The study has two objectives: to identify the users and their information needs of Sri Lankan small and medium enterprises (SMEs) financial information; and to examine the need for internationally comparable accounting information for Sri Lankan SMEs. The findings clarify issues with the current SME financial reporting standards and provide useful insights to assist in developing an appropriate reporting framework for Sri Lankan SMEs. An analysis of the literature reveals a paucity of empirical research on financial reporting by SMEs and little about the users and their financial information needs in the context of developing countries. No prior empirical research that examines the effects of adopting the International Financial Reporting Standard for Small and Medium Enterprises (IFRS for SMEs) in Sri Lanka was found to exist. This thesis contributes to the literature, through applying a mixed methods approach. A questionnaire survey was used to collect data from 323 accountants and owners of SMEs. Quantitative data was analysed using a statistical package for social sciences. The responses are subdivided into three categories: small; medium and large SMEs to reveal differences according to size. Forty-one face-to-face semi-structured interviews were conducted with accountants and owners, bank lending officers, income tax officers, and representatives from government agencies, and the accounting standards setting authority of Sri Lanka. Follow-up interviews were conducted with the same group of interviewees to obtain their comments on a proposed financial reporting framework. Qualitative data was analysed using thematic analysis via the NVivo software. Institutional theory was adopted as the theoretical framework to study Sri Lanka’s decision to adopt the IFRS for SMEs. This decision was in response to institutional pressures rather than alleged benefits of internationally comparable financial information. Coercive institutional pressures are the most obvious which drove the adoption of IFRS for SMEs both at country and individual firm levels. SMEs do not see any need to provide internationally comparable accounting information due to their limited cross border activities. Many of the accounting topics included in the IFRS for SMEs appear to be irrelevant. The prime users of the financial information are owner-managers, banks, and the Inland Revenue Department. Government institutions are also users of financial information, particularly for the large SMEs. Users and their financial information needs vary according to the size of the SME. The results indicate that SME financial statements are unable to meet the needs of the main users. Tax oriented reporting, a lack of detail and a lack of up-to-date information are the main weakneses in SME financial statements. Further, users indicate the existing financial reporting framework, based on general purpose financial reporting, is neither cost effective nor relevant to the diverse SME sector in Sri Lanka. Based on the findings, a framework for Sri Lankan SME financial reporting is proposed, which includes four tiers. The proposed framework allows non-publicly accountable entities to determine the objective of their financial reporting and tailor their information to users’ needs in a cost effective manner. These findings have implications, and recommendations for policy makers, and standard setters charged with developing and implementing an appropriate financial reporting framework for SMEs. The government and the local standard setters should pay greater attention to SME financial reporting and take steps to make it credible, relevant, and appropriate to the needs of users. The findings provide useful insights for developing countries, particularly the Asian countries where adoption of IFRS for SMEs is being considered.