“An Investigation into the Challenges of IFRS Adoption and Implementation amongst small and medium scale Enterprises in Nigeria”
CHAPTER ONE
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
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.
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.
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
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.
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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