AN INVESTIGATION INTO THE CHALLENGES OF IFRS ADOPTION AND IMPLEMENTATION AMONGST SMALL AND MEDIUM SCALE ENTERPRISE OPERATORS IN NIGERIA. ( A CASE STUDY OF SOME SELECTED SMES IN IKEJA, LAGOS STATE)
CHAPTER ONE
INTRODUCTION
1.1 STUDY BACKGROUND
Small and medium-sized businesses are the engines that power the majority of the world’s economies. Their significance to Nigeria’s economy cannot be overstated. As businesses participate in the manufacturing, importation, exportation, and employment, SMEs-both foreign and domestic-have made significant contributions to the economy’s gross domestic product.
According to Gono (2013), SMEs contribute to output and job development while also serving as a breeding ground for larger enterprises of the future. Taiwan, the most successful developing country in the last 50 years, is based on a thriving SME sector. Small and medium-sized enterprises (SMEs) have contributed significantly to Taiwan’s economic development by increasing exports and creating jobs.
The necessity to harmonize accounting reporting standards for businesses operating globally motivated the Central Bank of Nigeria to set January 2014 as the deadline for small and medium-sized enterprises in Nigeria to implement the International Financial Reporting Standard (IFRS).
This mandate has raised numerous concerns about SME operators’ understanding, preparation, and financial capacity to comply with the new accounting reporting standards. In this new era of globalization, it is critical to evaluate the impact of IFRS implementation on small and medium-sized firms, which play an important role in international trade in Nigeria.
According to the OECD (2012), the extent to which globalization affects SMEs is determined by their participation in exporting operations. This is especially true for SMEs in Nigeria, which is a significant exporter of agricultural products.
The implementation of IFRS in Nigeria, combined with the current condition of globalization, simply implies that SMEs cannot continue to use local standards for financial reporting. To be more successful worldwide, SMEs participating in international trade with subsidiaries and franchisees in other countries must follow the IFRS principles.
Adoption of the IFRS has been extensively embraced by many countries throughout the world as a result of the harmonization of accounting reporting standards. However, the whole IFRS issued by the IASB has been ruled to be irrelevant because to the substantial disclosure requirements for SMEs.
As a result, the IASB issued the IFRS for SMEs, a simplified version of the IFRS relevant to SMEs. On July 9, 2009, the International Accounting Standard Board (IASB) introduced an International Financial Reporting Standard (IFRS) tailored for use by small and medium-sized businesses (SMEs) as a consequence of extensive discussion of SMEs and consistent standards for SMEs globally (International Accounting Standards Board, 2010).
The development of IFRS for SMEs was prompted by various obstacles faced by these companies in adopting complete IFRSs in financial reporting, the most significant of which was the excessive disclosure requirements, based on a cost-benefit analysis for SMEs (Nazri, 2010).
1.2 THE PROBLEM’S STATEMENT
Access to credit is the most difficult barrier for small and medium-sized businesses in Nigeria. Small and medium-sized enterprises (SMEs) have the potential to transform the economy, but their greatest difficulty remains underfinance.
With the implementation of IFRS, SMEs in Nigeria are required to follow the new reporting standard beginning in January 2014. Many African countries face difficulties in raising awareness, accepting, and implementing the new IFRS requirements for SMEs (Fortuin, 2011).
Many firms are still unaware of the options available to them or how IFRS for SMEs might help them (Fortuin, 2011). This demonstrates a lack of understanding of the benefits of using IFRS for SMEs, which may discourage them from adopting them.
According to the findings of a Deloitte survey conducted in 2009, 43 percent of SME respondents were unaware of the IASB’s standard IFRS for SMEs.
When it comes to receiving financing from financial institutions and government agencies, SMEs have two key challenges: poor financial management and poor bookkeeping. According to Gono (2013), most SMEs fail owing to poor financial management and reporting. As a result, it is critical for SMEs to follow the current trend of financial reporting in order to reap the maximum benefits.
1.3 THE STUDY’S OBJECTIVES
The study’s major goal is to look into the barriers to IFRS adoption and implementation among small business owners in Ikeja, Nigeria. The following are the study’s specific objectives:
To ascertain the level of awareness of IFRS guidelines among Ikeja SME operators.
