Journal of Accounting in Emerging Economies

Preparedness of the entities for the IFRS for SMEs: an emerging country case
Merve Kili Ali Uyar Baak Ataman
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Merve Kili Ali Uyar Baak Ataman , (2016)," Preparedness of the entities for the IFRS for SMEs: an
emerging country case ", Journal of Accounting in Emerging Economies, Vol. 6 Iss 2 pp. 156 - 178
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JAEE
6,2
Preparedness of the entities for
the IFRS for SMEs: an emerging
country case
156 Merve Kl
Department of Management, Canik Baar University, Samsun, Turkey
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Ali Uyar
Department of Management, Fatih University, Istanbul, Turkey, and
Baak Ataman
Department of Management, Marmara University, Istanbul, Turkey

Abstract
Purpose The purpose of this paper is to determine the preparedness of the small- and medium-sized
enterprises (SMEs) for the International Financial Reporting Standard (IFRS) for SMEs in Turkey; and
to analyze the effect of several firm characteristics on such preparedness.
Design/methodology/approach The preparedness of the SMEs was determined via a
questionnaire survey. The effect of several characteristics of the SMEs (i.e. size, age, independent
auditing, internationality, and the existence of an accounting department) on their preparedness was
examined by employing non-parametric tests and logistic regression.
Findings This study found that the preparedness of the SMEs for IFRS for SMEs is low in Turkey.
Several firm characteristics including, size, independent auditing, and internationality have a
significant impact on the preparedness of the SMEs.
Research limitations/implications This study has some implications for several parties,
including national and international standard setting authorities, entities, managers, and accounting
professionals. SMEs are one of the most important actors in the adoption process of the IFRS for SMEs.
Their preparedness level for IFRS for SMEs will present important clues to sustain an effective and
successful adoption process. The results of this study show the profile of entities which are prepared
for IFRS for SMEs that will be useful for standard authorities and regulatory bodies. The findings of
this study will also be useful for other emerging countries standard authorities because they will face
similar problems in their adoption process.
Originality/value This research makes a significant contribution to the existing literature
because there are only a few studies that analyze the preparedness for IFRS for SMEs, especially in
emerging countries.
Keywords Turkey, IFRS, Preparedness, Emerging markets, IFRS for SMEs
Paper type Research paper

1. Introduction
Accounting as a language of business (Hellmann et al., 2010) is practiced differently
within varying historical, political, economic, and social environments and is shaped by
the context in which it operates and with which it interacts, because it is a social
practice (Gallhofer et al., 2011). Globalization impacts social, economic, political, and
cultural changes in all countries. The emergence and development of international
stock markets and international investment have led to a diffusion of financial
Journal of Accounting in Emerging
Economies
reporting beyond national borders (Callao et al., 2007). Further, the competition for
Vol. 6 No. 2, 2016
pp. 156-178
Emerald Group Publishing Limited
2042-1168
This study is supported by the Scientific Research Fund of Fatih University under the project
DOI 10.1108/JAEE-01-2014-0003 number P54081201_B.
 scarce resources, investment, and credit is also increasing globally (Murphy, 2000). As Entities for the
those multinational concerns increase, the pressure for the international harmonization IFRS for
of accounting grows rapidly (Street et al., 1999). Therefore, a recent question that has
been asked by professionals and regulators is whether the same language can be used
SMEs
by accountants, or in other words whether a globally accepted set of accounting
standards can be applied (Rezaee et al., 2010).
As a result of all these developments and changes, the regulators of national 157
securities markets all over the world are making efforts to harmonize the generally
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accepted accounting principles (GAAP) of their country with the GAAP of other
countries for the purpose of improving the performance of their national capital
markets (Barth et al., 1999). The main objective of the regulators is to attract foreign
entities to the domestic market by developing common reporting and disclosure
requirements for international companies (Hora et al., 1997). For this purpose, the
International Financial Reporting Standards (IFRS) was published for listed entities.
Subsequently, the need for another accounting framework for the use of unlisted and
comparably small-sized companies became apparent. The IFRS for small- and medium-
sized enterprises (SMEs) was published to meet this need. Now, international
accounting harmonization is an inevitable phenomenon for both listed and unlisted
companies and is on the agenda of standard setters in both developed and developing
countries. National regulators should take measures to harmonize their financial
reporting practices with globally accepted ones to be competitive in international
financial capital markets.
The Turkish regulatory bodies are also following the latest developments related to
the harmonization of entities financial reporting practices to maintain compliance with
the internationally accepted standards. In fact, the Turkish authorities give great
importance to IFRS, especially during Turkeys candidacy for the European Union (EU)
(Ataman, 2004). Turkey was recognized as a candidate for the EU in 1999 and
compliance with the IFRS plays an important role in this process (Ataman, 2004).
Initially, the full set IFRS has been legitimized only for the use of publicly accountable
entities (Gken et al., 2011). The International Accounting Standards and IFRS have
been translated into Turkish as the Turkish accounting standards and Turkish
Financial Reporting Standards and published for this purpose (Ataman and Altuk
zden, 2009). Then, the IFRS for SMEs was published as a simplified set of financial
reporting standards in accordance with the International Accounting Standard Board
(IASB)s draft (Yarba, 2008). The use of the IFRS for SMEs has been legitimized
within the New Turkish Commercial Code. As a result, SMEs have entered the
harmonization process. According to this regulation, entities will prepare their financial
statements in accordance with the IFRS for SMEs starting from 2013. However, the
necessary communiqu had not been published by the expected date of July 2012 by
the Standard Authority. This regulation has been postponed because of this delay.
However, the application of IFRS for SMEs is still on the agenda of the Standard
Authority, so entities should make necessary preparations as soon as possible for an
effective adoption process in Turkey.
This study measured the preparedness of SMEs to evaluate Turkeys adoption
process of the IFRS for SMEs. Entities preparedness has been measured by several
indicators, such as the training of personnel and management, adopting current
accounting program for the IFRS for SMEs, and arranging meetings. The
characteristics of entities that may affect their preparedness for IFRS for SMEs have
been also determined within the scope of this research.
 JAEE The contribution of this study to the existing literature is of great importance. First,
6,2 there are few studies that have dealt with the preparedness for the IFRS for SMEs in
emerging countries. This study has analyzed the preparedness of the entities for the IFRS
for SMEs for Turkey, an important emerging country, by conducting a survey of SMEs.
Therefore, this study provides new insights into the adoption process of the IFRS for
SMEs in emerging countries. Moreover, SMEs are one of the most important actors that
158 will affect the effectiveness of the adoption process of the IFRS for SMEs. The
measurement of their level of preparedness will give a general idea about what has been
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undertaken and should be undertaken to achieve a more effective adoption process in

