you may contact the Committee through the Director, Research Ethics (telephone [02] 9850 7854, email:
ethics@mq.edu.au). Any complaint you make will be treated in confidence and investigated, and you will be
informed of the outcome.
243
Section 1
YOUR PERSONAL PROFILE
Please respond to the following questions so that a profile for respondents can be developed.
1. Are you: Male Female
2. How old are you?
Under 20 years 20-24 25-29 30-34 35-39 40-49 50-59 60 or over

3. In total, how many years of formal education (primary, secondary and tertiary) did you complete?
Less than 15 years 15 years 16 years 17 years 18 years or over

4. In which country did you complete your:
Primary education ___________ Secondary education ______________ Tertiary education ___________
5. Are you a member of: ICASL ____________

Other (please specify)
6. How many years of professional experience do you have as a qualified accountant? _______ Years
7. In which of the following areas do you specialize or work?
___________
Accounting Audit Tax Consulting Other (please specify)
8. In which type of firm/organization do you work?
____________
Big 4 Accounting Firm Non-Big 4 Accounting Firm SME (Small & Medium-sized Entity) Other(please specify)
9. How large (in terms of qualified professional accountants) is the firm/organization in which you work?
1-5 6-20 21-100 Over 100

10. How familiar are you with Sri Lankan Financial Reporting Standards (SLAS) equivalents of IASs/IFRSs?
Very familiar Familiar Somewhat familiar Not familiar
11. How frequently do you refer to SLAS equivalents of IASs/IFRSs in your professional practice?
Often Sometimes Seldom Never

12. How familiar are you with SLFRS for SMEs equivalents of IFRS for SMEs?

13. How frequently do you refer to SLFRS for SMEs equivalents of IFRS for SMEs in your professional
practice?
244
Section 2
CASE STUDY
Below is a scenario and requires a judgment regarding the appropriate method of financial
reporting. Please note that by indicating that you agree (or disagree) with the proposed
accounting treatment, you will be understood to be disagreeing (or agreeing) with the other
treatment. You may refer to the accounting standards in making your judgments.
You are asked to provide a judgment on the matter by providing a response on the scale 1
to 7 (please indicate by circling the relevant number).
The required judgment is based on SLFRS for SMEs equivalent of IFRS for SMEs.
Before attempting the case study provided on the next page, please indicate the extent to
which you apply your prior knowledge of SLAS (Sri Lankan Financial Reporting Standards)
when interpreting and applying the newly issued SLFRS for SMEs on the following scale.
Not at all To Some Extent To a Great Extent

1 2 3 4 5 6 7
245
Case - Recognition of Revenue
“Dream Homes Real Estate” is a medium-sized non-listed company which engages in

developing residential real estate and selling individual apartments. During its 10 years of
successful business operations, Dream Homes has established an excellent record of being able
to fulfill its obligations towards its customers as contracted. The company now prepares the
financial statements in accordance with SLFRS for SMEs equivalent of IFRS for SMEs, and the
company’s financial year ends on 30th June.
At the beginning of 2013, Dream Homes purchased a new plot of land for the construction of
individual apartments. It designed an apartment complex to be built on the land and submitted
the designs to planning authorities in order to obtain building permissions. Once the designs
were approved, Dream Homes started marketing the individual apartments. A buyer entered into
an agreement with Dream Homes on 15th January 2013 for the sale of land and the construction
of a two bedroom apartment in one of the land plots in the proposed apartment complex. The
estimated purchase price of the apartment is LKR 15,000,000. The agreement prohibits the
company from transferring the apartment to another customer. Dream Homes acquires all
materials required for the construction from its subsidiary company Global Materials Private
Limited. The estimated purchase price does not include any interior designing elements of the
apartment. The apartment will be ready for occupation by 30th November 2013.
The buyer paid a non-refundable upfront deposit of LKR 2,000,000 on the agreement date for
the construction. The buyer is also required to make three progress payments at three stages of
completion, between the time of the initial agreement and contractual completion. These
progress payments are designed to compensate the company for its performance to date. The
buyer is able to specify only minor variations to the basic design. The agreement gives buyer the
right to consult and contract with his own interior designers for arranging the interior designing
components for each completed elements of the apartment over time. The company is
responsible for remedying any minor construction defects detected before the contractual
completion. The legal title of the apartment is passed to the buyer on contractual completion.
The company now has to decide whether to recognize revenue of this construction agreement
using either stage of completion using the percentage of completion method or the completed
contract method (i.e. on delivery of the completed real estate to the buyer at the end of the
contract).
The Accountant “Y” who works for Dream Homes Real Estate holds the view that “the company
can recognize the revenue of this construction agreement by reference to the stage of completion
using the percentage of completion method as construction of this apartment progresses”.
Record your judgment on Accountant Y’s view that the company can recognize the revenue of
this agreement using the percentage of completion method.
Case Strongly Strongly
Disagree Agree
Judgment 1 2 3 4 5 6 7
246
Please place a tick in the appropriate box where 1 denotes that the recognition criterion was
irrelevant and 10 denotes that the criterion was relevant in making the above judgment.
Criteria Irrelevant Relevant
1. If the entity is required to provide services together 1 2 3 4 5 6 7 8 9 10
with construction materials in order to perform its
contractual obligation to deliver the real estate to the
buyer, the agreement is an agreement for the sale of
goods and the criteria for recognition of revenue apply.
2. In an agreement for the sale of goods the entity may 1 2 3 4 5 6 7 8 9 10
transfer to the buyer control and the significant risks and
rewards of ownership of the work in progress in its
current state as construction progresses.
3. In an agreement for the sale of goods if all criteria for 1 2 3 4 5 6 7 8 9 10
recognition of revenue are met continuously as
construction progresses, the entity shall recognise
revenue by reference to the stage of completion using the
percentage of completion method.
4. An entity that undertakes the construction of real estate 1 2 3 4 5 6 7 8 9 10
and enters into an agreement with one or more buyers
before construction is complete, shall account for the
agreement as a sale of services, using the percentage of
completion method if the buyer is able to specify the
major structural elements of the design of the real estate
before construction begins and/or specify major structural
changes once construction is in progress.
5. The entity retains neither continuing managerial 1 2 3 4 5 6 7 8 9 10
involvement to the degree usually associated with
ownership nor effective control over the goods sold.
6. If the entity is required to provide services together
with construction materials in order to perform its 1 2 3 4 5 6 7 8 9 10
goods but the buyer does not obtain control or the
significant risks and rewards of ownership of the work in
progress in its current state as construction progresses.
7. It is probable that the economic benefits associated 1 2 3 4 5 6 7 8 9 10
with the transaction will flow to the entity.

completion method if the buyer acquires and supplies
construction materials and the entity provides only
construction services.
9. The costs incurred or to be incurred in respect of the 1 2 3 4 5 6 7 8 9 10
transaction can be measured reliably.
10. The amount of revenue can be measured reliably. 1 2 3 4 5 6 7 8 9 10
247
Please indicate the extent to which you applied your prior knowledge of SLAS (Sri Lankan Financial
Reporting Standards) to come to an appropriate judgment on this case on the following scale:
Not at All To Some Extent To a Great Extent

1 2 3 4 5 6 7
Please indicate how motivated you were to perform well on this case on the following scale:
Not at All Moderately Motivated Extremely Motivated

1 2 3 4 5 6 7
Please indicate how much effort you have expended on this case on the following scale:
Very Little Effort Moderate Effort A Great Deal of Effort

1 2 3 4 5 6 7
Please indicate the level of complexity of this case on the following scale:
Not Complex Moderately Complex Extremely Complex

1 2 3 4 5 6 7
Please indicate your level of familiarity in dealing with similar cases like this on the following scale:
Not Familiar Moderately Familiar Very Familiar

1 2 3 4 5 6 7
Please record the approximate time you spent to complete this survey:
Time Spent:
248
Thank you for taking the time to complete this instrument. Your assistance is very much
appreciated. If you have any further comments, please provide them in the space provided.
Please ensure that you have answered every question. Missing questions will mean all of
your responses are unusable.
Dinuja Perera
NSW 2109
Australia.
Thank you for your participation!
249
250

(Version 2 –Justification Requirement being Manipulated)
251
252
Phone: +61 2 9850 6137
Fax: +61 2 9850 8497
understanding factors affecting professional judgment of accountants when interpreting and applying IFRS
for SMEs.
1
research, you may contact the Committee through the Director, Research Ethics (telephone [02] 9850 7854,
email: ethics@mq.edu.au). Any complaint you make will be treated in confidence and investigated, and you will
be informed of the outcome.
253
Section 1
2. How old are you?



