Challenges of introducing IFRS in SMEs

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.



Module Name: Literature Review_____

Course: BA Accounting

Stage: 1/2/3/4 (please delete as appropriate)

Lecturer responsible: 

Assignment number:

Before submitting assignments, you should check through it to ensure that:

  • All material identified as originally from a previously published source has been properly attributed by the inclusion of appropriate citations within the text.
  • Corresponding entries have been made in the list of references at the end of the text.
  • Direct quotations are marked as such (using “quotation marks” at the beginning and end of the selected text).

  • Module: BS3234
  • Date: 07/07/2014
  • Essay Title: An analysis of the barriers and challenges of introducing IFRS in Small and Medium Enterprises (SME)
  • Word count: 2106
  • Tutor’s name:

An Analysis Of The Barriers And Challenges Of Introducing IFRS In Small & Medium Enterprises (SME).

2014

A literature review submitted in part fulfillment of

the requirements for the award of BA Accounting (with CIMA Advanced Diploma)

Abstract

This study reveals the barriers and challenges that encountered in the adoption of IFRS in SMEs, this will give a better understanding of SMEs, and contribution to the economic growth by the SMEs operates around world. And also addresses the need of the uniformity in accounting which enable the comparability of global trade and access of capital markets to improve and expand the business in SMEs. This study emphasizes on the accounting quality measures; comparability, faithfulness, timeliness, understandability, relevance and representation. Also it revels the ways of successful adoption of IFRS in SMEs. It also measured the challenges and barriers in adoption of IFRS in SMEs.

Acknowledgment

I wish to extend my heartiest gratitude to the almighty God for the courage that grant to me, to submit the coursework. I also wish to extend my gratitude to Prof. the supervisor of the degree program, who took his valuable time to share his knowledge, experience and ideas to complete this work and enable me to improve the academic knowledge, skills and attitude.

I also wish to extend my heartfelt appreciation to Sumeda Gunarathne, my loving husband who has constantly encourage me, support me during the writing of this literature review. I would like to thank the institution, Wisdom Business Academy, Robert Gordon University and support staff who have been supported to make this successful.

Also wish to thanks my parents and all well-wishers for the support that they extend to me.

Contents

Chapter 1– Introduction

1.1 What is meant by SMEs?

1.2 What is IFRS?

Chapter 2–Literature Review

2.1 - Importance of International Financial Reporting Standards (IFRS) for SMEs

2.2 - Barriers and challenges of introducing IFRS

Chapter 3 – Conclusion

Chapter 4 Reference

An Analysis Of The Barriers And Challenges Of Introducing IFRS In Small & Medium Enterprises (SME).

CHAPTER 1 - Introduction

1.1 What is meant by SMEs?

Small and Medium enterprises (SMEs) or Small and Medium sized businesses (SMBs) are companies or entities that does not have public accountability and publish general purpose financial statements for external users and whose debt or equity instruments traded in a public market or it is in process of issuing instruments for trading in a public market or foreign stock exchange or over the counter market.

It rarely comply with official and administrative requirements though their activities meant to be legal. Furthermore, SME’s drives towards innovation and competition between sectors, plays an important role in the global economic growth and it is important to sustain the large scale industries, especially in developing nations, it acts as an accelerator towards economic development and stability within several economies. It generates employment, development of infrastructure, creation of better living standards, and increase of GDP.

In the United States of America, SMEs employ 50% of her workforce, and generate more than half of the nation’s Gross Domestic Products. SMEs account for 99.8% of all companies and 65% of business turnover in European Union. The situation is not different in Africa as research reveals that in South Africa, SMEs account for about 91% of the formal business entities contributing about 51% and 57% of GDP, providing almost 60% of employment. (Cornish, 1993, cited in Ikem et al.)

Moreover, SME’s have the ability to change rapidly according to the economic changes and survive in the business even in the bad economic conditions.

1.2 What is IFRS?

It is a set of rules which should be followed by accountants maintain their books of account which can be understandable, comparable, relevance to the users of internal and external to the business. It’s designed as a global language for the business affairs, which fulfill the above measurements across the global trade.

This has been begun as an attempt of European Union to harmonize accounting, this set of rules called as “International Accounting Standards (IAS) introduced by International Accounting Standards Committee (IASC) in 1973 and 2001. After the taken over of IASC in 2001, new board has been set up as “International Accounting Standards Board (IASB) and during their first meeting adopted existing IAS and Standard Interpretations Committee standards (SIC) and continued to issue and develop standards under a new name “International Financial Reporting Standards”. IASB has introduced standards which is suitable for SMEs.