Turkey and similar emerging countries. Lastly, the effect of firm characteristics on the
preparedness of entities has been analyzed within the scope of this study. The results of
this analysis show which entities are more willing to use IFRS for SMEs. Regulatory and
the standard setting bodies may use this information to detect the profile of entities
which are reluctant to implement IFRS for SMEs can thereby determine strategies to
increase the willingness of those entities for a more successful adoption process.
The rest of this paper is organized as follows. In the next two sections, the literature
review and methodology are provided, respectively. In Section 3, hypotheses are
developed. Section 4 includes the results and discussion. Finally, the conclusion
presents the implications and limitations of the study.

2. Literature review
As capital becomes a global commodity, the ability to compete for this commodity
requires countries, especially emerging economies, to apply the reporting standards
that govern their accounting and disclosure practices (Baker and Wallage, 2000).
Therefore, emerging economies are trying to transmit an image of improved financial
reporting quality to their audience by applying globally accepted financial reporting
standard sets (Peng and Bewley, 2010). Emerging countries do not have sufficient
resources and expertise to develop a standard such as the IFRS for SMEs themselves.
Most of the emerging countries do not have their own accounting system (Neag et al.,
2009); so, the IFRS for SMEs may give them a chance to acquire a more developed
accounting system. In September 2010 and in January 2011, there were 66 and 73
jurisdictions, respectively, that have either adopted the IFRS for SMEs or stated a plan
for this transition (Vasek, 2011). Based on the International Accounting Standards
Board (2012) data, some of the emerging countries that have applied and/or proposed a
plan to adopt the IFRS for SMEs in the next three years, including Argentina, Brazil,
Egypt, Hong Kong, Malaysia, Nigeria, Peru, the Philippines, Turkey, Venezuela,
Zambia, Zimbabwe, Singapore, etc. As seen from this list, most of the developing
countries have adopted or will adopt the IFRS for SMEs in the near future (Bohusova
and Blaskova, 2012). For example, South Africa was the first country to adopt the IFRS
for SMEs in the world (Stainbank, 2008).
The IFRS for SMEs is proposed and designed for entities that produce general
purpose financial statements to meet the financial reporting needs of small companies
and to maintain easy and accurate economic decision making by a broad range of
resource providers and other users, such as non-manager owners, lenders, vendors, and
other creditors, customers, and employees (Pacter, 2009). The costs incurred in
complying with financial reporting regulations also differ between companies. Since
the full set of IFRS is complex and costly to implement, many regulators, and preparers
see the need for a separate internationally accepted accounting standard suitable for
SMEs ( Jermakowicz and Gornik-Tomaszewski, 2006).
 The IASB decided that the difference between the entities that should apply the full Entities for the
set of IFRS and those that should apply the IFRS for SMEs lies not in their size, but in IFRS for
their nature (public accountability or not). Part 2.2 of the IFRS for SMEs, which is
published by the International Accounting Standards Board (2009), indicates that
SMEs
(p. 12) the objective of financial statements of a small or medium-sized entity is to
provide information about the financial position, performance and cash flows of the
entity that is useful for economic decision making by a broad range of users who are 159
not in a position to demand reports tailored to meet their particular information needs.
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These issues have attracted the attention of the financial reporting standard-setting
authorities. The full set of IFRS has been modified in several ways by the IASB to fulfill
the needs of small enterprises, which is also in parallel with the full set of IFRS, by
taking into consideration the characteristics of SMEs (Siam and Rahahleh, 2010). Pacter
(2009) and Epstein and Jermakowicz (2010) list five main modifications in the IFRS for
SMEs that make it simpler than the full set of IFRS:
(1) topics that are not generally relevant to private entities have been eliminated;
(2) where full IFRS provide choices of accounting treatment in a particular
circumstance, only one choice is set out in the IFRS for SMEs;
(3) the principles for recognition and measurement of assets, liabilities, income, and
expense have been simplified;
(4) many disclosures in the full IFRS that are designed for public capital markets
have been deleted, and the required presentation simplified; and
(5) the entire body of standards has been redrafted into plain English to enhance
its clarity.
As a result of all those simplifications, the IFRS for SMEs consists of 230 pages divided
into 35 chapters (Walton, 2011). It starts with concepts and principles, moves on to
financial statement presentation, and ends with a series of financial reporting issues
(Walton, 2011).
Most of the earlier academic studies have dealt with the IFRS rather than the IFRS
for SMEs since it was an earlier project of the IASB. There are mainly three streams of
study in prior literature. One stream of studies analyzes the preparedness for or
compliance with full set IFRS in listed companies (Dumontier and Raffournier, 1998;
El-Gazzar et al., 1999; Murphy, 1999; Jermakowicz and Gornik-Tomaszewski, 2006;
Guerreiro et al., 2008). Another stream deals with preparedness for or compliance with
full set IFRS in SMEs ( Joshi and Ramadhan, 2002). In the third stream, a few studies
investigate the preparedness for or compliance with IFRS for SMEs (Eierle and Haller,
2009; Atik, 2010). Because there are very few studies on the relationship between firm
characteristics and IFRS for SMEs preparedness, we have benefited from prior studies
regarding full set IFRS. Table I presents a summary of the studies that have
investigated the association between the entities preparedness for or compliance with
IFRS and IFRS for SMEs with several firm characteristics, such as size, leverage,
profitability, auditor size, internationality, capitalization. Only two of the studies are
about IFRS for SMEs as shown in Table I.