___________
____________
1-5 6-20 21-100 Over 100



practice?
254
Section 2
CASE STUDY
You are also required to give a justification on your judgment in writing on the “Judgment
Justification Sheet” provided.

1 2 3 4 5 6 7
255

successful business operations, Dream Homes has established an excellent record of being able
to fulfill its obligations towards its customers as contracted. The company now prepares the
financial statements in accordance with SLFRS for SMEs equivalent of IFRS for SMEs, and
the company’s financial year ends on 30th June.
individual apartments. It designed an apartment complex to be built on the land and submitted
the designs to planning authorities in order to obtain building permissions. Once the designs
were approved, Dream Homes started marketing the individual apartments. A buyer entered
into an agreement with Dream Homes on 15th January 2013 for the sale of land and the
construction of a two bedroom apartment in one of the land plots in the proposed apartment
complex. The estimated purchase price of the apartment is LKR 15,000,000. The agreement
prohibits the company from transferring the apartment to another customer. Dream Homes
acquires all materials required for the construction from its subsidiary company Global
Materials Private Limited. The estimated purchase price does not include any interior designing
elements of the apartment. The apartment will be ready for occupation by 30th November 2013.
the construction. The buyer is also required to make three progress payments at three stages of
completion, between the time of the initial agreement and contractual completion. These
buyer is able to specify only minor variations to the basic design. The agreement gives buyer
the right to consult and contract with his own interior designers for arranging the interior
designing components for each completed elements of the apartment over time. The company
is responsible for remedying any minor construction defects detected before the contractual
contract).
The Accountant “Y” who works for Dream Homes Real Estate holds the view that “the
company can recognize the revenue of this construction agreement by reference to the stage of
completion using the percentage of completion method as construction of this apartment
progresses”.
256
Record your judgment on Accountant Y’s view that the company can recognize the revenue of
this agreement using the percentage of completion method.
You are also required to give a justification on your judgment in writing on the “Judgment
Justification Sheet” provided below. Some of you may be chosen at random to further
explain and justify your judgment to the researcher.

Disagree Agree
Judgment 1 2 3 4 5 6 7
JUSTIFICATION SHEET
Please provide a justification for your judgment above as to why you are agreeing/disagreeing with
the proposed accounting treatment. In making your justification please provide your reason(s) for
choosing your accounting treatment.
257
revenue by reference to the stage of completion using
the percentage of completion method.
4. An entity that undertakes the construction of real 1 2 3 4 5 6 7 8 9 10
estate and enters into an agreement with one or more
buyers before construction is complete, shall account
for the agreement as a sale of services, using the
percentage of completion method if the buyer is able to
specify the major structural elements of the design of
the real estate before construction begins and/or specify
major structural changes once construction is in
progress.
significant risks and rewards of ownership of the work
in progress in its current state as construction
progresses.
8. An entity that undertakes the construction of real 1 2 3 4 5 6 7 8 9 10

estate and enters into an agreement with one or more
buyers before construction is complete, shall account
for the agreement as a sale of services, using the
percentage of completion method if the buyer acquires
and supplies construction materials and the entity
provides only construction services.
258
Please indicate the extent to which you applied your prior knowledge of SLAS (Sri Lankan Financial Reporting
Standards) to come to an appropriate judgment on this case on the following scale:
1 2 3 4 5 6 7
Please indicate the extent to which the requirement to justify your judgment enabled you to make a better
judgment on the following scale:
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7

1 2 3 4 5 6 7
Time Spent:
259
appreciated. If you have any further comments, please provide them in the space
provided.
Dinuja Perera
NSW 2109
Australia.
260

(Version 3 – With Decision Aid)
261
262
Phone: +61 2 9850 6137
Fax: +61 2 9850 8497
understanding factors affecting professional judgment of accountants when interpreting and applying IFRS
for SMEs.
1
research, you may contact the Committee through the Director, Research Ethics (telephone [02] 9850 7854,
email: ethics@mq.edu.au). Any complaint you make will be treated in confidence and investigated, and you will
be informed of the outcome.
263
Section 1
2. How old are you?



___________
____________
1-5 6-20 21-100 Over 100



practice?
264
Section 2
CASE STUDY
You may refer to the decision aid provided which outlines further interpretation guidance
on IFRS for SMEs that may assist you in making your judgment.

1 2 3 4 5 6 7
265
DECISION AID
The following interpretation guidance provides you information related to accounting for revenue from the
construction of real estate (IFRIC 15 of full IFRS and SLFRS for SMEs). You may refer to this decision aid in making
your judgment.
Full IFRS
The interpretations in IFRIC 15 – Agreement for the Construction of Real Estate applies to the accounting for
revenue and associated expenses by entities that undertake the construction of real estate directly or through
subcontractors.
The SLFRS for SMEs (equivalent of IFRS for SMEs) is completely stand-alone document.
The Section 23 (Revenue) of SLFRS for SMEs provides simplified guidance as examples that focus on
particular aspects of transactions, including the Agreements for the construction of real estate.
IFRIC 15 (Full IFRS) SLFRS for SMEs
The agreement is an agreement for the rendering of services
If the entity is not required to acquire and supply construction An entity that undertakes the construction of real
materials, the agreement may be only an agreement for the estate, directly or through subcontractors, and enters
rendering of services in accordance with IAS 18. In this case, into an agreement with one or more buyers before
if the criteria in paragraph 20 of IAS 18 are met, IAS 18 construction is complete, shall account for the
requires revenue to be recognised by reference to the stage of agreement as a sale of services, using the percentage of
completion of the transaction using the percentage of completion method, only if:
completion method. The requirements of IAS 11 are
generally applicable to the recognition of revenue and the (a) the buyer is able to specify the major structural
associated expenses for such a transaction (IAS 18 paragraph elements of the design of the real estate before
21). construction begins and/or specify major structural
changes once construction is in progress (whether it
exercises that ability or not), or
(b) the buyer acquires and supplies construction
materials and the entity provides only construction
services.
The agreement is an agreement for the sale of goods
a) If the entity is required to provide services together with If the entity is required to provide services together
construction materials in order to perform its contractual with construction materials in order to perform its
obligation to deliver the real estate to the buyer, the contractual obligation to deliver real estate to the
agreement is an agreement for the sale of goods and the buyer, the agreement shall be accounted for as the sale
criteria for recognition of revenue set out in paragraph 14 of goods. In this case, the buyer does not obtain control
of IAS 18 apply or the significant risks and rewards of ownership of the
work in progress in its current state as construction
b) The entity may transfer to the buyer control and the progresses. Rather, the transfer occurs only on delivery
significant risks and rewards of ownership of the work in of the completed real estate to the buyer.
progress in its current state as construction progresses. In
this case, if all the criteria in paragraph 14 of IAS 18 are
met continuously as construction progresses, the entity
shall recognise revenue by reference to the stage of
completion using the percentage of completion method.
The requirements of IAS 11 are generally applicable to
the recognition of revenue and the associated expenses for
such a transaction.
c) The entity may transfer to the buyer control and the

significant risks and rewards of ownership of the real
estate in its entirety at a single time (e.g. at completion,
upon or after delivery). In this case, the entity shall
recognise revenue only when all the criteria in paragraph
14 of IAS 18 are satisfied.
266

