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An Analysis of the Possible Effects of the Introduction of IFRS for Small and Medium-Sized Entities

In 2006 the International Accounting Standards Board (IASB) issued a draft version of the International Financial Reporting Standards for Small and Medium-Sized Entities (IFRS for SMEs), marking an important milestone in the process of accounting harmonization. It is a sign, in fact, that the effects of globalization have reached not only large companies, but also small and medium entities. Many SMEs are already characterized by a high level of internationalization, being greatly influenced by external and international factors. Their reporting framework, however, is strictly rooted in country-specific regulations, and the attempts of harmonizing reporting rules for SMEs within the EU pale in comparison to the results obtained for the financial statements of listed companies. However, there is a need for transparency and comparability in financial reporting for SMEs too, given also the important role played by small and medium-sized entities in most European economies. For example, the presence of SMEs in the Italian context is so important that, in the past, some authors have considered the "dwarfism" of the Italian companies to be an economic advantage. In this paper, we consider the implications of the prospective application of IFRS by European SMEs, highlighting the pros and cons of introducing a differential reporting system for this category of firms. The complications that will be probably introduced in the existing regulatory framework with the adoption of IFRS for SMEs are analyzed, placing an emphasis on the function played by the financial statements of unlisted companies. We argue that the coexistence of a two or even three-tiered structure of accounting regulation could lead to confusion in the users and could also increase the costs of financial reporting for the preparers. Finally, we comment on the decision of the IASB, instead of incorporating specific application criteria in the new standards, to let the single States that are going to implement them to establish the qualitative and quantitative criteria that need to be fulfilled in order to apply the IFRS for SMEs.