3. Methodology
Data were collected through the questionnaire survey. The target population of the study
was all firms that have SME qualifications according to the criteria used in Turkey.
 JAEE
6,2
Panel A: full set IFRS studies
Dumontier, P. and Raffournier, B. 133 listed Swiss
(1998). Why firms comply
voluntarily with IAS: an
160 empirical analysis with
Swiss data
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El-Gazzar, S.M., Finn, P.M. and
Jacob, R. (1999). An empirical
investigation of multinational
firms compliance with
international accounting
standards
Murphy, A.B. (1999). Firm
characteristics of Swiss
companies that utilize
international accounting
standards
Joshi, P.L. and Ramadhan, S.
(2002). The adoption of
international accounting
standards by small and closely
held companies: evidence from
Bahrain
Jermakowicz, E.K. and Gornik-
Tomaszewski, S. (2006).
Implementing IFRS from the
perspective of EU publicly
traded companies
Guerreiro, M.S., Rodrigues, L.L.
and Craig, R. (2008). The
preparedness of companies to
adopt international financial
reporting standards:
Portuguese evidence
Panel B: IFRS for SMEs studies
Eierle, B. and Haller, A. (2009). 410 German SMEs
Does size influence the
suitability of the IFRS for small
and medium-sized entities?
Empirical evidence from
Germany
Table I. Atik, A. (2010). SMEs views on 216 Turkish SMEs
Studies about the adoption and application of
entities IFRS for SMEs in Turkey
preparedness for or
compliance with full
set IFRS and IFRS
for SMEs Note: aThe variable that has a significant impact
Analysis type/independent
Sample Data source variables
Annual Univariate and multivariate
companies reports tests
Listing status,
Internationalitya, Sizea,
Ownership structurea,
Leverage, Capital
intensity, Profitability,
Auditors typea
87 listed companies Worldscope Non-parametric test and
multivariate test
Internationalitya, Leveragea,
Membership of the EUa
44 Swiss companies Worldscope Multivariate test
Foreign reporting activitya,
Debt ratio, Capitalization,
Size, Auditing firm
36 Bahraini SMEs Questionnaire Frequency analysis
112 listed entities in Questionnaire Frequency analysis
Europe
31 Portuguese Questionnaire Non-parametric test and
companies listed on multivariate test
the Euronext Sizea, Commercial
Lisbon Stock internationalization,
Exchange Auditor typea, Profitabilitya,
Leverage
Questionnaire Non-parametric test
Size
Questionnaire Non-parametric test
Firm size, Having an
accounting department,
Commercial
internationalizationa,
Legal status
 Entities which have fewer employees than 250 or total assets or total sales less than Entities for the
40 million TL are categorized as SMEs in Turkey. The questionnaire was sent to IFRS for
650 randomly selected entities during the months of April, May, and June 2012, and
198 completed questionnaires were received with a response rate of 30.46 percent.
SMEs
The preparedness of SMEs and accountants for adopting the IFRS for SMEs
was measured by several questions. The entities were categorized into two groups
according to their preparedness. The prepared entities were coded as one and the 161
unprepared entities as zero. The effect of several characteristics on the preparedness
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of SMEs was measured with parametric and non-parametric tests. Several studies
have employed parametric tests (i.e. ordinary least square, ordinal, and logistic
regression) to detect the relationship between firms characteristics and their
preparedness for and implementation of the new accounting frameworks. Logistic
regression is one of the most popular methods used to measure the effect of several
factors on the preparedness for, implementation of, and adherence to the financial
reporting standard sets. The logistic regression model is useful when the dependent
variable is categorical data and dichotomous (Iatridis and Rouvolis, 2010). Many
prior studies have employed this method (see, e.g. Dumontier and Raffournier, 1998;
El-Gazzar et al., 1999; Zeghal and Mhedhbi, 2006; Goodwin et al., 2008; Aledo et al.,
2009; Iatridis and Rouvolis, 2010). Because the dependent variable is dichotomous
in the research model of this study, logistic regression is employed. The dependent
variable is the preparedness of the SMEs for IFRS for SMEs. The dichotomous
variable takes the value one if an entity has made preparation for the IFRS for SMEs,
and zero otherwise.

4. Hypotheses
4.1 Firm size
Size is one of the most frequently used explanatory factors to describe the financial
reporting behavior of entities (Sian and Roberts, 2009). Many prior studies have
investigated how size affects the IFRS perception, preparedness, or compliance ( Jones
and Higgins, 2006; Al-Shammari et al., 2008; Goodwin et al., 2008; rk, 2009; Sian and
Roberts, 2009). On the other hand, there are few studies that have analyzed the
association between firm size and IFRS for SMEs perception, preparedness, or
compliance (Eierle and Haller, 2009, Atik, 2010).
According to Glaum and Mandler (1997), the accountants of large entities have more
positive attitudes toward the harmonization of financial reporting practices globally.
There are several reasons behind this positive stance. First, large entities are more
sensitive to political costs. There is a significant positive relationship between firm size
and political costs (Watts and Zimmerman, 1990). Larger entities should present
credible accounting values in financial statements to reduce those political costs
(Guerreiro et al., 2008). So, large SMEs may be willing to apply the IFRS for SMEs to
disclose credible financial information. Furthermore, the public interest of an entity is
determined by its economic significance (Eierle and Haller, 2009). Large entities have a
higher level of social responsibility, so they should be more transparent and strict in
their financial reporting practices compared to small ones (Eierle and Haller, 2009).
Hence, large SMEs may sustain transparent financial reporting by implementing IFRS
for SMEs. Moreover, the implementation of the IFRS for SMEs will be more costly for
small-sized entities. Researchers explain this issue with reference to several aspects.
According to Eierle and Haller (2009), small entities generally do not have enough
accounting personnel, so they would obtain consulting services for higher fees.
 JAEE Singhvi and Desai (1971) determined that compliance with international standards will
6,2 be less costly for large entities because most of those entities produce the necessary
information for the internal decision-making process. Besides, as the size of an entity
increases, the disclosure level of the entity also increases because of the cost of
additional disclosure (Dumontier and Raffournier, 1998; Tyrrall et al., 2007). Small-sized
entities generally do not have sufficient financial capacity to overcome the cost of
162 additional disclosure. Furthermore, size is an important factor that determines entities
ability to adopt the international reporting standards because larger entities have more
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resources to spend on their preparation and on compliance with them (Murphy, 1999;
Jones and Higgins, 2006; Al-Shammari et al., 2008; Eierle and Haller, 2009). As a result,
IFRS for SMEs implementation will be more advantageous and less costly for larger
SMEs since they have more human and financial resources compared to the smaller
ones. Thus, the following hypothesis is developed:
H1. There is a significant positive effect of the firm size on the preparedness of
SMEs for the IFRS for SMEs.
Prior studies have used the total sales (Uyar, 2009; Cheung et al., 2010; Uyar, 2011)
or the number of employees (Choi, 1999; Akhtaruddin et al., 2009) as a measurement
of firm size. In this study, number of employees was used to determine the size of
an entity.

