Choice of Subject
The choice of subject for our thesis has been based on the concern for the adoption of International Financial Reporting Standards (IFRS) for Small and Medium-sized entities (SMEs) by SMEs in Sweden. There has been much debates and discussions during the last decade regarding the formulation of a set of standards suitable for small and medium-sized entities. In the effort, IFRS for SMEs was launched by International Accounting Standards Board (IASB), while the RRs standards were developed by Swedish Accounting Standards Board for the unlisted companies in Sweden. Full IFRS has been made statutory by the European Union for the listed companies to make their financial statements in compliance with IFRS. But there has not been yet any statutory regulations imposed on SMEs in Europe in reference to the adoption IFRS for SMEs. The external users of SMEs, which include indirectly involved owners, creditors and credit rating agencies, do require financial statements for the appropriate economic decisions to be made by them.
Almost all the countries have a national set of accounting standards to be followed by the companies operating within the national boundaries. These accounting standards had been developed over time, and with the purpose of their development was to keep a check and balance on the transactions and events of a company by bringing in quality and control into it. It was understandable to us that the public listed companies have a broad set of creditors and investors, and these stakeholders need to be presented with financial reports as per certain accounting standards in order to occupy them with the knowledge and understanding of the firm‟s financial position and performance. But, the question which we thought of was that why would small and medium-sized companies which do not have such a broad range of shareholders or creditors would need a global set of accounting standards to prepare their financial statements. Thus, in order to find the answers to these questions based on empirical observations we have selected this specific subject as our choice of study.
In order to be objectively involved in the thesis work one needs to have certain pre-involvement or interest in the field of study. This helps in choosing the appropriate methods and tools for data collection and analysis. Being naïve in the chosen field of study can create complications in a way that the author might move around different unrelated objectives without an appropriate idea about where the work might be headed to and what are going to be the end results. Setting objectives is not an easy task, and for our study we had to go through a lot of discussion in order to specify our objectives for this study. The objectives of our study in turn represent the research questions of our study as well. Thus the objective is defined to be the approach of SMEs in terms of their preparedness and willingness to adopt this new set of accounting standards, IFRS for SMEs, into their financial reporting.
Both the authors of this thesis come from the same program of study, which is Master in Accounting, and more or less share the same knowledge regarding International Financial Reporting Standards being taught during the module of Advanced Financial Accounting. The authors belong to Pakistan, where companies follow International Accounting Standards (IAS) which is issued by IASB, and IFRS are soon to be implemented by companies in Pakistan. During our studies in Pakistan we were mostly taught about the US GAAP (Generally Accepted Accounting Principles). Working on this specific topic regarding IFRS for SMEs would give us the opportunity to comprehend these standards and their usage in much more depth. Although, we do lack practical experience in Small and Medium-sized Entities or involvement in IFRS oriented financial statements, but we do share sound theoretical pool of knowledge regarding IFRS and SMEs.
It was during the course of Advanced Financial Accounting that our interest towards IFRS was developed. During the course we were given brief highlights regarding a new set of standards which have been developed by IASB for the SMEs, known as IFRS for SMEs. Since then the keenness to know IFRS for SMEs much in detail and how it will be seen by the markets was developed by us. It was then that we started to look into these standards, and read about it in some articles published in „The Economist‟. As, these standards were in very early stages of its launch into the market, we wanted to see how the SMEs are going to react to it, and what is going to be their approach and willingness towards it. More interest was developed when we could not find any previous studies conducted either specifically in Sweden or in other countries in general about this topic. Thus, we wanted to find out that how the SMEs in the real market perceive IFRS for SMEs. To be more specific about the approach of SMEs towards IFRS for SMEs, we have selected the SMEs operating in Sweden only.
In a study made by Eriksson and Wiedersheim-Paul (1997, cited in Arey and David 2008, p.7) perspective gives the point of view about the problem question from different dimension with the option of choosing the most appropriate one according to problem focus. An individual‟s judgment matters a lot in his/her choice of perspective, as it is about how the individual looks at the reality and how he/she perceives it from different perspectives. The discipline and the field of study of an individual matters in a way that it better equips the author in conducting a good research with sound choice of perspective. The reason for this is that things can be perceived differently from different individualistic minds as per their previous knowledge and expertise.
Our topic “Assessing the preparedness of small and medium-sized entities in Sweden to adopt International Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs)” will be viewed from an accounting perspective and academic perspective, since the study will be based on related theories from accounting and academics. Although, these accounting standards cover both internal and external perspectives, but we will be mainly looking at it from the external perspective and to some extent from internal perspective as well.