successful business operations, Dream Homes has established an excellent record of being
able to fulfill its obligations towards its customers as contracted. The company now prepares
the financial statements in accordance with SLFRS for SMEs equivalent of IFRS for SMEs,
and the company’s financial year ends on 30th June.
individual apartments. It designed an apartment complex to be built on the land and
submitted the designs to planning authorities in order to obtain building permissions. Once
the designs were approved, Dream Homes started marketing the individual apartments. A
buyer entered into an agreement with Dream Homes on 15th January 2013 for the sale of land
and the construction of a two bedroom apartment in one of the land plots in the proposed
apartment complex. The estimated purchase price of the apartment is LKR 15,000,000. The
agreement prohibits the company from transferring the apartment to another customer. Dream
Homes acquires all materials required for the construction from its subsidiary company
Global Materials Private Limited. The estimated purchase price does not include any interior
designing elements of the apartment. The apartment will be ready for occupation by 30th
November 2013.
the construction. The buyer is also required to make three progress payments at three stages
of completion, between the time of the initial agreement and contractual completion. These
buyer is able to specify only minor variations to the basic design. The agreement gives buyer
the right to consult and contract with his own interior designers for arranging the interior
designing components for each completed elements of the apartment over time. The company
is responsible for remedying any minor construction defects detected before the contractual
contract).
The Accountant “Y” who works for Dream Homes Real Estate holds the view that “the
company can recognize the revenue of this construction agreement by reference to the stage
of completion using the percentage of completion method as construction of this apartment
progresses”.
Record your judgment on Accountant Y’s view that the company can recognize the revenue
of this agreement using the percentage of completion method.
Disagree Agree
Judgment 1 2 3 4 5 6 7
267
revenue by reference to the stage of completion using the
percentage of completion method.
completion method if the buyer is able to specify the
major structural elements of the design of the real estate
before construction begins and/or specify major structural
changes once construction is in progress.
significant risks and rewards of ownership of the work in
progress in its current state as construction progresses.
8. An entity that undertakes the construction of real estate

and enters into an agreement with one or more buyers 1 2 3 4 5 6 7 8 9 10
completion method if the buyer acquires and supplies
construction materials and the entity provides only
construction services.
268
Please indicate the extent to which you applied your prior knowledge of SLAS (Sri Lankan Financial
Reporting Standards) to come to an appropriate judgment on this case on the following scale:
1 2 3 4 5 6 7
Please indicate the extent to which the decision aid clarified the differences between SLAS requirements
and the requirements of SLFRS for SMEs on the following scale:
Did not Clarify at All Clarified to Some Extent Clarified to a Great Extent
1 2 3 4 5 6 7
Please indicate the extent to which the decision aid enabled you to make a better judgment on the
following scale:
1 2 3 4 5 6 7
1 2 3 4 5 6 7

1 2 3 4 5 6 7
1 2 3 4 5 6 7
1 2 3 4 5 6 7
Time Spent:
269
appreciated. If you have any further comments, please provide them in the space
provided.
Dinuja Perera
NSW 2109
Australia.
270

APPENDIX 3


(Version 1 – With IFRS for SMEs Guidance)
271
272
Phone: +61 2 9850 6137
Fax: +61 2 9850 8497
Supervisors: Associate Professor Parmod Chand and Dr Rajni Mala
You are invited to participate in a study which investigates judgments made by accountants. This study aims to
examine the effects of guidance in International Financial Reporting Standards (IFRS) for Small and Medium-Sized
Enterprises (SMEs) on the professional judgments of accountants.
The study is being conducted by Dinuja Perera [Department of Accounting and Corporate Governance, Macquarie
University, NSW, Australia, dinuja.perera@mq.edu.au, Ph: (61) 414 729 623] to meet the requirements of Doctor of
Philosophy under the supervision of Associate Professor Parmod Chand [parmod.chand@mq.edu.au, Ph: (612) 9850
6137] and Dr Rajni Mala [rajni.mala@mq.edu.au, Ph: (612) 9850 8530] of the Department of Accounting and
Corporate Governance, Macquarie University.
If you decide to participate, you will be asked to complete a questionnaire. The questionnaire has two parts. Part one
collects demographic data about the respondents. Part two consists of a small case study, and you are asked to provide
your judgment on one scenario concerning a problem regarding appropriate financial reporting. It will take
As you participate in this study as an individual, you are not considered to be a representative of your work
organization or institution. The information provided by you represents your personal views only and not the views of
your workplace. No sensitive personal information will be collected. Any information or personal details gathered in
this study are confidential, except as required by law. No individual will be identified in any publication of the results.
Data will be analysed in aggregate form, held and accessed solely by the researchers (Associate Professor Parmod
Chand, Dr Rajni Mala and Dinuja Perera) and will not be used for any other purpose. The results of this study will be
incorporated into Dinuja Perera’s PhD thesis, which will be available at the Macquarie University Library for public
access. A summary of the research results data can be made available to you on request by email to the researchers.
Participation in this survey is entirely voluntary. If you could complete the attached questionnaire, your time and co-
operation will be greatly appreciated. If you do not wish to participate, simply do not return the questionnaire. Please
note that completion and return of the questionnaire will be regarded as consent to use the information for research
purposes.1
understanding the effects of guidance in IFRS for SMEs on the professional judgments of accountants.
1
The ethical aspects of this study have been approved by the Macquarie University Human Research Ethics Committee. If you
have any complaints or reservations about any ethical aspect of your participation in this research, you may contact the Committee
through the Director, Research Ethics (telephone [02] 9850 7854, email: ethics@mq.edu.au). Any complaint you make will be
treated in confidence and investigated, and you will be informed of the outcome. The local contact person is Professor Michael
White [michael.white @usp.ac.fj].
273
Section 1
2. How old are you?

4. What is your ethnicity?

_________________
Ethnic Fijian Indo-Fijian Chinese Other (please specify)

5. Are you a member of: FIA? ____________ ____________
(Please state membership status) Other (please specify)
6. How many years of professional experience do you have as a qualified FIA/CPA/CA? _______ Years
___________
____________
Big 4 Accounting Firm Non-Big 4 Accounting Firm Other (please specify)
1-5 FIA/CPAs/CAs 6-20 FIA/CPAs/CAs 21-100 FIA/CPAs/CAs Over 100 FIA/CPAs/CAs

10. How familiar are you with International Financial Reporting Standards (IFRS)?
Very familiar Familiar Not Sure Unfamiliar Very unfamiliar
11. How frequently do you refer to IFRS in your professional practice?
Always Often Sometimes Rarely Never

12. How familiar are you with Fijian equivalents of IFRS for SMEs?
13. How frequently do you refer to Fijian equivalents of IFRS for SMEs in your professional practice?
274
Section 2
CASE STUDY
Below is a scenario that requires your judgment regarding the appropriate method of financial reporting.
Please note that by indicating that you agree (or disagree) with the proposed accounting treatment, it
means you also disagree (or agree) with the other treatment. You may refer to the accounting standards
while making your judgments.
You are asked to provide a judgment on the matter by providing a response on the scale 1 to 7 (please
indicate by circling the relevant number).
The required judgment is based on IFRS for SMEs.
You may refer to the following guidance provided on IFRS for SMEs that may assist you in making your
judgment.
The following guidance provides information in making a judgment on whether an entity has significant
influence over another entity [Paragraphs 14.3 (a, b, and c) of Section 14 – Investments in Associates of
IFRS for SMEs]. You may refer to this guidance while making your judgment on the scenario.
 If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting
power of the associate, it is presumed that the investor has significant influence, unless it can be
clearly demonstrated that this is not the case.
 Conversely, if the investor holds, directly or indirectly (eg through subsidiaries), less than 20 per cent
of the voting power of the associate, it is presumed that the investor does not have significant
influence, unless such influence can be clearly demonstrated.
 A substantial or majority ownership by another investor does not preclude an investor from having
significant influence.
275
Case – Investments in Associates
A medium-sized non-listed company, Max Ltd, is a wholesaler of automotive spare parts to a range of
independent retailers and is the sole distributor for three major brands in the market (GT GAS, Ultima and
Supercharge). Max Ltd holds 15% share of the country’s automotive spare part market. In line with its new
market strategy to diversify its operations, in July 2012, Max Ltd acquired full stake in Acme Ltd, a retail
chain of hardware stores. Max Ltd prepares the financial statements in accordance with IFRS for SMEs, and
 During January 2013, Acme Ltd acquired 10% interest in the common stock of Logo Ltd, a retail
chain in the automotive spare part market, operating in most provinces. In July 2013, Max Ltd
acquired 8% interest in the common stock of Logo Ltd, with the intention of utilising proceeds from
dividends to meet the expenses of the ‘7 Year Debentures’ issued in April 2013 for its expansion
project.
 As at 30 June 2014, the majority shareholder of Logo Ltd held 62% of common stock, while the
second largest shareholder held 20% of common stocks. The remainder was held by Acme Ltd and
Max Ltd.
 The Board of Directors of Logo Ltd consists of ten members. The majority shareholder was
represented by six of the Board members, while the second largest shareholder was represented by
two members. Max Ltd and Acme Ltd were represented by one member each. The Board makes
decisions on the basis of a simple majority. The two Board members representing Max Ltd and
Acme Ltd are fully engaged in their own business operations. The Board meetings of Logo Ltd are
often held at very short notice. As such, Max Ltd and Acme Ltd Board representation is not available
for most of the Board meetings of Logo Ltd.
 During the financial year ending 30 June 2014, Logo Ltd has purchased $4 million worth of spare
parts on arms-length basis from its supplier base, out of which 25% was from Max Ltd. Logo Ltd’s
total turnover for the period is $9.35 million, recording a significant growth from last year’s turnover
of $4.3 million. 30% of this growth has been achieved from ‘GT GAS’ and ‘Supercharge’ brands.
 Max Ltd offers a strong marketing support and a wide range of retail services to its independent
retailer network, including Logo Ltd by providing advisory and coaching on the marketing strategy
to ensure greater customer satisfaction.
The accountant X who works for Max Ltd is of the view that “Max Ltd can account for its investment
in Logo Ltd as an associate, because Max Ltd has the ability to exert significant influence over Logo
Ltd”.
By applying IFRS for SMEs and the guidance provided, record your judgment on Accountant X’s
view that Logo Ltd can be treated as an associate of Max Ltd.