4.2 Firm age

The age of a company, which denotes its stage of development and growth, can affect
its financial reporting practices in several ways (Owusu-Ansah, 1998). According to
Al-Shammari et al. (2008), older companies have more established financial reporting
systems; therefore, compliance with international reporting standard framework will be
less costly for them. Owusu-Ansah (1998) also stated that the cost of collecting,
processing, and presenting data will be more burdensome for younger companies than
for older ones. This argument applies to SMEs as well; hence, the age of a SME can
affect its compliance with or preparedness for the IFRS for SMEs. Thus, the following
hypothesis is developed:
H2. There is a significant positive effect of firm age on the preparedness of SMEs
for the IFRS for SMEs.
The age of an entity has been measured as the number of years since its foundation in
compliance with the prior literature (Choi, 1999; Al-Shammari et al., 2008; Hossain, 2008;
Abd-Rahman et al., 2011).

4.3 Independent auditing

The prior literature showed that auditors have an important role in determining
financial reporting practices of entities (Dumontier and Raffournier, 1998; Aledo et al.,
2009; Hodgdon et al., 2009). Auditing and effective enforcement mechanisms are very
important in maintaining compliance with the IFRS (Hodgdon et al., 2009). According to
Aledo et al. (2009), the auditing firm size affects entities financial reporting practices.
Hodgdon et al. (2009) stated that the auditing firm size positively affects entities IFRS
compliance. Abd-Elsalam and Weetman (2003) also determined the significant positive
effect of the auditing firm size on companies compliance with the IFRS. According to
Goodwin et al. (2008), entities that are audited by Big 4 auditing firms are more
prepared for the IFRS.
 All of the previous studies dealt with the association between IFRS compliance and Entities for the
auditing firm size. Auditing activities will also affect the financial reporting practices of IFRS for
the SMEs. Currently, independent auditing is mandatory for publicly traded entities in
Turkey. However, the case is different for SMEs; independent auditing is not mandatory
SMEs
for SMEs in Turkey but can be obtained voluntarily. Voluntary auditing of the financial
statements of entities has been determined as a measurement of the financial reporting
quality in this research. If a SME gets auditing services, its willingness to implement 163
IFRS for SMEs will be higher. Thus, the following hypothesis is developed:
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H3. There is a significant positive effect of independent auditing on the

preparedness of SMEs for the IFRS for SMEs.
Entities that use an auditing service voluntarily are coded as one, and otherwise
as zero.

4.4 Internationality
As the internationality of entities increases, the need for and importance of the
harmonization of their financial reporting practices also increases (Atik, 2010).
Multinational companies are trying to cope with financial reporting differentiations
between jurisdictions on a cost-benefit basis (El-Gazzar et al., 1999). So, there are two
groups of entities that may benefit from applying international reporting standards
more than others (Murphy, 1999):
(1) entities in countries where there are no national reporting standards; and
(2) multinational entities that seek to prepare a common set of financial statements.
Firms that obtain a significant part of their revenues from international markets tend to
develop international policies in several areas, including investing, marketing,
financing, and disclosure (El-Gazzar et al., 1999). Therefore, entities that undertake
international activities may find the compliance with internationally accepted
standards advantageous in making their financial statements more reliable
internationally (Murphy, 1999; Guerreiro et al., 2008). International entities face
additional regulatory obstacles related to disclosure requirements, and thus have more
incentive to present timely and complete disclosures (Hodgdon et al., 2009). Another
reason that makes the implementation of international reporting standards beneficial
for those entities is their wider range of decision makers (Murphy, 1999).
According to Hodgdon et al. (2009), entities with international operations will face
different and challenging financial reporting regulations of the countries in which they
operate, so those firms may have a greater incentive to adopt international financial
reporting standards and to make more and complete disclosures about their activities.
Furthermore, entities that try to obtain financing from international banks and other
international financial institutions will find it beneficial to comply with international
reporting standards (Dumontier and Raffournier, 1998). Barniv and Fetyko (1997)
determined that the harmonization of financial reporting standards has been
supported, especially by the larger multinational entities. As the size of the
international activities of entities increases, their willingness to comply with an
international standard set also increases. El-Gazzar et al. (1999) found that firms are
more motivated to adopt international financial reporting standards voluntarily in
order to enhance their foreign activities. According to them, compliance with
internationally accepted standards reduces the risk of international users of financial
statements and resource providers and helps the firm to obtain international resources
 JAEE at reasonable costs. According to Atik (2010), entities which have foreign partners or
6,2 export activities are more likely to apply a new financial reporting standard set. Hence,
the following hypothesis is developed:
H4. There is a significant positive relationship between the internationality of SMEs
and their preparedness for the IFRS for SMEs.
164 Most studies have employed the percentage of foreign sales to total sales as a
measurement of internationality (Barniv and Fetyko, 1997; Dumontier and Raffournier,
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1998; El-Gazzar et al., 1999; Murphy, 1999). In this study, the entities were categorized
according to their international activities. The entities that carry out export activities were
categorized as international companies, so they are coded as one, and otherwise as zero.

