IMPLEMENTING INTERNATIONAL FINANCIAL REPORTING STANDARD FOR SMALL AND MEDIUM ENTERPRISES IN GHANA: PROBLEMS AND PROSPECTS

ABSTRACT
SMEs have come to accept the importance of accounting information harmonization in order to remain in today’s business environment. In 2009, the IASB developed and published the IFRS for SMEs in response to the need for a high quality internationally comparable and transparent financial information. In January 2012, the Institute of Chartered Accountants, Ghana directed the use of IFRS for SMEs in Ghana for reporting periods beginning 2013. However, there are widespread reports of non-compliance regarding the 2013 financial reports which resulted in the extension of the compliance period to 2015 by the Institute (ICAG, 2014). The result indicate that Eighty Five (85%) of the sampled entities prepare financial statements. However, most of these financial statements are prepared in compliance with the Ghana National Accounting Standards and others with the full IFRS. The implication of this finding is that, internationally, there is no demand on SMEs to prepare financial reports for international users hence no compliance regarding the directive by ICAG regarding 2015 period.It was recommended that there should be a continuous education, sensitisation, and communication to stakeholders of issues associated with IFRS for SMEs should commence in earnest. Also A rigorous IFRS/IFRS for SMEs capacity building programme should be embarked upon by all regulatory bodies, firms and training institutions in order to provide the needed manpower for the successful implementation of the IFRS for SMEs.


CHAPTER ONE
INTRODUCTION
Small and Medium Scale Enterprises (SME’s) have come to accept the importance of accounting information harmonization in order to remain in today’s business environment. In 2009, the IASB developed and published the IFRS for SMEs in response to the need for a high quality internationally comparable and transparent financial information. Since the adoption of the IFRS for SMEs in Ghana in January, 2012, research is yet to empirically examine the level of compliance and the possible implementation issues confronting SMEs in Ghana. With about 90% of businesses registered in Ghana falling within the SME category, SMEs seem to remain a critical sector in Ghana’s quest for economic development. The research therefore contributes to filling the gap by examining the implementation problems and benefits of IFRS for SMEs in Ghana. This research therefore provides a platform to identify some issues and provides guidelines to practitioners and policy makers.

Background to the Study
Small and Medium-sized Entities (SMEs) contribute quite significantly to the economic growth and development of Ghana. SMEs provide about 85% of manufacturing employment and contribute up to about 70% of National Gross Domestic Product (GDP) (Abor & Quartey, 2010). Even in developed countries, SMEs make a significant contribution to GDP and national employment (Culkin & Smith, 2000). According to Hallberg (2001), SMEs are the engines for economic development in several developed countries such as Japan and United States.

The role they play as a major source of innovation and growth has been emphasized in contemporary research (Bravnerhjelm, 2008).Prasad, Green and Murinde (2001) also contends that, growing SMEs will contribute to expanding the size of the directly productive sector in the economy; generating tax revenue for the government and facilitating poverty reduction through fiscal transfers and income from employment and firm ownership in terms of profits, dividends and wages.

In Ghana, SMEs represent a significant segment of the economy and account for a large proportion of economic activities. Data from the Registrar General Department in Ghana indicate that about 90% of businesses registered are either micro, small or medium enterprises (Mensah, 2004). Compared to larger companies, most SMEs are registered as sole proprietorship and private companies rather than corporate bodies. SMEs are seen to mostly exist in the service industry, trading, agri-business and manufacturing industry. SMEs are also seen in the form of restaurants, consulting services and mostly diverse in nature. Despite the economic contribution of SMEs, the failure rate is much higher than that of larger organisations. For instance, SMEs in South Africa fail at a rate of between 70% and 80% (Adeniran & Johnston, 2012).

