CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The world is becoming a global village and therefore, the need for harmonization in operations of the economy and organizations. International Accounting Standards (IAS) are written to meet the needs of investors in international capital markets. Most companies adopting International Financial Reporting Standards (IFRS) are large listed entities. The International Accounting Standard Board (IASB) has not stated that IFRS are only aimed at quoted companies, but certainly the majority of adopters are large and quoted entities. In many countries IFRSs are used as generally accepted accounting principles (GAAP), which means that unquoted small and medium-sized entities (SMEs) have to apply them.
There is an argument that all entities should apply the same accounting standards in order to give a fair presentation of the affairs of the entity. However in some cases, many of the IFRSs are complex and can be difficult for SMEs to apply, particularly in areas such as financial instruments. Additionally, not all the information required by IFRSs for disclosure is needed by the users of the SME’s financial statements. Some analysts therefore suggest that SMEs and public entities should be allowed to use some simplified or differing standards as the nature of the business is different from large companies.
The users of financial statements of SMEs are different from the users of the financial statements of quoted companies. The only user groups that use the financial statements of SMEs according to ICAN (2015) are its shareholders/owners, senior managements and possibly government departments and agencies. A SME is often owned and managed by a small of entrepreneurs, and may be a family-owned and family-run business. Large companies, in contrast, are run by professional boards of directors, who must be held accountable to their shareholders. Because there are big differences between SMEs and large quoted companies, it is not clear whether there is any reason why SMEs should comply with IFRSs. There are arguments in favour of using IFRSs for SMES, and arguments against.
The aim of developing a set of IFRS for SMEs is that they allow information presented to be reliable, relevant, comparable and understandable. The information presented should be suitable for the need of the managers, directors and any other interested parties of the SMEs. The cost of complying with IFRSs is usually high and large companies are able to bear the cost, and this might be insignificant compared to their sizes. For SMEs the cost is relatively much higher, and is doubtful whether the benefits of complying would justify the cost. Some IFRSs deal with subjects that are of little or no relevance to SMEs and this may lead to presentation of financial statement that not relevant to users.
In July 2009, the IASB published the IFRS for SMEs. The IFRS for SMEs is intended to be applied to the general purpose financial statements that do not have public accountability. The essence of this study is to identify the effects of IFRS adoption by SMEs on their performance. At the turn of the millennium, the many corporate collapses, business failures and fraudulent financial reporting scandals tarnished the reputation of accountants and resulted in credibility crises for the accounting profession. The profession struggled to rebuild its reputation and desperately searched for a solution. All this resulted in a major restructures in the financial reporting framework leading to the development of the International Financial Reporting Standard (IFRS for SMEs) by the International Accounting Standards Board (IASB).
Understanding the impact of adopting globalised accounting standards in emerging economics would help us identify the benefits and limitations of such adoption as well as identify the potential factors that are necessary for a successful transition. Understandable and relevant information improve the level of investment and enable stakeholders make informed economic decisions. In conclusion, it is apparent that international financial reporting standards are an important component in the performance of SMEs.
1.2 STATEMENT OF THE PROBLEM
Small and medium sized entities are entities that do not have public accountability and do not publish their financial statement for external users. IASB after some consideration and arguments decided to produce IFRS for SMEs which are quite different from those IFRS used by quoted entities. IFRS for SMEs imposes a lesser burden on SME due to the facts that some topics in IFRS are being omitted because they are not relevant, there is simplification of many recognition and measurement requirements and there is substantially fewer disclosures.
Given this simplification of these standards, some SMEs in Nigeria are still not adopting these IFRSs for SMEs because they still feel that the requirements are burdensome and costly to implement. Most of these SMEs are still falling back on the old set of standards which make their financial statements not relevant and comparable to their financial statements across the globe. The major aim why IASB produced this standard is to harmonize ways that financial statements are prepared globally and to encourage uniform accounting systems.
These new standards are bound to implore the performance of SMEs as good reporting systems will be instituted which will in turn attract customers and investors because these entities are complying with the international reporting system.
1.3 OBJECTIVES OF THE STUDY
The main objective of the study is to examine the effect of (IFRS) on the performance of small and medium scale enterprise, however, the following are the specific objective of the study.
- To examine the effect of IFRS on profitability of SMEs in Nigeria.
- To examine the relationship between IFRS and growth of SMEs in Nigeria.
- To examine the effect of IFRS on quality of financial reposting of SMEs in Nigeria.
1.4 RESEARCH QUESTION
The following questions were considered in the study.
- Do IFRS have any effect on profitability of SMEs in Nigeria.
- Is there any relationship between IFRS and growth of SMEs in Nigeria.
- Do IFRS affect the quality of financial reporting of SMEs in Nigeria
1.5 STATEMENT OF HYPOTHESES
The following hypotheses were formulated for the study
- IFRS do not have any effect on profitability of SMEs in Nigeria
- There is no relationship between IFRS and growth of SME in Nigeria.
- IFRS do not significantly affect the quality of financial reporting by SMEs.
1.6 SIGNIFICANCE OF THE STUDY
The study will be beneficial to the following groups:
Investors and other users of financial statement: The study will provide them with an overview of IFRS and provides them with an in-depth knowledge of IFRS financial reporting in Nigeria.
National Accounting Regulators: these are institutions charged with the responsibility of implementing IFRS in their various countries. The study appraises the challenges that may impede IFRS implementation in Nigeria.
Accounting Students: The study will increase their awareness of the rudiments of IFRSs in Nigeria and their effects on SMEs performance in Nigeria.
Researchers: the study provides a guide for further studies in IFRS for SMEs in Nigeria.
1.7 SCOPE OF THE STUDY
The study is focused on the effects of IFRSs on the performance of SMEs in Nigeria. The study is expected to be carried out within the population of eighty-eight SMEs operators in Okoroette town in Akwa Ibom State, among the manufacturing and business sectors. Okoroette is a town and local government area in Akwa Ibom State, Nigeria. The local government area was previously part of Cross River State. It was later joint Akwa Ibom State with the total population of 139,090 (2006 Nigeria Population Census).