4.5 Existence of an accounting department

Entities technical capability and institutional structure affect their financial reporting
practices. Entities that have technical capability and an established financial reporting
system will also have greater capacity to adopt new accounting frameworks.
According Atik (2010), the compliance with a new financial reporting standard set will
be less costly for those entities that have an accounting department. Many departments
and external auditors in the organization can assist the implementation process of new
financial reporting practices ( Jones and Higgins, 2006). However, the existence of an
established accounting department helps to implement newly adopted financial
reporting standards. Accounting departments are one of the inseparable parts of large
enterprises; however, the situation might not be so in SMEs. Therefore, existence of an
accounting department in an SME is expected to make difference in transition to IFRS
for SMEs. Therefore the entities that have an accounting department and thus an
established financial reporting system will be more willing to apply the IFRS for SMEs.
Hence, the following hypothesis is developed:
H5. There is a significant positive affect of the existence of an accounting
department on the preparedness of SMEs for the IFRS for SMEs.
Entities were categorized into two groups based on the existence of an accounting
department. Those that have an accounting department are coded as one, and
zero otherwise.

5. Results and discussion

5.1 Descriptive statistics
The results of the descriptive statistics including firm age, status, number of
employees, and industry of the surveyed entities are presented in Table II. Most of the
entities have operated for more than fifteen years (44.4 percent). A total of 63.1 percent
of the entities are limited partnership. The research sample of this study includes
entities that have fewer than ten employees (23.7 percent), between 10 and 49
employees (51.0 percent), and between 50 and 250 employees (25.3 percent). The entities
were categorized according to the industry in which they operate. The majority of the
firms are manufacturing companies (59.6 percent), followed by merchandising
companies (28.3 percent), and service companies (12.1 percent). The majority of the
entities are not audited by an independent auditing firm (76.3 percent).
Some questions in this survey aimed at understanding the accounting organization
of the entities. For this purpose, the respondents were asked if they have an accounting
department or not. Most of the entities indicated that they have an accounting
 Characteristic Frequency Percentage
Entities for the
IFRS for
1. Firm age SMEs
0-5 years 25 12.6
6-15 years 85 43.0
More than 15 years 88 44.4
Total 198 100 165
2. Status
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Limited partnership 125 63.1

Corporation 41 20.7
Sole proprietorship 31 15.7
Non-limited company 1 0.5
Total 198 100
3. Number of employees
Fewer than 10 47 23.7
10-49 101 51.0
50-250 50 25.3
Total 198 100
4. Industry
Manufacturing 118 59.6
Merchandising 56 28.3
Service 24 12.1
Total 198 100
5. Independent auditing
Yes 47 23.7
No 151 76.3
Total 198 100
6. Existence of an accounting department
Yes 164 82.8
No 34 17.2
Total 198 100
Total 198 100
7. Export activities
Yes 114 57.6
No 84 42.4
Total 198 100
8. Awareness about the IFRS for SMEs
Yes 122 61.6
No 76 38.4
Total 198 100
9. Expected adoption process in Turkey
Immediately 2 1.0
1-2 years 73 36.9
3-4 years 79 39.9
5-6 years 33 16.7 Table II.
Never 11 5.6 Descriptive statistics
Total 198 100 of the entities
 JAEE department (82.8 percent). The export activities of the entities were investigated to
6,2 measure their internationality. 57.6 percent of the entities have export activities.
Further, the awareness of SMEs about the IFRS for SMEs was measured. Most of the
respondents are aware that the IFRS for SMEs will be mandatory starting from 2013
(61.6 percent). However, a considerable amount of entities are still unaware of the
adoption process of the IFRS for SMEs in Turkey (38.4 percent). For an effective
166 adoption process of IFRS for SMEs, the awareness of the related parties, such as
entities, professionals, academicians, and all of the stakeholders, should be maintained.
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Effective coordination and communication of those parties will ease the transition
process to the standards. The expectations of the respondents about the adoption
process of the IFRS for SMEs were investigated within the scope of this research. Most
of the respondents stated that the adoption process of the IFRS for SMEs will be
completed in 1-2 years (36.9 percent) or 3-4 years (39.9 percent) in Turkey. Only 5.6
percent of the respondents were very pessimistic about the adoption process of the
IFRS for SMEs and indicated that this process will never be completed.

5.2 Preparedness of the SMEs on the IFRS for SMEs

The preparedness of the entities for the IFRS for SMEs was investigated by employing
a questionnaire. The questions that were asked to measure the preparedness of the
SMEs are based on the prior literature (Guerreiro et al., 2008; Ballas et al., 2010).
As a result of the prior literature, a total of five questions were prepared to measure
the preparedness of the entities: one general question and four specific questions. The
general question aimed at investigating whether the entities have made any preparations
for the adoption of IFRS for SMEs. Other specific research questions are as follows:
RQ1. Have your accounting personnel taken training for the IFRS for SMEs?
RQ2. Has your management taken training about the IFRS for SMEs?
RQ3. Have you adopted your current accounting program for the IFRS for SMEs?
RQ4. Have you arranged meetings within the company to inform your accounting
personnel?
Table III shows the survey results related to the SMEs level of preparedness for the
IFRS for SMEs. Only 24.7 percent of the entities have made preparations for the IFRS
for SMEs; 75.3 percent of them have not made any preparations for the IFRS for SMEs.

