Are SMEs Willing to Report under IFRS? Czech Evidence
The small and medium sized enterprises (SMEs) sector has an irreplaceable role in the context of the market economy. SMEs represent over 1 million economic subjects, or 99.84 % of all entrepreneurs in the Czech Republic. They employ over 1.8 million employees and account for approximately 51 % of exports and about 56 % of imports. SMEs play a major role in the development of the endogenous potential of individual regions in the Czech Republic, as they are entrepreneurially and socially connected to a given region in a significant way and make up the regional entrepreneurial backbone.
SMEs are facing problems in the endeavor to become involved in cross-border activities. We can include among these problems disproportionate differences in legal systems of individual countries, the absence of unified accounting standards, the absence of a unified taxation system, the limited supply of funds for these units, insufficient support and information and, of course, cultural and language differences. International Financial Reporting Standards (IFRS) are an instrument for facilitating border crossing for SMEs. Although the actual implementation of IFRS to SMEs is somewhat complicated and costly, subsequent reporting according to IFRS is simpler for businesses. In the world of globalization and international trade, SMEs do not really play such a fundamental role, and the harmonization of their financial statements is unnecessary. On the other hand, SMEs often seek investors abroad, and the latter would subsequently require financial statements in a comparable form suitable for consolidation.
We conducted structured interviews with representatives of SMEs in 2013. The representatives of 157 companies were approached for the survey about the willingness to comply with IFRS reporting in Czech SMEs. All approached companies were categorized as SMEs according to IFRS. The interviews ascertained whether the business was connected with a foreign partner, whether they reported according to IFRS at present, whether they were planning to report according to IFRS in the future, and how they viewed benefits stemming from the use of IFRS.
The majority of companies (over 80 %) did not use IFRS in their reporting and do not plan to use it in the future. Reporting according to IFRS is voluntary in the Czech Republic, which is why it was expected that IFRS will mainly be used by companies forming a consolidated group with foreign participation or by companies that have a major foreign business partner. The percentage of monitored companies forming a consolidated group with foreign participation is 30.6 %.
It seems that companies view the expected benefit as a decisive factor for adopting IFRS. Companies consider the comparability of financial statements the strongest advantage, followed by strengthening business credibility and strengthening business prestige. Advantages stemming from access to European Union funds and strengthening the possibility of acquiring credit were also important but to a lesser degree.
The survey results suggest that companies view the possibility of adopting IFRS with reserved interest. Despite a relatively small proportion of companies that report or intend to report according to IFRS in the future, companies are expressing interest in educating their workers in this area. The proportion of companies interested in IFRS education is 27.8 %, which exceeds the number of companies reporting or intending to report according to IFRS by 10 %.
The survey has shown that if SMEs are not immediately obliged to prepare financial statements in accordance with IFRS, they are not interested in the problem of international accounting harmonization. The predominant view among Czech companies is that possible implementation of IFRS brings no advantages to them. It must be added that Czech companies are reluctant to provide the public with information as to their economic activity. They are afraid that some of their know-how or practices in preparation of financial statements will be leaked. In regards to providing information about their company on the market, they see more disadvantages than advantages, such as improved competitive ability stemming from greater transparency of the business.
This paper is one of the research outputs of the project IGA VSE F3/2/2014.