With countries around the world adopting IFRS, many argue that the IASB should t

ID: 2370371 • Letter: W

Question

With countries around the world adopting IFRS, many argue that the IASB should tailor its standards to meet the needs of small enterprises. One view is that the board should create standards for SMEs, specifically those that do not have public accountability. Others, however, believe that full IFRS are suitable for all entities. The board also needs to determine which entities the IASB SME standards should be intended for. One view is that public accountability should be the distinguishing factor. Full IFRS, rather than SME IFRS, should be required for companies that are public. Others believe the IASB should set forth characteristics of SMEs and let individual countries determine whether the companies qualify as an SME. Another possibility would be to use a size test to determine the enterprise

Explanation / Answer

The expected benefits of global accounting standards are compelling. The use of one set of

high quality standards by companies throughout the world has the potential to improve the

comparability and transparency of financial information and reduce financial statement

preparation costs. When the standards are applied rigorously and consistently, capital

market participants will have higher quality information and can make better decisions.

Thus markets allocate funds more efficiently and firms can achieve a lower cost of capital.

These arguments have been used to support the adoption of International Financial

Reporting Standards (IFRS) for financial reporting for consolidated listed entities in

European Union (EU) member states (EC1606/2002). Other jurisdictions have cited similar

reasons for adoption of IFRS (see Brown, 2011), reflecting the demand for high quality

standards that can improve the quality and comparability of financial reporting and promote

the development of national capital markets and the integration of markets internationally.

A fundamental question is whether IFRS have changed the information available to market

participants in a way that is beneficial, that is, are markets more efficient when IFRS are

used? We expect that IFRS information provided by firms to market participants may differ

significantly from information based on prior national GAAP, due to differences between

requirements of national standards and IFRS. The extent to which the change to IFRS

provides more useful information that translates into benefits observable in capital markets

is a question currently being addressed in research.

Some studies gather evidence about changes in market liquidity and firms

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With countries around the world adopting IFRS, many argue that the IASB should t

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