CHAPTER
ONE
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
Small
and medium scale enterprises are the engine that drives most economies of the
world. Their importance to the economy of Nigeria cannot be overlooked. SMEs
activities-both international and local have contributed immensely to the gross
domestic product in the economy as they participate in manufacturing,
importation, exportation, employment etc.According to Gono (2013), SMEs contribute to output
and employment creation and theyare also a nursery for the larger firms of the
future. The most successful developing country overthe last 50 years, Taiwan is
built on a dynamic SME sector. Small and medium enterprises (SMEs)have played a
significant role in Taiwan?s economic development in
expanding exports andproviding jobs.
The
need to harmonize accounting reporting standards for organizations operating
around the world has prompted the Central bank of Nigeria to set January 2014
as deadline for adoption of the International Financial Reporting Standard
(IFRS) for small and medium scale enterprises in Nigeria. This mandate has
posed a lot of questions on the awareness, readiness and financial ability of
SME operators to comply with the new accounting reporting standards. This new
era where globalization is fast becoming real, it is imperative to investigate
the effect the IFRS adoption possess on small and medium scale enterprises as
they have a key role to play in international trade in Nigeria. According to
OECD (2012), the level of which globalization affect SMEs is a function of
their engagement in exporting activities. This is particularly the case of SMEs
in Nigeria, as Nigeria is a major exporter of agricultural produce.
The
introduction of IFRS in Nigeria and the current state of globalization simply
means that SMEs cannot continue with local standards for financial reporting
purposes. For SMEs involved in international trade with subsidiaries and
franchises in other countries to be more successful internationally, it must
comply with the IFRS guidelines. As a result of the harmonization of accounting
reporting standards, the adoption of the IFRS has been widely accepted by
various countries of the world. However, the full IFRS promulgated by the IASB
has been found to be irrelevant due to the disclosure requirements, which are
extensive for SMEs. For this reason, the IASB promulgated a simplified version
of the IFRS applicable to SMEs-the IFRS for SMEs.As a result of broad
discussion of SMEs and common standards for SMEs worldwide, theInternational
Accounting Standard Board (IASB) introduced an International Financial
ReportingStandard (IFRS) designed for use by small and medium-sized entities
(SMEs) on July 9, 2009 (International Accounting Standards Board, 2010). The
introduction of IFRS specifically for SMEswas necessitated by many challenges
faced by these entities in adopting full IFRSs in financialreporting, the main
of which was the excessive disclosure requirements, based on a
cost-benefitanalysis for SMEs (Nazri, 2010).
1.2 STATEMENT OF THE PROBLEM
In
Nigeria, the greatest challenge facing small and medium scale enterprises is
access to finance. SMEs as the engine of the economy have the full potentials
to turn the economy around for the better, but their greatest challenge still
remains underfinance.
With
the introduction of IFRS, SMEs in Nigeria are mandated to adopt the new
reporting standard from January 2014. The awareness, acceptance and
implementation of the new IFRS guidelines for SMEs are challenges for many
African countries (Fortuin, 2011). Many businesses still do not understand what
options are available andhow IFRS for SMEs interplay to their benefit (Fortuin,
2011). This is an indication of
the lack ofawareness of the benefits accrued through the use of IFRS for SMEs
which may in turn inhibitSMEs from adopting them. The results of the survey by
Deloitte in 2009 revealed that 43% of SMErespondents were not aware of the
IASB's standard IFRS for SMEs.
Poor financial management
and book-keeping are two major barriers confronting SMEs when it comes to
accessing funds from financial institutions and government agencies. A study
conducted by Gono (2013) revealed that most SMEs fail due to poor financial
management and reporting. So it is important for SMEs to follow the current
trend of financial reporting and enjoy the full benefits that are associated.