Yes No
Item Frequency Percentage Frequency Percentage

Preparedness: have you made any preparations for

the adoption of the IFRS for SMEs in your company? 49 24.7 149 75.3
P1. Our accounting personnel have taken the IFRS
for SMEs training 45 22.7 153 77.3
P2. Our management has taken the IFRS for
SMEs training 5 2.5 193 97.5
Table III. P3. We have adopted our current accounting
Preparedness of the program for the IFRS for SMEs 1 0.5 197 99.5
entities for the IFRS P4. We have arranged meetings within the company
for SMEs to inform our accounting personnel 7 3.5 191 96.5
 In all, 45 of the respondents (22.7 percent) declared that they have made preparations for Entities for the
the IFRS for SMEs by attending related trainings. This finding is compatible with Uyar IFRS for
and Gngrm (2013) which determined that 89.8 percent of the respondents stated a
need for IFRS for SMEs training. Moreover, the management of only five entities has
SMEs
taken IFRS for SMEs training (2.5 percent). The transition process of a new financial
reporting system includes not only training, but also several alterations to the information
systems, such as computer support and software applications (Ballas et al., 2010). 167
Only one entity has adapted its current accounting program to the IFRS for SMEs (0.5
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percent). Furthermore, only seven entities have arranged meetings within the
company to inform their accounting personnel (3.5 percent). It seems that the majority
of the entities are not sufficiently prepared for IFRS for SMEs, despite the fact that at the
time of this study its being put into effect in Turkey was imminent. The entities that have
made preparations have only taken training. A large percentage of the entities have not
held any meetings related to the IFRS for SMEs or searched for a new accounting
program.
Many prior studies have used non-parametric tests to determine the relationship
between firm characteristics and entities preparedness for implementation of new
accounting frameworks (Barniv and Fetyko, 1997; El-Gazzar et al., 1999; Guerreiro
et al., 2008; Eierle and Haller, 2009; Atik, 2010; Siam and Rahahleh, 2010; Cole et al., 2011;
Siam and Al-Daass, 2011). Thus, we employed non-parametric tests to assess
the effect of several firm characteristics on the SMEs level of preparedness for the IFRS
for SMEs.
The sample of this study was categorized into two groups according to their
characteristics, such as firm size, independent auditing, and internationality.
The significance of differences between those groups was analyzed by performing
two-sample t-tests and non-parametric tests (Kruskal-Wallis 2). The results of those
analyses were the same, so only the findings of the Kruskal-Wallis c2 test are presented
in Table IV.
The findings of this study show that as the size of the entities increases,
their preparedness for the IFRS for SMEs also increases. This finding is compatible
with prior literature (see, e.g. Dumontier and Raffournier, 1998; Guerreiro et al., 2008;
Aledo et al., 2009; Hodgdon et al., 2009). Possible reasons that cause unpreparedness of
the smaller entities may be the scarcity of qualified staff and resources. On the other
hand, larger entities have greater resources and time to devote to the implementation
process of new accounting frameworks, so it is expected that those entities will have
greater knowledge about the new applications compared to smaller ones ( Jones and
Higgins, 2006).
The preparedness level of the entities did not differ according to their age, measured
by number of operating years. It was expected that as the age of an entity increases, its
preparedness level for a new accounting framework will increase (Al-Shammari et al.,
2008). The results of this study contradict this finding.
Many prior studies have revealed that auditing affects an enterprises compliance
with or preparedness for new accounting frameworks (Abd-Elsalam and Weetman,
2003; Goodwin et al., 2008; Hodgdon et al., 2009); thus, it increases the reliability and
quality of information reported on the financial reports. The results of this study
support this argument in that there is a significant positive effect of independent
auditing on preparedness of SMEs for the IFRS for SMEs.
The internationality of an entity might also affect its willingness to adopt a new
international financial reporting framework. The findings of this study show that most
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6,2

168
JAEE

Table IV.

the entities
characteristics on
the impact of firm

the preparedness of
Univariate analysis:
Firm size Firm age
050 More than 50 015 years More than 15 Years
employees employees
Mean SD Mean SD Kruskal- Mean SD Mean SD Kruskal-
Wallis 2 Wallis 2
Preparedness: we have made preparations for the IFRS
for SMEs 0.06 0.247 0.30 0.462 11.104*** 0.12 0.332 0.27 0.443 2.484
P1. Our accounting personnel have taken the IFRS for
SMEs training 0.06 0.247 0.28 0.450 9.327*** 0.12 0.332 0.24 0.430 1.865
P2. Our management has taken the IFRS for SMEs training 0.02 0.146 0.03 0.161 0.039 0.00 0.000 0.03 0.168 0.738
P3. We have adopted our current accounting program for the
IFRS for SMEs 0.02 0.146 0.00 0.000 3.213* 0.00 0.000 0.01 0.076 0.145
P4. We have arranged meetings within the company to inform
our accounting personnel 0.02 0.146 0.04 0.196 0.356 0.04 0.200 0.03 0.184 0.018
Independent auditing Internationality
Yes No Yes No
Mean SD Mean SD Kruskal- Mean SD Mean SD Kruskal-
Wallis 2 Wallis 2
Preparedness: we have made preparations for the IFRS
for SMEs 0.36 0.486 0.21 0.410 4.296** 0.29 0.456 0.19 0.395 2.532
P1. Our accounting personnel have taken the IFRS for
SMEs training 0.30 0.462 0.21 0.405 1.740 0.29 0.456 0.14 0.352 5.890***
P2. Our management has taken the IFRS for SMEs training 0.04 0.204 0.02 0.140 0.746 0.03 0.161 0.02 0.153 0.012
P3. We have adopted our current accounting program for the
IFRS for SMEs 0.00 0.000 0.01 0.081 0.311 0.00 0.000 0.01 0.109 1.357
P4. We have arranged meetings within the company to inform
our accounting personnel 0.09 0.282 0.02 0.140 4.451** 0.04 0.185 0.04 0.187 0.001

(continued )
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Existence of accounting
department
Exist Non-exist
Mean SD Mean SD Kruskal-
Wallis 2
Preparedness: we have made preparations for the IFRS
for SMEs 0.27 0.444 0.15 0.359 2.211
P1. Our accounting personnel have taken the IFRS for
SMEs training 0.24 0.431 0.15 0.359 1.496
P2. Our management has taken the IFRS for SMEs training 0.02 0.155 0.03 0.171 0.029
P3. We have adopted our current accounting program for
the IFRS for SMEs 0.00 0.000 0.03 0.171 4.824***
P4. We have arranged meetings within the company to
inform our accounting personnel 0.04 0.188 0.03 0.171 0.042
Notes: SD, standard deviation. *,**,***Significant at the 0.1, 0.05 0.01 level, respectively