A complete set of financial statements should include a statement of financial position, a statement of changes in equity, a statement of cash flows, notes to the financial statements and a single statement of comprehensive income or a separate income statement and separate statement of comprehensive income which is replaced by the statement of income and retained earnings in cases where the only movements in equity for the period relate to profit and loss, dividends, errors and changes in accounting policy. These set of statements enables entrepreneurs to understand the concepts and theories used in International financial reporting. (Abdulrazak, M.J, 2013)

IFRS for SMEs aims to provide a simplified, self-contained set of standards for SMEs, remove the choices of accounting treatment; which means that uniformity of accounting across business entities, and provide minimum and simple disclosure requirements, without disturbing their contribution to the economic growth and stability of the entity.

Chapter 2–Literature Review

2.1- Importance of International Financial Reporting Standards (IFRS) for SMEs

Various countries use different financing and accounting methods in business, which limits the comparability and hinder the access of global investments;

IFRS for SMEs aims to provide a simplified, self-contained set of standards for SMEs, remove the choices of accounting treatment; which means that uniformity of accounting across business entities, and provide minimum and simple disclosure requirements, without disturbing their contribution to the economic growth and stability of the entity, to increases comparability of financial reporting effectiveness, understand the financial position of different companies. It is important to understand the financial statements in order to attract foreign investors to the country, therefore it should be written in a language that users can understand & not only the language barrier structure of the financial statements is important to compare, if not so investors need to go through trial conversion to have a better understanding, as the companies which owned by foreign investors usually compare the figures with home countries. (Cited in StruhaÅ™ová, K. et al.)

Also its aim at protecting interest of stakeholders and reduce the burden on SMEs by providing revision to the IFRS once every three years.

In the research carried out by Neag, R. et al stated that the aim of proposal for a Directive of the European Parliament and of the council on the annual financial statements, consolidated financial statements and related reports would be to improve comparability EU wide.

Further, the authors Neag, R. et al also stated that on their research, IASB is concern on competitiveness of community capital markets to achieve the convergence of the standards used in preparing financial statements, with the introduction of new IFRS limitations will be narrowed and it could be used across globally, for cross-border transactions or listing. And also stated that, the main focus of introduction of IRFS for SMEs to achieve the efficient and cost-effective functioning of the capital market, while maintaining the confidence in the financial market and protecting investors. This enables free movement of capital in equal markets in the home country and global capital markets.

Moreover, understand and compare of financial statements supports to make the wise investment decisions, and It will facilitates the expansion of businesses to the globe, through global partnerships, harmonizing and participation, aiming at transparency, accounting quality and reduction of cost of capital. (Pownall and Schipper 1999, cited in Abdulrazak, M.J, 2013)

Based on these, quality of accounting will be measured by various aspects such as faithfulness in representation, comparability, timeliness, understandability and value relevance. Its serves the purpose of publicly traded companies but not owner managed businesses and it has been a growing need of uniformity in accounting methods when trading across different countries (Brookfield, 2001 cited in Abdulrazak, M.J, 2013).

Introduction of IFRS for SMEs will lead to the convergence of methods used in valuation of assets of the business across globe. (UNCTD, 2008, cited in Abdulrazak, M.J, 2013) Since, there has been a growing need in the regulatory authorities such as the tax system for proper accounting for small and medium enterprises. Regulatory environment has been among the most prevalent challenges facing small and medium enterprises. This has led to an increasing pressure for small and medium enterprises to fulfill the requirements of accounting (Mirza, Holt, & Knorr, 2011 cited in Abdulrazak, M.J, 2013).

2.2 - Barriers and challenges of introducing IFRS

Since SMEs are not publicly listed companies, user of their FS are mainly focus on short term cash flow and liquidity and solvency of the company. So that, full IFRS need not to be introduced for their accounting, it need to be governed by a separate set of standards.

The other main challenge for SMEs in introducing IRFS would be the huge burden on reporting, in terms of cost and other resources and this reporting procedure is very much time consuming. (Evans and collaborators, 2007 cited in Neag, R, et al.), Further, in their research emphasized that low interest will be given by the external users for this additional cost incurred and the cost associated in preparation & publication of financial statements, which will give unnecessary exposure of the firm.

Though, IFRS implementation is costly, gradually it will turns into an advantage of preparing financial statements, that can be understandable by the users on a competitive market, as it is written in a global language. (Keasey and Short, 1990 cited in Neag, R, et al.).

With the development of former small and medium firms, it will be passed to the category of publicly traded companies, which involves using IFRS, previous knowledge and experience in IFRS in SMEs would be a obvious advantage. (Cited in Neag, R, et al.)

With the increase of globalization of capital markets, it generates a higher requirement on financial statements which could be highly comparable. (Paseková, M. et al.)

The problem faced by SMEs in following full IFRS, is that the content of the most IFRS will not be relevant to SMEs.

Majority of entrepreneurs are hold onto cultural and attitudes towards the IFRS, seek the IFRS system as a complex one, and also high cost involved in subscription fees and other expenses in maintaining reliable accounting softwares which supports IFRS.(Madawaki, 2011, cited in Abdulrazak, M.J, 2013)

Also, Abdulrazak, M.J, 2013 stated that majority of the SMEs possesses little knowledge of the accounting theories and concepts which can be adopted in their organisations.