Disagree Agree
Judgment 1 2 3 4 5 6 7
276
Please indicate the level of help the guidance provided in making your judgment on the following scale:
Not at all Helpful Of Some Help Extremely Helpful

1 2 3 4 5 6 7
Please indicate the extent to which the guidance provided enabled you to make a better judgment on the
following scale:
1 2 3 4 5 6 7
Please indicate the extent to which you require additional guidance in IFRS for SMEs in making accurate
judgments on an ongoing basis on the following scale:
1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7
277
Thank you for taking the time to complete this instrument. Your assistance is very much appreciated. If
you have any further comments, please provide them in the space provided.
Please make sure that you have answered every question. Missing questions will mean that all of your
responses cannot be used.
Dinuja Perera
NSW 2109
Australia
Thank you very much for your participation!
278

(Version 2 – With Full IFRS Guidance)
279
280
Phone: +61 2 9850 6137
Fax: +61 2 9850 8497
purposes.1
1
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Section 1
2. How old are you?


_________________

___________
____________


282
Section 2
CASE STUDY
You may refer to the following guidance provided that may assist you in making your judgment.
The following guidance provides information in making a judgment on whether an entity has significant influence
over another entity [Paragraphs 14.3 (a, b, and c) of Section 14 – Investments in Associates of IFRS for SMEs]. You
may refer to this guidance while making your judgment on the scenario.
 If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting power of the
associate, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not
the case.
 Conversely, if the investor holds, directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting
power of the associate, it is presumed that the investor does not have significant influence, unless such influence can be
clearly demonstrated.
 A substantial or majority ownership by another investor does not preclude an investor from having significant influence.
You may further refer to the following additional guidance provided in Paragraphs 6 to 9 of IAS 28 – Investments
in Associates and Joint Ventures of IFRS while making your judgment on the scenario.
 The existence of significant influence by an entity is usually evidenced in one or more of the following ways:
a) representation on the board of directors or equivalent governing body of the investee;
b) participation in policy-making processes, including participation in decisions about dividends or other
distributions;
c) material transactions between the entity and its investee;
d) interchange of managerial personnel; or
e) provision of essential technical information.
 An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary
shares, or other similar instruments that have the potential, if exercised or converted, to give the entity additional voting
power or to reduce another party’s voting power over the financial and operating policies of another entity (i.e. potential
voting rights). The existence and effect of potential voting rights that are currently exercisable or convertible, including
potential voting rights held by other entities, are considered when assessing whether an entity has significant influence.
Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or
converted until a future date or until the occurrence of a future event.
 In assessing whether potential voting rights contribute to significant influence, the entity examines all facts and
circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements
whether considered individually or in combination) that affect potential rights, except the intentions of management and
the financial ability to exercise or convert those potential rights.
 An entity loses significant influence over an investee when it loses the power to participate in the financial and
operating policy decisions of that investee. The loss of significant influence can occur with or without a change in
absolute or relative ownership levels. It could occur, for example, when an associate becomes subject to the control of a
government, court, administrator or regulator. It could also occur as a result of a contractual arrangement.
283
chain of hardware stores. Max Ltd prepares the financial statements in accordance with IFRS for SMEs,
project.
Max Ltd.
often held at very short notice. As such, Max Ltd and Acme Ltd Board representation is not
available for most of the Board meetings of Logo Ltd.
total turnover for the period is $9.35 million, recording a significant growth from last year’s
turnover of $4.3 million. 30% of this growth has been achieved from ‘GT GAS’ and ‘Supercharge’
brands.
The accountant X who works for Max Ltd is of the view that “Max Ltd can account for its
investment in Logo Ltd as an associate, because Max Ltd has the ability to exert significant influence
over Logo Ltd”.
By applying IFRS for SMEs and the guidance provided, record your judgment on Accountant X’s

Disagree Agree
Judgment 1 2 3 4 5 6 7
284

1 2 3 4 5 6 7
following scale:
1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7
285
Dinuja Perera
NSW 2109
Australia
286

(Version 3 – With Affirmative Example)
287
288
Phone: +61 2 9850 6137
Fax: +61 2 9850 8497
purposes.1
1
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Section 1
2. How old are you?


_________________

___________
____________


290
Section 2
CASE STUDY
You may refer to the example provided as guidance that may assist you in making your judgment.
project.
Max Ltd.
291
Ltd”.
Assume that the following example is provided as guidance in making the judgment.
Example
It is likely that significant influence exists and there is an associate relationship for the following
example.
Entity A was one of the three shareholder’s in a regional airport, Entity B.
 As at 30 June 2014, the majority shareholder held 62% of voting shares, the second shareholder
held 20% of voting shares and Entity A held 18% of the voting shares in Entity B.
 Entity B’s Board of Directors consisted of ten members. The majority shareholder was
represented by six of the Board members, while Entity A and the other shareholder were
represented by two members each. A shareholders’ agreement stated that certain Board and
shareholder resolutions required either unanimous or majority decision. There is no indication
that the majority shareholder and the other shareholders act together in a common way.
 During the financial year ending June 2014, Entity A had provided Entity B with maintenance
and technical services and had sold Entity B a software licence for $4 million.
 Additionally, Entity A had sent a team of management experts to give business advice to the
Board of Entity B.
Entity A appears to have significant influence over Entity B, and therefore, it should be accounted
for as an associate.
By applying IFRS for SMEs and the example provided, record your judgment on Accountant X’s

Disagree Agree
Judgment 1 2 3 4 5 6 7
292
Please indicate the level of help the example provided in making your judgment on the following scale:

1 2 3 4 5 6 7
Please indicate the extent to which the example provided enabled you to make a better judgment on the
following scale:
1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7
293
Dinuja Perera
NSW 2109
Australia
294

(Version 4 – With Counter Example)
295
296
Phone: +61 2 9850 6137
Fax: +61 2 9850 8497
purposes.1
1
297
Section 1
2. How old are you?