Table IV.
SMEs
IFRS for
Entities for the

169
 JAEE of the entities that carry out exporting activities are prepared for the IFRS for SMEs.
6,2 This finding is compatible with Atik (2010). According to the findings, the
majority of the entities which engage in exporting have taken IFRS for SMEs
training. There are several reasons behind this fact. International entities should be
more transparent than national ones (El-Gazzar et al., 1999) because they are more
visible on foreign markets (Dumontier and Raffournier, 1998). As the internationality
170 of an entity increases, it attributes more importance to the harmonization
of financial reporting. Thus, entities that undertake international operations are
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more eager to make preparations for the implementation process of the IFRS
for SMEs.
The existence of an accounting department in an organization may affect its
financial reporting practices. It is expected that the firms that have an accounting
department makes preparations for the IFRS for SMEs. The findings of this study
show that the entities that have adopted an accounting program that is compatible with
the IFRS for SMEs also have an accounting department. Contrary to the expectations,
other items of preparation for the IFRS for SMEs do not differ according to the
existence of an accounting department.
Before evaluating the research model, correlation analysis was used to check
for the existence of the multicollinearity problem among the independent variables.
Table V presents the findings of this analysis. According to the results, the
preparedness of entities has a positive significant correlation with firm size and
independent auditing.
Moreover, there is no multicollinearity among the independent and the dependent
variables as 0.80 (Bryman and Cramer, 2009) and 0.90 (Hair et al., 2009) are considered
as a threshold for the multicollinearity problem. According to Lind et al. (2002),
correlations among the independent variables between 0.70 and 0.70 do not cause a
problem for the regression analyses.
There are significant positive correlations between several independent
variables of the research model but none of them exceeds the threshold values.
Hence, those correlations do not create a multicollinearity problem for the research
model.

PREP SIZE AGE AUDITING INT EAD

PREP 1.000
SIZE 0.237** 1.000
AGE 0.112 0.253** 1.000
AUDITING 0.148* 0.228** 0.105 1.000
INT 0.113 0.170* 0.166** 0.215** 1.000
EAD 0.106 0.344** 0.069 0.128 0.070 1.000
Notes: PREP is the probability of preparedness for the IFRS for SMEs and takes one if the entity has
made any preparations for the IFRS for SMEs, and zero otherwise; SIZE (firm size) takes the value one
if the entity employs more than 49 employees, and zero otherwise; AGE (number of operating years)
takes the value one if the entity has operated for more than 15 years, and zero otherwise; AUDITING
(independent auditing) takes the value one if the entity uses independent auditing services, and zero
otherwise; INT (internationality) takes the value one if the entity carries out export activities, and zero
Table V. otherwise; EAD (existence of an accounting department), takes the value one if the entity has a
Correlation analysis separate accounting department, and zero otherwise. *,**Significant at 0.1, 0.05 level, respectively
 Besides this analysis, variance inflation factor (VIF) analysis should be performed Entities for the
to detect the presence of collinearity (Zeghal and Mhedhbi, 2006; Akhtaruddin et al., IFRS for
2009). Independent variables with a VIF of ten or above are considered as highly
correlated with one or more of the other variables in the model (McClave et al., 2005;
SMEs
Akhtaruddin et al., 2009). VIF analysis was performed to detect the possible collinearity
problems between the independent variables. The results of this analysis are presented
in Table VI. 171
The VIF values do not exceed the threshold value of 10, as seen from Table VI.
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There is no multicollinearity problem between the independent variables of the

research model in this study.
Logistic regression analysis was carried out to determine the impact of the firm
characteristics, including firm age, size, auditing, internationality, and existence of an
accounting department on the preparedness of the entities for the IFRS for SMEs.
Logistic regression was employed because the dependent variable is dichotomous
and takes only two values, one and zero (Zeghal and Mhedhbi, 2006; Iatridis and
Rouvolis, 2010).
The research model is as follows:
 
Log P i =1
P i a1 a1 SIZEi a2 AGEi a3 AUDITINGi a4 INTi

a5 EADi ei
where Pi is the probability of preparedness for the IFRS for SMEs and takes one
if the entity has made any preparations for the IFRS for SMEs, and zero
otherwise; SIZEi (firm size) takes the value of 1 if the entity employs more than
49 employees, and zero otherwise; AGEi (number of operating years) takes the
value of 1 if the entity has operated for more than 15 years, and zero otherwise;
AUDITINGi (independent auditing) takes the value of 1 if the entity receives
independent auditing services, and zero otherwise; INTi (internationality) takes the
value of 1 if the entity carries out exporting activities, and zero otherwise; EADi
(existence of an accounting department) takes the value of 1 if the entity has an
accounting department, and zero otherwise; e is the margin of error. The results are
presented in Table VII.
The findings show that only the firm size affects the SMEs preparedness for IFRS
for SMEs. As the size of an entity increases, its preparedness for IFRS for SMEs also
increases. There may be several reasons behind this fact. The size of an entity affects
its financial reporting practices. Large-sized entities have more resources and
established financial reporting systems to implement new practices. Large-sized
entities may have more personnel to apply this standard compared with smaller ones.
Large SMEs may intend to grow and to become a listed company. They also have more

Collinearity statistics
Independent variables Tolerance VIF

Firm size 0.796 1.296

Firm age 0.919 1.088
Independent auditing 0.913 1.095 Table VI.
Internationality 0.925 1.082 Collinearity
Existence of an accounting department 0.879 1.138 diagnostics
 JAEE Factors Expected sign Coefficient Wald statistic
6,2
SIZE + 1.584*** 5.908
AGE + 0.206 0.138
AUDITING + 0.394 1.062
INT + 0.297 0.659
EAD + 0.206 0.138
172 Constant 3.376*** 13.815
Model 2 16.750***
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Sample size 198

Notes: Dependent variable: P is the probability of preparedness for the IFRS for SMEs and takes one if
the entity has made any preparations for the IFRS for SMEs, and zero otherwise. Independent
variables: SIZE (firm size) takes the value one if the entity employs more than 49 employees, and zero
otherwise; AGE (number of operating years) takes the value one if the entity has operated for more
than 15 years, and zero otherwise; AUDITING (independent auditing) takes the value one if the entity
Table VII. uses independent auditing services, and zero otherwise; INT (internationality) takes the value one if the
Results of the entity carries out export activities, and zero otherwise; EAD (existence of an accounting department)
logistic regression takes the value one if the entity has a separate accounting department, and zero otherwise.
analysis ***Significant at the 0.01 level

foreign activities than others. Hence, the IFRS for SMEs seems to be more
advantageous for and applicable to larger SMEs.
The other independent variables do not affect the preparedness of the entities
according to the logistic regression analysis. In fact, the non-parametric tests reveal
the effect of size, internationality, and independent auditing on the preparedness of the
entities. Hence, the results of the non-parametric tests and logistic regression do not
support each other completely.