Research philosophy is very important for selecting the best appropriate research design for answering the research questions. There are two research philosophies; the epistemological philosophy and the ontological philosophy. Epistemology is the study of knowledge and knowing/belief. It refers to the ways to acquire the knowledge (Bryman & Bell, 2007). It describes how it is possible to know about the world that is how we can study about reality. It is further divided into two parts: positivism and interpretivism (phenomenology). Positivism is a study of social reality and beyond, that is how the social world can be analyzed as natural science. While, interpretivism or anti-positivism relates to elements such as values, norms and subjective position of researcher and research community are important for interpretation of reality (Bryman & Bell, 2007).
On the other hand, Ontological assumption refers to the subject of existence. It concerns the nature of the world and human being in social contexts (Bryman & Bell, 2007). It deals with nature of the world and what we can know about it. The ontological assumption is divided into Objectivism and Constructionism. Objectivism is a normative emphasis that asserts that social phenomena and their meanings have an existence that is independent of social actors (Bryman & Bell, 2007). On the other hand, Constructionism position accepts that social phenomena and their meanings can be continually accomplished by social actors and reality of social world is constructed and does not exist out there (Bryman & Bell, 2007).
In our research for the epistemological assumption we take the interpretivist position and for the ontological stance we take the constructionist view point. Reasons being that in our research, we will investigate at what extent Swedish SMEs want to adopt IFRS for SMEs and what is the reaction against/in favor of new proposal. As per the interpretivist approach, the researcher as per their norms and values will be identifying and interpreting the approach of SMEs in Sweden towards the accounting standards. The adoption of constructionism view point as the ontological assumption will lead the researchers in accomplishing their conclusive result as per their analysis of the knowledge acquired. Subjective judgment of the respondents in expressing their viewpoint in support of easing the tasks of interpretation and opinion building will be considered vital.
The concern of research approach is about answering the researchers‟ questions regarding the way in which they will collect data (Saunder et al., 2000). The research philosophy is usually based on the researchers‟ interpretation of the development of data, facts and knowledge. It is just simply the way we go about doing research to develop knowledge, rather than profound and not something which you will give much thought (Saunder et al., 2000). Thus, the implementation of suitable method to achieve the best foundation of the study will be essential for any research. Since, there can be numerous concerns at stake but two stands out in particular. First, there is the question of what form of theory one is talking about. Secondly, there is the matter of whether data are collected to test or to build theories (Bryman & Bell, 2007).
According to Bryman & Bell, research approaches can be segregated into three different types; inductive, deductive and abductive approaches. In deductive approach a conceptual and theoretical structure (model) is developed and then tested by empirical observations; use the hypothesis testing to derive its outcome. This is usually from general to particular approach and data is collected to test the theories. Inductive approach is normally from particular to general approach and data is collected to generate the theories. In this approach, theory is developed from the observations of empirical reality and all findings connected with certain enquiry that what reality is (Bryman & Bell, 2007). To put it straightforwardly, deduction involves a process in which:
With induction the connection is reversed:
Finally, the abduction is a combination of both the deductive and inductive approach.
More simply it can be defined as:
Observations/findings Theory Observations/findings
Theory Observations/findings Theory
In our research we shall use the abductive approach because we think it is the best approach that has a link with research methods to answer our research questions. We start with the theory about the International Financial Reporting Standards (IFRS), Small and Medium-sized entities (SMEs) and IFRS for SME. On the basis of these theories, we will develop the theoretical framework which will help us in creating the interview guide. Analysis of empirical findings will be tested against the theoretical framework, and on the basis of this conclusion regarding this study would be derived. The tests conducted on the observations/findings would lead us to the conclusions in terms of either the empirical findings validate the theoretical framework or not. If the empirical findings are in line with the theoretical framework then we would not generate any new theory. Contribution to the knowledge would be made when the findings are not in accordance to the theoretical framework and reasons are provided by the respondents to support their views or opinions of rejecting particular observations/findings.
