“An Investigation into the Challenges of IFRS Adoption and Implementation amongst small and medium scale Enterprises in Nigeria” DEPARTMENT OF ACCOUNTING 88PAGES
CHAPTER ONE
INTRODUCTION
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
The
fast pace of globalization with integration of national financial markets has
stimulated the need for a common financial language (IFRS) because good
financial reporting makes investment and financial decisions more efficient. 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 they are also a
nursery for the larger firms of the future. The most successful developing
country over the 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 and providing 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 at 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 and other mineral resources like limestone, coal among
others.
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, the International Accounting Standard Board (IASB) introduced an
International Financial Reporting Standard (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 SMEs was
necessitated by many challenges faced by these entities in adopting full IFRSs
in financial reporting, the main of which was the excessive disclosure requirements,
based on a cost-benefit analysis for SMEs (Nazri, 2010).
1.2 STATEMENT
OF THE PROBLEM
There is no doubt about the fact that 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
under-finance.
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 and how IFRS for SMEs interplay to their benefit (Fortuin,
2011). This is an indication of the lack of awareness of the benefits accrued
through the use of IFRS for SMEs which may in turn inhibit SMEs from adopting
them.
The results of the survey by Deloitte in 2009 revealed that 43%
of SME respondents 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
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
1.3 RESEARCH QUESTIONS
By the time this study will be concluded, it will find answers
to the following questions:
1.
What is the level of awareness of IFRS guidelines amongst SME
operators in Nigeria?
2.
What is the level of adoption of IFRS guidelines among SMEs?
3.
What are the challenges faced by Small and Medium Scale
enterprises in implementing the IFRS guidelines?
1.4 OBJECTIVES OF THE STUDY
The broad objective of the study is to investigate the
challenges facing the adoption and implementation of the IFRS amongst small
scale enterprise owners. Specific objectives of the study are:
1.
To determine the level of awareness of IFRS guidelines amongst
SME operators.
2.
To examine the extent to which IFRS is adopted by small and
medium scale enterprises.
3.
To investigate the challenges of implementation of the IFRS guidelines
for SMEs by Small and Medium Scale Enterprises.
1.5 RESEARCH HYPOTHESES
To achieve a good base for carrying out the research, the study
seeks to test the following three (3) operational hypotheses outlined in null
and alternative form:
1. H0: There is low level of
awareness of IFRS guidelines among small and medium scale enterprises
H1: There is high level of
awareness of IFRS guidelines among small and medium scale enterprises
2. H0: There is low level of adoption of IFRS Guidelines
by small scale enterprises.
H1: There is
high level of adoption of IFRS Guidelines by small scale enterprises.
3. Ho: The implementation of IFRS
among small and medium scale enterprises do not involve challenges.
H1: The implementation of IFRS among small and medium
scale enterprises involves challenges.
1.6 SCOPE AND LIMITATIONS OF THE STUDY
In a developing country like Nigeria, large percentage of
businesses in the state falls within the small and medium scale enterprises
sub-sector, the need to clearly define the scope and area of the study becomes
imperative. The study captures small and medium scale enterprises in Nigeria.
The population of this study includes all small and medium scale enterprises in
Nigeria whose working capital ranges between 3 Million Naira and 5 Million
Naira. The sample of 10 SMEs will be drawn from all small and medium scale
enterprise in Ondo State. Questionnaires will be administered in these
enterprises to derive needed information.
A study of this nature could not have been carried out without
any hitch. Notable among the constraints is the paucity of relevant empirical
literature in the adoption of IFRS among small scale enterprises. Empirical
information on problems of small scale enterprises are abundant in literature
but work done on their financial literature is still scanty and that will be a
serious limitation to the study.
1.7 SIGNIFICANCE OF THE STUDY
Given the vital role and contribution which small scale
businesses in developed and developing countries make, and considering the
ongoing reforms by the Central Bank of Nigeria for a sustainable financial
literacy framework for small and medium scale enterprises in the country, the
significance of this study cannot be over emphasized.
The significance of this study therefore will lie in the attempt
to document the factor that is truly responsible for hindering the adoption of
IFRS amongst small scale enterprises but which have not been appreciated,
recognized or factored into the various incentives schemes and policy measures
being put up for SMEs in the state and the nation at large.
In addition, this research will equip owners of small scale
enterprises by encouraging them to give the keeping of proper accounting
records a greater priority in the objectives of their business. With this,
adequate information about the profitability of the business will be accurately
known.
Furthermore, apart from the result of the study contributing to
the “knowledge bank” of small scale enterprises, it will stimulate more
researches into this area since from research literature work in this field is
still minimal.
1.8 ORGANIZATION OF THE STUDY
In other to carry out an organized research work, this study
will be presented in five (5) chapters. These chapters will be organized in a
sequential manner that will aid careful investigation and easy achievement of
the objectives.
Chapter one will be a preview of the background of the study and the problem(s) that necessitated the research. This will lead to the outline of the objectives, significant of the study, research questions and operational hypothesis within the sample scope of small scale enterprises. Chapters two will presents the review of relevant works as it relates to the study. Also, theories about the dependent and independent variables will be discussed. It will also examine the theoretical framework of the adoption of IFRS and small scale enterprises.
Chapter three will reveals the methods of data collection in relation to the research design, population and sample with emphasis on the model specification, estimation, validation and reliability of research instrument.
Chapter four will presents and analyses the data and also the findings, dealing with the extent to which small scale enterprises adopt IFRS and its underlining challenges.
Chapter five will summarizes major findings from the study, recommends tentative policy thrust and also states suggested areas of further research.
Chapter one will be a preview of the background of the study and the problem(s) that necessitated the research. This will lead to the outline of the objectives, significant of the study, research questions and operational hypothesis within the sample scope of small scale enterprises. Chapters two will presents the review of relevant works as it relates to the study. Also, theories about the dependent and independent variables will be discussed. It will also examine the theoretical framework of the adoption of IFRS and small scale enterprises.
Chapter three will reveals the methods of data collection in relation to the research design, population and sample with emphasis on the model specification, estimation, validation and reliability of research instrument.
Chapter four will presents and analyses the data and also the findings, dealing with the extent to which small scale enterprises adopt IFRS and its underlining challenges.
Chapter five will summarizes major findings from the study, recommends tentative policy thrust and also states suggested areas of further research.
1.9
OPERATIONAL DEFINITION OF TERMS
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS):
Are
a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.
SMALL AND MEDIUM SCALE ENTERPRISES
For
the purpose of this Study, a Small and Medium Scale Enterprise (SME) is an
enterprise that has asset base (excluding land) of between N5million –N500
million and labour force of between 11 and 300.
Profitability
Is the measure of the
difference between the purchase price and the costs of bringing to market i.e.
the revenue a company derives from its operations, less all explicit costs
IFRS 1 First Time Adoption of International Financial Reporting Standard
sets out the procedures that an entity must follow when it adopts IFRSs for the
first time as the basis for preparing its general purpose financial statement.
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