Difficulties in the Adoption of IFRS on Small and Medium Enterprises (SMEs) in Brazil

Introduction

Seen as the language of business, Accounting aims to provide stakeholders relevant, reliable, comparable and timely information that can assist them in making decisions. As many companies are being impacted by globalization, it is needed that accounting presents financial reports with harmonized accounting procedures and understandable by the entire business community. “Harmonization would save time and money that is currently spent to consolidate divergent financial information when more than one set of reports is required to comply with the different national laws or practice” (Diaconu, 2007; p. 4). Until recently, it was possible to find a wide variety of accounting procedures between countries due to cultural differences, tax rules, business practices and economic dynamics, among others. Nobes and Parker (2008) noted that differences in financial reporting are the norm. They believe if a set of transactions is given to several accountants to prepare financial statements, they will not produce identical statements. This way, it became more difficult to understand the different forms of accounting disclosure without first delving into the intrinsic characteristics of each country.

From the moment the internationalization of markets increased the flow of foreign investments and facilitated the formation of economic blocs, accounting began to be questioned because the same transaction could be recorded in alternative ways, depending on the country of origin. In certain situations and depending on the complexity of the operation, the same transaction can be accounted for by accountants from the same country in different ways. Thus, to achieve harmonization of standards in different jurisdictions it has become necessary and of extreme urgency for companies operating in different countries to adopt a common approach.

Consequently, between 1973 and 2000, the International Accounting Standards Committee (IASC) issued the International Accounting Standards (IAS). The prospect of lower costs of capital prompted many European ‘global players’ to adopt international accounting systems. The following step was the publication by the European Commission entitled “Accounting Harmonization: a New Strategy vis-à-vis International Harmonization” (European Commission, 1995), in which seven Member States (Austria, Belgium, Finland, France, Germany, Italy, and Luxemburg) promoted measures that allowed companies to depart from the national rules and prepare their consolidated financial statements in accordance with IAS or U.S. GAAP (Sellhorn, 2006).

The International Accounting Standards Board (IASB) was created to substitute the IASC in international harmonization of accounting, through the issuance of International Financial Reporting Standards (IFRS). In 2000, the International Organization of Securities Commission (IOSCO) suggested regulators of the capital markets in each country guide multinational companies to adopt IFRS. This recommendation has been followed by the countries of the European Union (EU) since 2005, mainly by companies with shares traded on stock exchanges. In parallel, the authorities of the United States showed signs of concern about a series of frauds whose causes were related to the accounting treatment of stock options operations in connection with the payment of Chief Executive Officers (CEOs). For at least ten years, the Financial Accounting Standard Board (FASB) considered new rules for this type of transaction, but was prevented from introducing them by legal issues. Some American companies therefore began to record revenue that did not exist, while expenses incurred were not reported, inflating the results and performance of these companies in the capital markets. This deceptive practice not only reduced taxes over gains of capital, but also created a speculative bubble that led to the collapse of the financial system hurting small investors. These problems contributed to the United States strengthening its accounting rules and in October 2002 a memorandum pledging to harmonize their accounting standards to IFRS standards was signed. According to Nobes and Parker (2008), this has reduced, but not eliminated, differences between IFRS and US GAAP.