There are five different types of research designs; experimental, cross-sectional, longitudinal, case study and comparative designs (Bryman & Bell, 2007, p. 39). The research design that we will employ in our research work is the cross-sectional design. It is also called social survey design. “ Cross-sectional design involves the collection of data on more than one case and at a single point in time in order to collect a body of quantitative or quantifiable data in connection with two or more variables, which are then examined to detect patterns of association” (Bryman & Bell, 2007, p. 55). When a number of cases are looked at one single point in time, then it is termed as a survey. In this design, we use semi-structured interviews for the different cases relating to SMEs in Sweden. The variation between these cases is helpful for us and this can only be obtained when more cases are scrutinized. The data collection is finished at a single point in time for all case concurrently. This means that the respondents are expected to answer most of the questions asked in the interview, and their feedback is collected promptly. Through this data we shall obtain useful findings which will help us in exploring our research question. Using this design, we will try to make sure that the representativeness of the sample being studied in relation to the overall population is adequate. The key strong point of this research design is thus derived from its representation of the different cases, which we get through analyzing different reactions of SMEs in Sweden to adopt IFRS for SMEs.
The two main methods that researchers apply in their studies are; qualitative and quantitative,
which straightforwardly influence the different kind of data collection methods used in the research (Kekäle, de Weerd-Nederhof, Cervai and Borelli, 2009). “Quantitative research that is focused primarily on the construction of quantitative data, and quantitative data is a systematic record that consists of numbers constructed by researcher utilizing the process of measurement and imposing structure” (Ray Kent, 2007). The quantitative methods employ measurement that can be quantifiable while qualitative cannot be measured. It could also be differentiated by the connection Figure 2.1 Research Strategy Flow-Chart between theory and research which helps in determining which methods to be used (Bryman & Bell, 2007).
We use qualitative research strategy for our work and as a consequence we conduct semi-structured interviews for the collection of data. We choose qualitative research strategy for many reasons. Firstly, we have main concern with words, images rather than numbers because we want to conduct interviews to generate some theory and not to test new theory. We can sketch a clear picture in advance what we are looking for by using this method. Secondly, as a part of abductive research, all aspects of our study are carefully designed before data is collected so the later stages of research can be carried out carefully. Thirdly, in our research our main concern is with subjectivity and gaining access to “inside” experience and relate with inside reality of human. Fourthly, in our research, we seek close involvement with the people being investigated. It is only possible in qualitative research because in quantitative research, researchers are uninvolved with their subject and in some cases may have no contact with them. Finally, it is a very good tool to conduct large market research for assessing the preparedness of SMEs in Sweden to adopt IFRS for SMEs.
Data collections are the means, which refer to the sources from where the relevant information can be gathered that will be used in answering the research questions. The sources from where the relevant information can be gathered are primary and secondary data sources. Primary data collection sources refer to the sources from where concerned original data is collected for the research problems identified in the study. Primary data sources include observations, experiments, social surveys like questionnaires, and interviews. While secondary data sources are the ones from where we collect the information contributed by others towards the study but its purpose might be different from that of ours. Secondary data sources comprise of books, journals, articles, and web-based data about the specific subject (Ghauri & Gronhaug, 2005, p. 91-102).
Our data collection was initiated with the secondary data sources, on the basis of which our theoretical framework is constructed. We started with readings of previous and current literature, which stood out to be of relevance to our research question, and provided us with beneficial understanding and knowledge of key objective terms on which further study should be approached. Finding exactly specific and relevant secondary sources in accordance to the chosen research question is a complex activity, as it is a tough job to find objectively same previous or current work. But reasonably relevant secondary sources have been identified and included through out the thesis work. The sources of secondary data on which we relied for referencing in our study were mainly obtained from the University Library‟s electronic search engine at Umeå University. The ease of access to large amount of secondary data sources especially the books at the Umeå University library has been the most utilized source of information for our study. Due to technological advancements and availability of almost all kind of data regarding any issue and topic on the Internet, clicks and constant look backs have been directed towards the electronic sources. Keywords searched: International Financial Reporting Standards, IFRS, Small and Medium-sized entities, SMEs, IFRS for SMEs, SMEs in Sweden, IFRS for SMEs in Sweden, IFRS in Europe.
For primary data collection we have opted for face-to-face interviews. We will be carrying out semi-structured interviews from the respondents based in Umeå, Sweden. Semi-structured interviews provide the researcher with the ease of producing a list of questions on specific topics, which are formulated into the interview guide. (Bryman & Bell, 2007). We will be using open-ended questions in the semi-structured interview guide, as it provides much more room to the respondents to express their views and reasons. In semi-structured interviews, the order in which the questions will be asked might vary, but it is preferred to keep track of the questions in the same order as in the interview guide (Bryman & Bell, 2007). The interview guide which will be used for the interviews will be attached in the Appendix section of this thesis. This interview guide will be sent to the respondents a week prior to the formal interview, so that the respondents do have an idea and appropriate preparation for their expressions regarding the questions. The interview guide is devised in a way to be structured into two parts. First part will take into account the background of the respondents and their brief profiles in terms of designation, experience etcetera, while the second part will deal with a set of questions related to the issues and topics concerning the research questions.