_________________

___________
____________


298
Section 2
CASE STUDY
You may refer to the example provided as guidance that may assist you in making your judgment.
project.
Max Ltd.
299
Ltd”.
Assume that the following example is provided as guidance in making the judgment.
Example
It is likely that significant influence does not exist and there is no associate relationship for the
following example.
Entity X was one of the three shareholders in a garment manufacturing firm, Entity Y.
 As at 30 June 2014, the majority shareholder held 62% of voting shares and the second
shareholder held 20% of voting shares in Entity Y. Entity X held 18% of the voting shares in
Entity Y.
 Entity Y’s Board of Directors consisted of ten members. The majority shareholder was
represented by seven of the Board members, while the second largest shareholder was
represented by two members. Entity X was represented by one Board member. The Board
member of Entity X is always too busy to attend Board meetings. The Board makes decisions on
the basis of a simple majority.
 During the financial year ended June 2014, Entity X has made a one-off sale of $4 million worth
of computer aided fully integrated designing and manufacturing Machines to Entity Y. With this
new technology Entity Y’s overall production efficiency increased by almost 30%.
 Entity X had also sent a team of technical experts to give technical support for operating the new
machines sold to Entity Y.
Entity X does not appear to have significant influence over Entity Y, and therefore, it should not
be accounted for as an associate.
By applying IFRS for SMEs and the example provided, record your judgment on Accountant X’s

Disagree Agree
Judgment 1 2 3 4 5 6 7
300
Please indicate the level of help the example provided in making your judgment on the following scale:

1 2 3 4 5 6 7
Please indicate the extent to which the example provided enabled you to make a better judgment on the
following scale:
1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7
301
Dinuja Perera
NSW 2109
Australia
302

(Version 5 – With All Guidance)
303
304
Phone: +61 2 9850 6137
Fax: +61 2 9850 8497
purposes.1
1
305
Section 1
2. How old are you?


_________________

___________
____________


306
Section 2
CASE STUDY
You may refer to the guidance and examples provided that may assist you in making your judgment.
The following guidance provides information in making a judgment on whether an entity has significant influence
over another entity [Paragraphs 14.3 (a, b, and c) of Section 14 – Investments in Associates of IFRS for SMEs]. You
may refer to this guidance while making your judgment on the scenario.
 If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting power of the
associate, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not
the case.
 Conversely, if the investor holds, directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting
power of the associate, it is presumed that the investor does not have significant influence, unless such influence can be
clearly demonstrated.
 A substantial or majority ownership by another investor does not preclude an investor from having significant influence.
You may further refer to the following additional guidance provided in Paragraphs 6 to 9 of IAS 28 – Investments
in Associates and Joint Ventures of IFRS while making your judgment on the scenario.
 The existence of significant influence by an entity is usually evidenced in one or more of the following ways:
a) representation on the board of directors or equivalent governing body of the investee;
b) participation in policy-making processes, including participation in decisions about dividends or other
distributions;
c) material transactions between the entity and its investee;
d) interchange of managerial personnel; or
e) provision of essential technical information.
 An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary
shares, or other similar instruments that have the potential, if exercised or converted, to give the entity additional voting
power or to reduce another party’s voting power over the financial and operating policies of another entity (i.e. potential
voting rights). The existence and effect of potential voting rights that are currently exercisable or convertible, including
potential voting rights held by other entities, are considered when assessing whether an entity has significant influence.
Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or
converted until a future date or until the occurrence of a future event.
 In assessing whether potential voting rights contribute to significant influence, the entity examines all facts and
circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements
whether considered individually or in combination) that affect potential rights, except the intentions of management and
the financial ability to exercise or convert those potential rights.
 An entity loses significant influence over an investee when it loses the power to participate in the financial and
operating policy decisions of that investee. The loss of significant influence can occur with or without a change in
absolute or relative ownership levels. It could occur, for example, when an associate becomes subject to the control of a
government, court, administrator or regulator. It could also occur as a result of a contractual arrangement.
307
chain of hardware stores. Max Ltd prepares the financial statements in accordance with IFRS for SMEs,
project.
Max Ltd.
often held at very short notice. As such, Max Ltd and Acme Ltd Board representation is not
available for most of the Board meetings of Logo Ltd.
total turnover for the period is $9.35 million, recording a significant growth from last year’s
turnover of $4.3 million. 30% of this growth has been achieved from ‘GT GAS’ and ‘Supercharge’
brands.
The accountant X who works for Max Ltd is of the view that “Max Ltd can account for its
investment in Logo Ltd as an associate, because Max Ltd has the ability to exert significant
influence over Logo Ltd”.
308
The following two examples are also provided as guidance in making your judgment.
Example 01 Example 02
It is likely that significant influence exists and there is It is likely that significant influence does not exist
an associate relationship for the following example. and there is no associate relationship for the
following example.
Entity A was one of the three shareholder’s in a regional Entity X was one of the three shareholders in a garment
airport, Entity B. manufacturing firm, Entity Y.
 As at 30 June 2014, the majority shareholder held  As at 30 June 2014, the majority shareholder
62% of voting shares, the second shareholder held 62% of voting shares and the second
held 20% of voting shares and Entity A held 18% shareholder held 20% of voting shares in Entity
of the voting shares in Entity B. Y. Entity X held 18% of the voting shares in
 Entity B’s Board of Directors consisted of ten Entity Y.
members. The majority shareholder was  Entity Y’s Board of Directors consisted of ten
represented by six of the Board members, while members. The majority shareholder was
Entity A and the other shareholder were represented by seven of the Board members,
represented by two members each. A while the second largest shareholder was
shareholders’ agreement stated that certain Board represented by two members. Entity X was
and shareholder resolutions required either represented by one Board member. The Board
unanimous or majority decision. There is no member of Entity X is always too busy to attend
indication that the majority shareholder and the Board meetings. The Board makes decisions on
other shareholders act together in a common way. the basis of a simple majority.
 During the financial year ending June 2014,  During the financial year ended June 2014,
Entity A had provided Entity B with maintenance Entity X has made a one-off sale of $4 million
and technical services and had sold Entity B a worth of computer aided fully integrated
software licence for $4 million. designing and manufacturing Machines to Entity
 Additionally, Entity A had sent a team of Y. With this new technology Entity Y’s overall
management experts to give business advice to production efficiency increased by almost 30%.
the Board of Entity B.  Entity X had also sent a team of technical
experts to give technical support for operating
the new machines sold to Entity Y.
Entity A appears to have significant influence over Entity X does not appear to have significant influence
Entity B, and therefore, it should be accounted for as over Entity Y, and therefore, it should not be
an associate. accounted for as an associate.
By applying IFRS for SMEs together with the guidance and the examples provided, record your
judgment on Accountant X’s view that Logo Ltd can be treated as an associate of Max Ltd.

Disagree Agree
Judgment 1 2 3 4 5 6 7
309
1 2 3 4 5 6 7
Please indicate the level of help the examples provided in making your judgment on the following scale:
1 2 3 4 5 6 7
following scale:
1 2 3 4 5 6 7
Please indicate the extent to which the examples provided enabled you to make a better judgment on the
following scale:
1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7

1 2 3 4 5 6 7
310
Dinuja Perera
NSW 2109
Australia
311
312
APPENDIX 4


(Questionnaire)
313
314
Phone: +61 2 9850 6137
Fax: +61 2 9850 8497
You are invited to participate in a study which investigates the decision usefulness of International Financial Reporting
Standards (IFRS) for Small and Medium-Sized Enterprises (SMEs). This study aims to examine the users’ perception
towards the decision usefulness of the SME financial statements prepared in compliance with IFRS for SMEs.
collects demographic data about the respondents. Part two consists of accounting information extracted from the IFRS
for SMEs and you are asked to provide your opinion on the usefulness of each of the information when making a loan
decision. It will take approximately 20-25 minutes to complete the questionnaire.
purposes.1 To gain further insights, follow-up interviews will be carried out. Please indicate your willingness to
participate in the follow-up interviews at the end of this questionnaire.
understanding the perceptions of users on the decision usefulness of IFRS for SMEs.
1
treated in confidence and investigated, and you will be informed of the outcome. The local contact person is Mr Chaminda Ruwan
Thilakerathne (telephone [+94] 112 903 654, email: chamindat@kln.ac.lk).
315
Section 1
2. How old are you?