6. Conclusions
The international activities of firms have increased as a result of globalization in recent
years. They can make international investments, merge with foreign entities, or take
credit from foreign banks. All of those activities necessitate comparable financial
statements. For instance, if an entity wants to merge with a foreign entity or make an
acquisition in a foreign country, it will analyze the financial statements of the target
company. Understanding the target companys financial statements, which are
compatible with its national regulations, will not be an easy task. Hence, the number of
international mergers and acquisitions or global capital movements will be affected
adversely because of the complications involved in understanding the financial
situation of the target companies. Banks will also give credit to foreign entities after
having analyzed their financial statements. A financial reporting framework
that is compatible with internationally accepted financial reporting standards will
ease the business of banks and decrease the cost and risk of credit. First, the needs of
listed companies for internationally accepted standards have been answered with full
set IFRS. The regulatory bodies and standard setting authorities have aimed at
creating comparable, understandable, and transparent financial statements
with the publication of this standard set. Many developed and developing countries
all over the world have followed the harmonization process by legitimizing the use
of IFRS in their own jurisdictions. After a while, the need for another standard set for
 unlisted entities became apparent; thus, the IFRS for SMEs has been published to Entities for the
respond to this need. IFRS for
SMEs are the backbone of the economy of Turkey and many other countries. Most
of the employment and total sales is maintained by them. SMEs can conduct exports or
SMEs
international investments, can merge with foreign SMEs, or can take credit from
foreign banks in the same way as listed entities. So, SMEs also need internationally
comparable financial statements. The implementation process for the IFRS for SMEs 173
and preparedness of the entities have a vital role in the harmonization of the accounting
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applications in all over the world. This study aimed at analyzing the preparedness of
the SMEs for the IFRS for SMEs in Turkey and determining the effect of several firm
characteristics including size, age, independent auditing, internationality, and existence
of an accounting department on their preparedness. According to the results, most
entities have not made any preparation for the IFRS for SMEs. The majority of the
prepared entities accounting personnel have only attended training. A large
percentage of the SMEs management have not taken any training regarding the
IFRS for SMEs. Only one entity has adapted its current accounting program for the
IFRS for SMEs. Moreover, most of the entities have not held any meetings to
inform their accounting personnel. There is some evidence that several firm
characteristics such as size, independent auditing, and internationality affect the
preparedness of SMEs. According to the findings of this study, larger entities
have made more preparations for the IFRS for SMEs compared to small ones.
Independent auditing has a positive effect on the preparedness of the entities. Further,
the entities that are involved in international activities are more prepared for the
IFRS for SMEs.
The findings of this research suggest important implications for several parties,
including national and international standard setting authorities, entities, managers,
and accounting professionals. First, large and international SMEs are more prepared to
apply the IFRS for SMEs, so national and international standard setting authorities
may suggest a step-by-step adoption process for the IFRS for SMEs. This study may be
beneficial for the standard authorities of other emerging countries. The Turkish
Standard Authority is following all of the developments in international financial
reporting for several reasons, and especially for the EU candidacy process. So, other EU
candidate countries standard authorities may face similar problems in the adoption
process. They can take the findings of academic studies in similar countries into
consideration to achieve a more effective adoption process. The findings show that the
percentage of entities that have made preparations for the IFRS for SMEs is
particularly low. Entities accounting personnel should attend training about the IFRS
for SMEs for an effective implementation process. Further, entities should hold
meetings to inform their personnel and should revise their current accounting program.
In addition, managers and owners should be informed about IFRS for SMEs
implementation process mainly because an effective implementation process of IFRS
for SMEs require commitment and reinforcement from managers, owners, and
accounting professionals in SMEs. The problems and obstacles in this process will be
overcome by the collaboration of those parties.
This study has some limitations. First, the SMEs did not present any information about
their financial position, such as sales, net profit, total debt. Thus, the effect of those
financial characteristics on firms preparedness for the IFRS for SMEs could not be
measured. Second, this research was conducted before the application of the IFRS for
SMEs, so only the preparedness of the entities about the implementation of IFRS for SMEs
 JAEE can be determined. After the application date, SMEs compliance with the IFRS for SMEs
6,2 can also be measured. Finally, this research was carried out only in Turkey. The study can
be extended to other emerging countries and their adoption processes can be compared.

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About the authors

Merve Kl is an Assistant Professor of Accounting and Finance in the Department of
Management at the Canik Baar University in Samsun, Turkey. She received her PhD in
Management from the Fatih University. Her research interests are performance of corporations,
international financial reporting standards, and voluntary disclosure. Her articles have been
published in several journals. Merve Kl is the corresponding author and can be contacted at:
mervekilic@basari.edu.tr
Ali Uyar is an Associate Professor of Accounting and Finance in the Department of
Management at the Fatih University in Istanbul, Turkey. He received his PhD in Accounting and
 JAEE Finance from the Marmara University, Turkey. He teaches cost accounting, managerial
accounting, and financial accounting. His research interests are related to cost and management
6,2 accounting practices, corporate reporting, and voluntary disclosure. His research papers have
been published in various national and international journals.
Baak Ataman is a Professor of Accounting and Finance in the Department of
Management at the Marmara University in Istanbul, Turkey. Her research interests are
financial reporting standards, financial reporting, and financial statement analysis. Her papers
178 have been published in various academic journals. She published several books in the field
of accounting.
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