Face-to-face interviews are preferable over other type of interviews, for instance telephonic interviews, as the interview settings and the presence of both the interviewer and the interviewee provides more confidence and the ease of understandability to both the parties. In face-to-face interviews the exactness of understanding each other and the doubts raised from the responses can be clarified instantly. Non-verbal gestures in face-to-face interview provide the clues about the comfort and understanding of the questions by the respondent, on the basis of which the questions can be rephrased, skipped or less emphasized. Interviews were conducted with the concern to generate the maximum possible detailed views of the respondents in reference to the research question formulated (Bryman & Bell, 2007).
All interviews will take place in a setting comfortable to both the interviewee and interviewer. Rendezvous will be decided as per the suitability and access of the interviewee. From the perspective of ethics, respondents will be provided with all kind confidentiality concerns, and as per their permissions their identity might be disclosed or kept anonymous. The use of recorders during the interviews will be as per the discretion of the respondents. Use of recorders during the interview will helps in concentrating solely on the interview rather than going for multi-tasking activities during the interview. Relevant data will be excerpted from the recording as per its conciseness and preciseness in answering the specific question being asked. The collected data do need to be organized and formalized into specific format in the thesis writing, as it would not be useful to include the word by word reply of a respondent. On the average the interviews would be of 30 to 40 minutes length.
Table of contents :
Chapter 1 – Introduction
1.2 Problem Background
1.3 Research Questions
1.4 Purpose of the Study
Chapter 2 – Research Methodology
2.1 Choice of Subject
2.4 Research Philosophy
2.5 Research Approach
2.6 Research Design
2.7 Research Strategy
2.8 Data Collection
2.9 Sample Selection
2.10 Quality Criteria
2.11 Ethical Considerations
Chapter 3 – Theoretical Framework
3.1 International Financial Reporting Standards
3.1.2 Financial Statements and IFRS
3.1.4 Principle-based vs. Rule-based Standards
3.1.5 Costs and Benefits of IFRS
3.2 Small and Medium-sized Enterprises
3.2.2 What are Small and Medium-sized Entities
3.2.3 Similarities and Differences between Small and Big Business Reporting Needs
188.8.131.52 Differences between Small and Big Business Reporting Needs
184.108.40.206 Similarities between Small and Big Business Reporting Needs
3.2.4 Users of SMEs Financial Statements
3.2.5 Costs and Benefits of International Standards for SMEs
3.3 IFRS for SMEs
3.3.2 IFRS for SMEs and National/Local Accounting Standards
3.3.3 Financial Statements Users
3.3.4 An inside look into IFRS for SMEs
3.3.5 IFRS and IFRS for SMEs
3.3.6 Factors of Consideration in the Shift towards IFRS for SMEs
3.4 Theoretical Framework
Chapter 4 – Empirical Findings
4.1 Interviewees‟ Profiles
4.2 Opinions of SMEs and their Auditors
4.2.1 IFRS for SMEs vs. Swedish GAAP
4.2.2 Characteristics of IFRS for SMEs
4.2.3 Cost-Benefit Analysis of IFRS for SMEs
4.2.4 Corporate Social Responsibility (CSR)
4.2.5 Rule-based vs. Principle-based Standards
4.2.6 Users of SMEs Financial Statements
4.2.7 Regulations for the use of IFRS for SMEs
4.3 Experts Opinion
4.3.1 IFRS for SMEs vs. Swedish GAAP
4.3.2 Characteristics of IFRS for SMEs
4.3.3 Cost-Benefit Analysis of IFRS for SMEs
4.3.4 Corporate Social Responsibility (CSR)
4.3.5 Rule-based vs. Principle-based Standards
4.3.6 Users of SMEs Financial Statements
4.3.7 Regulations for the use of IFRS for SMEs
Chapter 5 – Analysis and Discussions
5.1 Accounting Standards followed by SMEs in Sweden
5.2 IFRS for SMEs vs. Swedish GAAP
5.3 Costs and Benefits of IFRS for SMEs
5.4 Corporate Social Responsibility (CSR)
5.5 Users of Financial Statements of SMEs
5.6 Regulations Regarding IFRS for SMEs
5.7 Building New Knowledge
Chapter 6 – Conclusion and Recommendations
6.3 Further Research