4. Are you a member of: the Institute of Bankers of Sri Lanka (IBSL)?

5. If you are a member of the IBSL, what level of qualification you have attained?
Certificate in Banking & Finance (CBF) Diploma in Banking & Finance (DBF)
6. Do you possess any professional accounting qualifications? Please specify
7. In which type of organization do you work?
Commercial Bank Industrial Development Bank Other (please specify)

8. How large (in terms of qualified bankers) is the organization in which you work?
1-5 6-20 21-100 Over 100
9. Which of the following best characterizes your main field of work?
Accepting Deposits Advancing Loans Credit Creations Trade Financing Other (please specify)
10. How many years of experience do you have in making lending decisions for Small and Medium-sized
Enterprises (SMEs)? _______ Years
11. Are you familiar with the Sri Lanka Financial Reporting Standards (SLFRS) for SMEs, equivalent of
IFRS for SMEs?
Very Unfamiliar Unfamiliar Not Sure Familiar Very Familiar

12. Have you made any loan evaluations/approval decisions based on the financial statements prepared in
compliance with SLFRS for SMEs?
None Limited Some Many
316
Section 2
Assume that you are a lending officer considering a term loan application received from a new client which
is a medium-sized (non-listed) company. It prepares the financial statements in compliance with the Sri
Lanka Financial Reporting Standards (SLFRS) for Small and Medium-sized Enterprises (SMEs), equivalent of
IFRS for SMEs.
1. To what extent the following statements describe your analysis of the loan application for a medium-
1. sized (non-listed)
To what extent thecompany?
following statements describe your analysis of the loan application for a medium-
sized (non-listed) company?
Strongly Strongly
Disagree Agree
i. My lending decision is based on first-

hand information and impression of 1 2 3 4 5
management quality
ii. My lending decision is based on
accounting information of the company 1 2 3 4 5
iii. My lending decision is based on non-

accounting information of the company 1 2 3 4 5
iv. My method of analysis differs according
to the respective client/company 1 2 3 4 5
Please list any other factor(s) that describe your analysis of the loan application for a medium-sized
(non-listed) company:
317
2. What sources of information do you use when making a term loan decision? Please assess the
following sources in terms of the usefulness in making a term loan decision for a medium-sized (non-
listed) company.
Not Extremely
Useful Useful
i. General information about the client

and business 1 2 3 4 5
ii. Annual Financial Statements:
a) Income Statement 1 2 3 4 5
b) Balance Sheet 1 2 3 4 5
c) Cash Flow Statement 1 2 3 4 5
d) Statement of Changes in Equity
and Income & Retained 1 2 3 4 5
Earnings
e) Statement of Accounting 1 2 3 4 5
Policies
f) Related Party Disclosures 1 2 3 4 5
g) Notes to the Annual Financial 1 2 3 4 5
Statements
iii. Business Plan 1 2 3 4 5
iv. Business Credit Report 1 2 3 4 5
v. Income Tax Returns 1 2 3 4 5
vi. Bank Statements 1 2 3 4 5
vii. Collateral Documents 1 2 3 4 5
viii. List of Guarantees Proposed 1 2 3 4 5
ix. Legal Documents 1 2 3 4 5
Please list any other sources of information you consider useful when making a term loan decision for
a medium-sized (non-listed) company:
318
3. Financial accounting uses different valuation concepts for measuring assets and liabilities.
Please indicate how familiar you are with the following measurement concepts.
Measurement Concept Very Very

Unfamiliar Familiar
i. Historical cost 1 2 3 4 5
ii. Lower of cost or Market value 1 2 3 4 5
iii. Value in use 1 2 3 4 5
iv. Fair value 1 2 3 4 5
4. Please give your opinion on the following statements. Your assessments should be based on the usefulness
of the measurement concepts of assets/liabilities when making a term loan decision for a medium-sized
(non-listed) company:
Strongly Strongly
Disagree Agree
i. All assets and liabilities should be
reported following the same measurement 1 2 3 4 5
concept
ii. All assets and liabilities should be
reported at fair value, with historical cost 1 2 3 4 5
information presented in the notes
iii. All assets and liabilities should be
reported at historical cost, with fair value 1 2 3 4 5
information presented in the notes
iv. Assets and liabilities should be reported
following different measurement
concepts, with the relevant measurement 1 2 3 4 5
concept depending on the nature of the
asset or liability
v. Companies should be permitted to choose
among alternative measurement concepts 1 2 3 4 5
for different classes of assets and/or
liabilities
319
5. The SLFRS for SMEs requires the following presentations and disclosures to be included in financial
statements and in the notes to the financial statements of an SME.
The following tables consist of a number of information items specified by the SLFRS for SMEs that you
might need when making a typical term loan decision for a medium-sized (non-listed) company.
You are required to evaluate each information item independently and circle the response that best
represents your opinion on the usefulness of each of the information when making a lending decision.
a) Please indicate the extent to which the following information disclosed in the Statement of Financial
Position (Balance Sheet) are useful when making a term loan decision:
Information Item Not Extremely

Useful Useful
i. Cash and cash equivalents 1 2 3 4 5
ii. Trade and other receivables 1 2 3 4 5
iii. Financial assets 1 2 3 4 5
iv. Inventories 1 2 3 4 5
v. Property, plant and equipment measured at 1 2 3 4 5
historical cost
vi. Investment property carried at fair value 1 2 3 4 5
through profit or loss
vii. Intangible assets 1 2 3 4 5
viii. Biological assets carried at cost less
accumulated depreciation and impairment 1 2 3 4 5
ix. Biological assets carried at fair value 1 2 3 4 5
through profit or loss
x. Investments in associates carried at fair 1 2 3 4 5
value through profit or loss
xi. Investments in jointly controlled entities 1 2 3 4 5
carried at fair value through profit or loss
xii. Trade and other payables 1 2 3 4 5
xiii. Financial liabilities (except trade & other 1 2 3 4 5
payables and provisions)
xiv. Liabilities and assets for current tax 1 2 3 4 5

xv. Deferred tax liabilities and deferred tax 1 2 3 4 5
assets
xvi. Provisions 1 2 3 4 5
xvii. Non-controlling interests, presented within 1 2 3 4 5
equity separately from equity attributable to
the owners of the parent
xviii. Equity attributable to the owners of the 1 2 3 4 5
parent
320
b) Please indicate the extent to which the Sub-Classification of the following items disclosed in the
Statement of Financial Position (Balance Sheet) or in the Notes are useful when making a term loan
decision:

Useful Useful
i. Property, plant and equipment in 1 2 3 4 5
classifications appropriate to the entity
ii. Trade and other receivables showing
separately amounts due from related parties,
amounts due from other parties, and 1 2 3 4 5
receivables arising from accrued income not
yet billed
iii. Inventories, showing separately amounts of
inventories:
a) held for sale in the ordinary course of
business 1 2 3 4 5
b) in the process of production for such
sale
c) in the form of materials or supplies to
be consumed in the production process
or in the rendering of services
iv. Trade and other payables, showing
separately amounts payable to trade 1 2 3 4 5
suppliers, payable to related parties, deferred
income and accruals
v. Provisions for employee benefits and other 1 2 3 4 5
provisions
vi. Classes of equity, such as paid-in capital,
share premium, retained earnings and items 1 2 3 4 5
of income and expense
vii. An entity with share capital, for each class of
share capital:
a) the number of shares authorised
b) the number of shares issued and fully
paid, and issued but not fully paid
c) par value per share, or that the shares
have no par value
d) a reconciliation of the number of shares
outstanding at the beginning and at the 1 2 3 4 5
end of the period
e) the rights, preferences and restrictions
attaching to that class including
restrictions on the distribution of
dividends and the repayment of capital
f) shares in the entity held by the entity or
by its subsidiaries or associates
g) shares reserved for issue under options
and contracts for the sale of shares,
including the terms and amounts
321
c) Please indicate the extent to which the following information disclosed in the Statement of
Comprehensive Income (Income Statement) are useful when making a term loan decision:

