The Evolution of Financial Reporting for Private Entities in the European Union
University of Trieste - Department of Economics, Business, Mathematics and Statistics
Bruno De Rosa
University of Trieste - Department of Business Administration
January 13, 2010
Purpose of this paper: This paper aims to discuss the recently introduced International Financial Reporting Standard for Small and Medium-Sized Entities (IFRS for SMEs) and its effects, with particular emphasis on the financial reporting framework within the European Union. The study aims to explain the consequences of introducing financial reporting standards developed for a “strong equity” (Nobes and Parker, 1998) context to a situation in which there is no or little separation between ownership and control.
Design: The paper opted for a conceptual approach, describing the origins of differential reporting for small and medium-sized entities, usually based on the needs of the users of financial information and assessing the consequences of reducing this degree of financial reporting by the means of the new IASB’s standard, based on the same conceptual framework as the “full IFRSs” adopted by listed companies. The authors chose to give special attention to the financial reporting framework of the European Union for two reasons: 1) the EU decided to adopt IFRSs for all listed companies in 2005, but left to each member State to decide whether to apply those standards to private companies; and 2) most EU countries can be described as “weak equity” countries, where financial reporting is oriented toward creditors, and not investors, and where publishing financial statements is a legal obligation for unlisted companies.
Findings: The introduction of a new standard for small and medium-sized entities’ financial reporting in the EU would have a twofold effect: Harmonizing financial reporting for all unlisted companies within the EU and introducing standards oriented toward investors’ needs in a weak equity environment, thus creating a potential gap between small and medium-sized entities’ financial reporting and users’ needs. This paper argues, however, that a common framework for financial reporting for public and private entities is in the best interest of the users of financial information, especially from the point of view of EU financial reporting harmonization. In fact, the coexistence of a two or even three-tiered structure of accounting regulation could lead to confusion for the users and to an increase in the costs of financial reporting for the preparers. The new standard would have the welcomed outcome of reducing the degree of differential reporting between listed and private companies, thus providing users and preparers alike with one single “true and fair view” when describing a firm’s financial performance and financial position.
Originality/value: This paper fulfills the need to study the potential effect of the prospective application of the new financial reporting standards for small and medium-sized entities. The issue is highly debated in literature and among practitioners, for matters of cost, opportunity and feasibility of such a great leap in financial reporting for private entities.
Number of Pages in PDF File: 10
Keywords: IFRS, private entities, accounting harmonization, ownership structure, small and medium-sized entities
JEL Classification: M40, M41working papers series
Date posted: January 15, 2010 ; Last revised: January 31, 2010
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