To investigate the extent to which IFRS is used by small and medium-sized businesses in Ikeja, Lagos state.
To establish the obstacles of Small and Medium Scale Enterprises in Ikeja, Lagos state, in implementing the IFRS rules for SMEs.
1.4 QUESTIONS FOR RESEARCH
The research will provide answers to the following questions:
What is the level of awareness of IFRS guidelines among Nigerian SME operators?
What IFRS guidelines have SMEs adopted?
What obstacles do small and medium-sized businesses face while applying the IFRS guidelines?
1.5 HYPOTHESIS OF RESEARCH
To lay a solid foundation for the research, the following hypotheses were proposed, with the hope that by the time suitable responses were delivered, the study would have covered all necessary territory. To accomplish this, the study intends to evaluate the two (2) operational hypotheses presented in null form below:
Ho: Adoption of IFRS Guidelines by small and medium-sized businesses is poor.
2. Ho: The implementation of the IFRS has no substantial impact on the profitability of small businesses.
1.6 THE STUDY’S SCOPE AND LIMITATIONS
With a substantial proportion of firms in the state falling into the small scale enterprises sub-sector, it is critical to precisely identify the scope and area of the study.
The study is thus limited to small scale firms operating in the Ikeja Local Government Area of Lagos State, however the findings can be used to obtain insight into the complete small scale enterprises.
A study of this magnitude could hardly have gone off without a hitch. Among the obstacles was the scarcity of relevant empirical material on the adoption of IFRS by small businesses. Although empirical information on the challenges of small scale firms is abundant in the literature, work on their financial literature is still scarce, which was a significant restriction of the study.
1.7 THE STUDY’S SIGNIFICANCE
Given the vital role and contribution that small scale businesses play in both developed and developing countries, and in light of the Central Bank of Nigeria’s ongoing reforms for a sustainable financial literacy framework for the country’s small and medium scale enterprises, the importance of this study cannot be overstated.
The importance of this study lies in the attempt to document the factor that is truly responsible for impeding IFRS adoption among small scale enterprises but has not been appreciated, recognized, or factored into the various incentive schemes and policy measures being put in place for SSEs in the state and the nation at large.
Furthermore, this research will equip small business owners by urging them to prioritize the maintaining of good accounting records in their business objectives. This will provide appropriate information regarding the profitability of the business.
Furthermore, aside from contributing to the “knowledge bank” of small scale firms, the results of the study will motivate more research into this area, as research literature work in this sector is still limited.
Finally, it will be a requirement for the award of a Bachelor of Science (B.Sc.) in Accounting.
1.8 THE STUDY’S ORGANIZATION
This research is divided into five (5) chapters. These chapters are organized in a logical order to facilitate serious examination and easy achievement of the goals.
The first chapter provides an overview of the study’s context and the problem(s) that prompted the research. This results in an outline of the aims, significance of the study, research questions, and operational hypotheses for a sample of small scale firms in Lagos, Nigeria.
The second chapter provides a review of significant works as they pertain to the study. Theories about the dependent and independent variables were also discussed. It also investigates the theoretical foundation of IFRS adoption for small business enterprises.
The third chapter discusses data collection methods in connection to the research design, population, and sample, with an emphasis on model specification, estimation, validation, and dependability of research instruments.
The fourth chapter presents and analyzes the data as well as the findings, focusing on the extent to which small businesses embrace IFRS and the underlying obstacles.
Chapter five summarizes the study’s principal conclusions, suggests a tentative policy thrust, and suggests areas for further investigation.
1.9 OPERATIONAL TERM DEFINITION
Small Scale Enterprises: A small scale enterprise is one that employs no more than five people and has an annual turnover of less than five hundred thousand Naira (N500, 000).
Financial literacy is the capacity to grasp basic accounting and finance concepts as well as their application, as well as the ability to apply such knowledge and skills to properly manage financial resources for a lifetime of financial well-being.
IFRS stands for International Financial Reporting Standard.
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AN INVESTIGATION INTO THE CHALLENGES OF IFRS ADOPTION AND IMPLEMENTATION AMONGST SMALL AND MEDIUM SCALE ENTERPRISE OPERATORS IN NIGERIA. ( A CASE STUDY OF SOME SELECTED SMES IN IKEJA, LAGOS STATE)
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