Useful Useful
i. Revenue 1 2 3 4 5
ii. Finance costs 1 2 3 4 5
iii. Share of the profit or loss of investments in 1 2 3 4 5
associates
iv. Share of the profit or loss of jointly
controlled entities accounted for using the 1 2 3 4 5
equity method
v. Tax expense 1 2 3 4 5
vi. A single amount comprising the total of:
a) the post-tax profit or loss of a
discontinued operation, and
b) the post-tax gain or loss recognised on 1 2 3 4 5
the measurement to fair value less costs
to sell or on the disposal of the net
assets constituting the discontinued
operation
vii. Profit or loss 1 2 3 4 5
viii. Each item of other comprehensive income 1 2 3 4 5
classified by nature
ix. Share of the other comprehensive income of
associates and jointly controlled entities 1 2 3 4 5
accounted for by the equity method
x. Total comprehensive income 1 2 3 4 5
xi. Profit or loss for the period attributable to:
a) non-controlling interest 1 2 3 4 5
xii. Total comprehensive income for the period
attributable to: 1 2 3 4 5
a) non-controlling interest
xiii. An analysis of expenses using a
classification based on the nature of 1 2 3 4 5
expenses (e.g. depreciation, purchases of
materials, transport costs, employee benefits
and advertising costs) within the entity
xiv. An analysis of expenses using a
classification based on the function of 1 2 3 4 5
expenses (e.g. cost of sales, cost of
distribution or administrative activities)
within the entity
322
d) Please indicate the extent to which the following information disclosed in the Statement of Changes in
Equity and Statement of Income & Retained Earnings are useful when making a term loan decision:

Useful Useful
i. Total comprehensive income for the period,
showing separately the total amounts 1 2 3 4 5
attributable to owners of the parent and to
non-controlling interests
ii. For each component of equity, the effects
of retrospective application or retrospective 1 2 3 4 5
restatement recognised
iii. For each component of equity, a
reconciliation between the carrying amount
at the beginning and the end of the period,
separately disclosing changes resulting
from:
a) profit or loss
b) each item of other comprehensive 1 2 3 4 5
income
c) the amounts of investments by, and
dividends and other distributions to,
owners, showing separately issues of
shares, treasury share transactions,
dividends and other distributions to
owners, and changes in ownership
interests in subsidiaries that do not
result in a loss of control
iv. In the statement of income and retained
earnings:
a) retained earnings at the beginning of
the reporting period
b) dividends declared and paid or
payable during the period 1 2 3 4 5
c) restatements of retained earnings for
corrections of prior period errors
d) restatements of retained earnings for
changes in accounting policy
e) retained earnings at the end of the
reporting period
323
e) Please indicate the extent to which the following information disclosed in the Statement of Cash Flows are
useful when making a term loan decision:

Useful Useful
i. Cash flows for a reporting period classified
by operating activities, investing activities 1 2 3 4 5
and financing activities
ii. Cash flows from operating activities using:
a) the indirect method, whereby profit or
loss is adjusted for the effects of non-
cash transactions, any deferrals or
accruals of past or future operating 1 2 3 4 5
cash receipts or payments, and items
of income or expense associated with
investing or financing cash flows
b) the direct method, whereby major
classes of gross cash receipts and 1 2 3 4 5
gross cash payments are disclosed
iii. Major classes of gross cash receipts and
gross cash payments arising from investing 1 2 3 4 5
activities
iv. Major classes of gross cash receipts and
gross cash payments arising from financing 1 2 3 4 5
activities
v. Cash flows arising from transactions in a 1 2 3 4 5
foreign currency
vi. Cash flows from interest and dividends 1 2 3 4 5
received and paid
vii. Cash flows arising from income tax 1 2 3 4 5
viii. The amount of significant cash and cash
equivalent balances held by the entity that
are not available for use by the entity 1 2 3 4 5
(because of foreign exchange controls or
legal restrictions, etc.)
324
f) Please indicate the extent to which the following information disclosed in the Notes to the Financial
Statements are useful when making a term loan decision:

Useful Useful
i. A statement that the financial statements
have been prepared in compliance with 1 2 3 4 5
the SLFRS for SMEs
ii. A summary of significant accounting
policies applied:
a) the measurement basis (or bases)
used in preparing the financial 1 2 3 4 5
statements
b) the other accounting policies used
that are relevant to an understanding
of the financial statements
iii. The judgements, apart from those
involving estimations, that management
has made in the process of applying the 1 2 3 4 5
entity’s accounting policies and that have
the most significant effect on the amounts
recognised in the financial statements
iv. The key assumptions concerning the
future, and other key sources of
estimation uncertainty at the reporting 1 2 3 4 5
date, that have a significant risk of
causing a material adjustment to the
carrying amounts of assets and liabilities
within the next financial year
325
Are you willing to participate in a follow-up interview? Yes No
If “Yes,” please provide your
Name:
Contact Number:
Email:
Dinuja Perera
NSW 2109
Australia
326

(Interview Guide)
327
328
Interview Guide
Name:
Date:
Location:
Time:
1. Interview Introduction
 Brief explanation of the interview process and response to interviewee’s questions

 Participants will be reminded that the interview is recorded (if they agree)
2. Role of accounting information (Financial Statements)
 How familiar are you with SLFRS for SMEs?
 Have you made any loan evaluations/approval decisions based on the financial
statements prepared in compliance with SLFRS for SMEs?
 What is the usefulness of accounting information (financial statements) on your lending
decisions?
 What are the key quantitative/qualitative aspects that you use from the financial
statements?
 How much time do you spend in evaluating financial statements?
3. Perceptions and use of financial statements prepared in compliance with SLFRS for
SMEs
 To what extent the accounting information contained in the financial statements
(prepared in accordance with SLFRS for SMEs) helps you to make better lending
decisions?
 Do you find any “information overload” in financial statements prepared in compliance
with SLFRS for SMEs (i.e. they are not useful for your lending decisions)?
The International Accounting Standards Board (IASB) makes the following claim that:
“An explicit and unreserved statement indicating that the company’s financial statements
have been prepared in compliance with the IFRS for SMEs would enhance the reliability
of the financial information provided by the entity.”
 To what extent this statement enhances the reliability of your lending decisions based on
SLFRS for SMEs?
 Do you think that the reliability of financial statements prepared in compliance with
SLFRS for SMEs is enhanced when they are audited?
 Do you believe that complete financial reports prepared in compliance with SLFRS for
SMEs helps to lower the borrower’s cost of capital?
329
 Are you satisfied with the General Purpose Financial Statements (GPFSs) prepared in
compliance with SLFRS for SMEs? OR
 Do you require SME borrowers to prepare project/loan based Special Purpose Reports
(SPR) which satisfy specific accounting requirements of the bank?
 Is there an intensive competition among the commercial banks for attracting SME
customers?
 If yes, do you believe that requesting those SPR lead to a potential loss of customers?
4. Perceptions of the simplified measurement and recognition requirements of SLFRSs for
SMEs
“The SLFRS for SMEs mandates some recognition or measurement requirements that
are different from measurement under full IFRS. For example, the standard does not
allow the revaluation policy option on property, plant and equipment for SMEs. The
assets will only be measured at their historical cost.”
 Does this prohibition of revaluation impact your credit decision?
“The SLFRS for SMEs requires all research and development costs to be recognised as
expenses when incurred. However, IAS 38 of full IFRS requires all research costs to be
charged to expense when incurred, but development costs incurred after the project is
deemed to be commercially viable are to be capitalised.”
 Do you think that this different treatment on development cost has an impact on your
credit decisions?
 To what extent the fair values for certain assets classes are useful for your lending
decisions (such as investments in associates, investments in jointly controlled entities for
which there are published price quotations)?
 To what extent the deferred tax accounting disclosures are useful in your lending
decisions?
“The topics relevant to Earnings Per Share, Interim Financial Reporting, Segment
Reporting and Special Accounting for Assets held for Sale are not addressed by the
SLFRS for SMEs.”
 Do you consider that the absence of these information have an impact on your lending
decisions?
5. Conclusion of Interview
 Do you have any other concerns/comments other than what we have discussed on
SLFRS for SMEs? Please indicate.
330
APPENDIX 5