Apart from the removal of cultural and other cross country differences, it influences business practices, but it is most likely induce additional indirect costs of harmonization, in SMEs accounting this cost causes direct costs by forcing millions of European firms, e.g., adjust their accounting systems, training cost of accounting staff, also stated that SME financial accounting harmonization can only be successful, if the benefits of harmonization exceed the direct and indirect costs of harmonization. (Fülbier, R.U., and Gassen, J., 2010)

Moreover, Abdulrazak, M.J, 2013 also discuss about the need of qualified staff for the purposes of accounting in the organisations, which would be a barrier or a challenge in introducing IFRS in SMEs.

The regulatory bodies should facilitate training and educational programs on IFRS in order to encourage entrepreneurs to move into the uniform reporting method, in addition it enables the skills and knowledge of the entrepreneurs in financial management. This will result in right adoption of accounting principles and practices, increases comparability due to the uniformity. (Neag, Masca, & Pascan, 2009 cited in Abdulrazak, M.J, 2013)

Tax of authorities use the financial statements in determining the tax that need to be paid by the entities, which the companies must maintain proper accounting records and comply with the IFRS and accounting practices, which would be a major challenge for small and medium enterprises. (Holt, 2010, cited in Abdulrazak, M.J, 2013)

In the research by Neag, R, et al highlighted, IFRS for SMEs would bring no particular benefits especially to companies which operate locally as there is a little need for an international comparability.

StruhaÅ™ová, K. et al stated in their research, the challenges faced in reporting in the country of Czech, currently they are using GAAP, Czech tax legislation and cost related to reporting under IFRS.

Baldarelli, M.G., Demartini, P., Škare*,L.M, 2007 stated in their research that all costs need to be incurred for the implementation, but it makes financial reporting more useful for both management purpose and bank’s credit decisions

Holban, I., stated in his research on “Reflection on the Value Under IFRS for SME’s”, Evolution of multinational companies affected, due to the complexity of the business- management since IRFS has focus on the measure of fair value in a different way. The term “fair value” widely discussed in the measurement of revaluation exercise, during the acquiring stage of the entity, with the introduction of IFRS for fair value measurement to be new names for the entry value and current cost has been emerged. i.e. reproduction cost and replacement cost. Reasonable evaluation, using of the market information should be carried out in order to justify the subjective arguments, users of financial information demands elaboration of general application.

CHAPTER 3 - Conclusion

Adoption of IFRS is challenging and costly for the SMEs as it does not have a sound accounting reporting system, as well as the knowledgeable staff and less contribution of entrepreneurs. Lots of research has been taken place in order to address the limitations and ease the adoption process in SMEs both in developed and developing countries, which could be identified as lack of resources, time, knowledge, commitment. Also pointed out by been hugely committing on reporting structure and systems, the chance of been loss of focus on the business, future of the entity, innovation. Mainly, the cultural and attitude barrier of the entrepreneurs obstruct the new change.

Research contained mixed results for the adoption of IFRS in SMEs.

Most of the researches have revealed that there is greater need of uniformity in financial reporting across the global trade, which enable to move the investments from country to country. Further examinations can be carried out to address the challenges of adoption of IFRS in SMEs in order to smooth the induction without upsetting the contribution by the SMEs to the world economic growth.

CHAPTER 4 - References

Abdulrazak, M.J 2011, ‘the effect of adopting international financial reporting standards on quality of counting reports of small and medium enterprises in Nairobi County’

Baldarelli, M.G., Demartini, P., Škare*,L.M., 2007, ‘International Accounting Standards for

SME’s’ , Empirical Evidence from SMEs in a Country in Transition and in a Developed Country facing new challenges.

Fülbier, R.U., and Gassen, J 2010, ‘IFRS for European Small and Medium-Sized Entities?

A Theoretical and Empirical Analysis’, IFRS for European SMEs’ – A Theoretical and Empirical Analysis.

Holban, I., ‘Reflecting on the Value Under IFRS for SME’s’ Recent Research in Applied Economics (Tomis University From Constanta)

Ikem, O.C., Chidi, O.F., and Titus, I.T., ‘Financial Challenges of Small and Medium-Sized Enterprises

(Smes) In Nigeria: The Relevance of Accounting Information’, Review of Public Administration & Management Vo. 1 No. 2

Neag, R., and MaÈ™ca, E., ‘The Option of Adopting the IFRS for SME at the European Union Level’, Advances in Accounting, Auditing and Risk Management

Paseková, M., Müllerová, L., Strouhal, J., and Chyzhevska, L., 2010, ‘IFRS for SMEs: Challenge for Emerging Countries? Case of Czech Republic and Ukraine’, World Academy of Science, Engineering and Technology, Vol:4 2010-06-21

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.