Financial reporting implications for adopting two-tier accounting standards: International Financial Reporting Standards (IFRS) and IFRS for small- and medium-sized enterprises

Purpose The adoption of two sets of International Financial Reporting Standards (full IFRS and IFRS for small- and medium-sized entities (SMEs)) has many accounting and public policy implications across various jurisdictions. We examine the effects of the reduced guidance in IFRS for SMEs on reporting judgments of accountants. We also examine the relative effectiveness of explicit guidance and the examples provided in accounting standards.

Design/methodology/approach We conduct an experiment where availability of guidance was manipulated between participants who were either provided with limited explicit guidance in the IFRS for SMEs or detailed explicit guidance in the full IFRS for making their judgments. Example type was manipulated between participants where they were provided with either an affirmative example or a counter example as guidance in making their judgments.

Findings Our findings indicate 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 the IFRS for SMEs. We further show that accountants employ a biased reasoning approach when evaluating the examples by overstating the similarities presented in the examples.

Research limitations/implications The results have accounting and public policy implications for the 80-plus countries that refer to the IFRS for SMEs for developing their accounting standards for SMEs.

Originality/value This is one of the first studies to examine the implications of adopting IFRS for SMEs and full IFRS together. The findings are relevant to the IASB and its monitoring of implementation issues and potential amendments to the IFRS for SMEs.