Participant Information and Consent Form – Paper 4

331
332
Investigator's Copy

Phone: +61 2 9850 6137
Fax: +61 2 9850 8497
You are invited to participate in an interview that will take approximately 30-45 minutes of your time. Questions will
include your perception on the usefulness of financial statements prepared in compliance with IFRS for SMEs on your
lending decisions for SMEs. If you agree, then your interview will be audio-recorded. The audio recording or any
notes taken during the interview will be transcribed by the investigator (Dinuja Perera) and you will have the ability to
verify your comments and responses prior to the final inclusion in the research project. Your identity will be kept
confidential. For the purpose of analysis, the research project will only use anonymous codes for each interview
participant.
Data will be held and accessed solely by the researchers (Associate Professor Parmod Chand, Dr Rajni Mala and
Dinuja Perera) and will not be used for any other purpose. The results of this study will be incorporated into Dinuja
Perera’s PhD thesis, which will be available at the Macquarie University Library for public access. A summary of the
research results data can be made available to you on request by email to the researchers.
Participation in this interview is entirely voluntary. You are not obliged to participate and if you decide to participate,
you are free to withdraw at any time without having to give reasons and without consequences. If you could
participate, your time and co-operation will be greatly appreciated. You are requested to sign the written Participant
Information and Consent Form enclosed to confirm your agreement to participate. You will be given a copy of the
consent form to keep as a record.1
1
Thilakerathne (telephone [+94] 112 903 654, email: chamindat@kln.ac.lk)
333
I agree to participate in this research.
Participant’s Name:
(Block letters)
Participant’s Signature: ____________________________Date:
Investigator’s Name:
(Block letters)
Investigator’s Signature: ________________ Date: _______________
334
Participant's Copy

Phone: +61 2 9850 6137
Fax: +61 2 9850 8497
You are invited to participate in an interview that will take approximately 30-45 minutes of your time. Questions will
include your perception on the usefulness of financial statements prepared in compliance with IFRS for SMEs on your
lending decisions for SMEs. If you agree, then your interview will be audio-recorded. The audio recording or any
notes taken during the interview will be transcribed by the investigator (Dinuja Perera) and you will have the ability to
verify your comments and responses prior to the final inclusion in the research project. Your identity will be kept
confidential. For the purpose of analysis, the research project will only use anonymous codes for each interview
participant.
Data will be held and accessed solely by the researchers (Associate Professor Parmod Chand, Dr Rajni Mala and
Dinuja Perera) and will not be used for any other purpose. The results of this study will be incorporated into Dinuja
Perera’s PhD thesis, which will be available at the Macquarie University Library for public access. A summary of the
research results data can be made available to you on request by email to the researchers.
Participation in this interview is entirely voluntary. You are not obliged to participate and if you decide to participate,
you are free to withdraw at any time without having to give reasons and without consequences. If you could
participate, your time and co-operation will be greatly appreciated. You are requested to sign the written Participant
Information and Consent Form enclosed to confirm your agreement to participate. You will be given a copy of the
consent form to keep as a record.1
1
Thilakerathne (telephone [+94] 112 903 654, email: chamindat@kln.ac.lk)
335
I agree to participate in this research.
Participant’s Name:
(Block letters)
Participant’s Signature: ____________________________Date:
Investigator’s Name:
(Block letters)
Investigator’s Signature: ________________ Date: _______________
336
APPENDIX 6
Thematic Node Hierarchy – Paper 4
337
338
Thematic node hierarchy
1. Simplified IFRS for SMEs
1.1 Recognition & measurement requirements
1.1.1 Revaluation of PPE
1.1.1.1 Dilution of risk
1.1.1.2 Assets valuation
1.1.1.3 Re-payment ability
1.1.1.4 Annual review
1.1.2 Capitalisation of development cost
1.1.2.1 Aggregated analysis
1.1.2.2 New ventures
1.1.2.3 Re-payment capacity
1.1.3. Accounting for deferred tax
1.1.3.1 Disclosure
1.1.3.2 Business nature & size
1.1.3.3 Taxes payable method
1.1.4 Fair value (FV) measurements
1.1.4.1 Asset classes
1.1.4.2 Mark-to-market FV
1.1.4.3 Financial instruments
1.1.4.4 Business nature & size
1.2 Topics omitted from IFRS for SMEs
1.2.1 Earnings per share
1.2.2 Segment reporting
1.2.3 Interim reporting
1.2.3.1 Management accounts
1.2.3.2 Audited accounts
2. Role of accounting information
2.1 Accuracy
2.2 Comparability
2.3 Process
2.4 Benchmarking
2.5 Uniformity
2.6 Credit score
2.7 Five Cs
2.8 Financial capacity
2.9 Accounting quality
2.10 Forecasts
2.11 Intensive competition
3. Compliance with IFRS for SMEs
3.1 Pricing decisions
3.2 Relationship lending
3.3 Customer bargaining power
3.4 Audited reports
3.5 Auditor’s reputation
3.6 Confidence
3.7 Reliability
339

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ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

FOR SMALL AND MEDIUM-SIZED ENTERPRISES (SMEs): PROBLEMS AND

A thesis submitted to Macquarie University in fulfilment of the requirement for the

Appendix 1: Ethics approval letters………………………………………………………………………………………233

Appendix 2: Research instrument – Paper 2…………………………………………………………………………241

Appendix 3: Research instrument – Paper 3…………………………………………………………………………271

Appendix 4: Research instrument – Paper 4…………………………………………………………………………313

Appendix 5: Participant information and consent form – Paper 4…..…………………………………..331

Appendix 6: Thematic node heirarchy – Paper 4…………………………………………………………………..337

Table 2.1: Size threshold for SMEs worldwide .............................................................................. 56

I wish to express my sincere appreciation to those who have contributed by providing

First of all, I am extremely grateful to my principal supervisor, Associate Professor Parmod

My sincere gratitude is reserved for Professor Graeme Harrison at Macquarie University

I am extremely appreciative to the Institute of Chartered Accountants of Sri Lanka

I am enormously indebted to the Higher Degree Research (HDR) committee at Macquarie

AASB Australian Accounting Standards Board

Overview of the Thesis

While the changeover to international accounting standards by SMEs continues to

The concept of international convergence of accounting standards dates back to 1950s

1.2 AIM AND OBJECTIVES

 To examine whether accountants are able to distinguish between the recognition

 To investigate user perceptions of the decision usefulness of financial statements

Paper 2: Confirmation Bias in the Reporting Judgments of Accountants when Applying

Paper 3: The Impact of the Reduced Guidance in International Financial Reporting

Paper 4: User Perceptions of the Decision Usefulness of Financial Statements prepared

1.4 ORGANIZATION OF THE THESIS

The details of the six chapters are as follows:

Chapter 1 Overview of the Thesis

Chapter 2 Paper 1: Issues in the Adoption of International Financial Reporting

Chapter 3 Paper 2: Confirmation Bias in the Reporting Judgments of Accountants

Chapter 4 Paper 3: The Impact of the Reduced Guidance in International Financial

Chapter 5 Paper 4: User Perceptions of the Decision Usefulness of Financial

Chapter 6 Summary and Conclusions

Issues in the Adoption of International Financial Reporting Standards

Small and medium-sized enterprises (SMEs) in various jurisdictions are currently

Keywords: IFRS for SMEs, accounting convergence, non-publicly accountable entities,

Small and medium-sized enterprises (SMEs) in various jurisdictions are currently

It is widely accepted that explicit accounting information leads to the successful

It is recognized that IFRS enhance the comparability of financial information of different

2.2 DEFINITIONS FOR SMALL AND MEDIUM-SIZED ENTERPRISES

The European Commission (EC) adopted the Commission Recommendation 2003/361/EC

a) do not have public accountability, and

An entity has public accountability if:

a) its debt or equity instruments are traded in a public market or it is in the

2.3 IMPORTANCE OF SMES ACROSS THE GLOBE

2.4 IFRS FOR SMES AT A GLANCE

Section 14 Investments in Associates and Section 15 Investments in Joint Ventures of IFRS

2.6 PROBLEMS POSED BY IFRS FOR SMES

2.6.2 National legislations and enforcement issues

The principal modification to the existing provisions is the introduction of general

2.6.4 Technical difficulties inherent in IFRS for SMEs

In the absence of specific requirements for transactions, events or conditions,

2.7 CONCLUSIONS AND IMPLICATIONS

The implementation of two versions of international financial reporting standards (full

Certain limitations of this study need to be acknowledged. The discussion on the

Asia Pacific Economic Corporation (APEC). (2008). Chinese SMEs technological

Association of Chartered Certified Accountants (ACCA). (2010). IFRS for SMEs:

Association of Chartered Certified Accountants (ACCA). (2012). Comprehensive review

Australian Accounting Standards Board (AASB). (2010a). Accounting alert 2009/09 -