Mostly, SMEs encounter limited financial and non-financial resources. One of the major problems is access to sources of external finance (Herrington et al., 2009). The majority of SMEs depend on funding from the owner, family and friends, which is often inadequate for survival and growth (Carpenter and Petersen, 2002). Research by Berry et al. (2002) documents the reliance of SMEs on bank debt as the most appropriate source of financing. These researchers, however, pointed out that, access to bank debt is a frequently cited challenge for SMEs as they lack a consistent track record of profitability that would demonstrate their capability to repay loans. Banks do prefer credible audited financial statements by independent auditors for reasonable assurance of the firms’ creditability. (Howorth & Moro, 2006) indicates that, the bank’s lending decision is often based on the evaluation of the SME’s financial statements and/or the provision of collateral, and/or credit rating score.

Besides, the activities of SMEs on the international markets are limited by a great deal of obstacles in comparison to large enterprises. Different national financial reporting and tax systems can be considered as the most important obstacles (European Commission, 2003). The variability of the national financial reporting standards allowed companies to choose from numerous accounting methods in presenting their financial statements. This caused uncertainty about the reliability and usefulness of the information derived from these reports. It was also very difficult to compare the financial statements of companies situated in different countries.

Again, many developing countries strive to mobilize financial resources from domestic and international sources to attain their economic and social development goals. The availability of relevant information on potential investment targets has a bearing on efforts to mobilize investment for financing economic and social development. Such information plays an important role in making critical investment decisions and conducting risk assessment. It also contributes to improved investor confidence and decreased cost of capital. Economic resources have become more mobile across borders. Enterprises that provide potential investors with reliable and comparable financial statements are more likely to attract domestic and international investment.

In addition, the faster pace of globalization, the growing interdependence of international financial markets and the increased mobility of capital have added to the pressure and demand for the harmonization of accounting and financial reporting frameworks and related standards around the world (ACCA, 2010).Recognizing the significant influence that financial reporting has on investment decisions, developing countries are attaching greater importance to transparency in accounting and reporting. This is a welcome development considering the fact that the quality of financial reporting is essential to the needs of users who require useful accounting information for investment and other decision-making purposes. It is expected that, countries adopting IFRS for SMEs would have higher degree of transparency and comparability of financial reporting, decrease in asymmetric information and at the end would attract more investment and foster higher international trade.

According to the Intergovernmental Working Group of Experts on International Standards of Accounting Reporting, SMEs in most countries have been required to conduct their accounting and reporting on the basis of standards originally intended for larger companies (ISAR, 2001). In July 2009, the International Accounting Standards Board (IASB) developed and published a separate set of financial reporting standards - International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). The standard was designed to apply to the financial reporting needs of all SMEs irrespective of size or geographical location.


In developing the IFRS for SMEs, one of the objectives was to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting set of standards for the SME sector. The IFRS for SMEs represents a big step forward for SMEs in particular and for the financial communication in general.The IFRS for SMEs isdesigned to meet the financial reporting needs of entities that; Do not have public accountability responsibility and Publish general purpose financial statements for external users. The IASB recognized the cost and difficulty relatively to small private entities of preparing a fully compliant IFRS information.
The IASB argues that, a single set of global financial reporting standards appropriate for SMEs is needed because, the benefit of global accounting information will increase comparability, improved efficiency of capital allocation, consistency in audit quality and the facilitation of financial reporting education and training. The IASB also recognised that, users of private entity financial statements may have a different focus from those interested in publicly listed companies. This difference can be explained in the area of; financial statement users and their information needs; the accounting expertise available to the entity and the ability of SMEs to bear the cost of using the same standard as the larger publicly accountable entities (IASB, 2009).
The IFRS for SMEs attempts to meet needs, whilst trying to balance the costs and benefits to the preparers of the financial statements. The IFRS for SMEs is a stand-alone standard and does not require cross-referencing to IFRSs. In addition, it contains fewer disclosure requirements in a dramatically shorter document compared to full IFRSs and is therefore expected to appeal both the users and preparers of financial statements. IFRS for SMEs enables companies to adopt a cost-effective global standard which facilitates global comparison and interpretation of financial statements by users as well as providing the ability to adopt an international framework when preparing consolidated financial statements. The IFRS for SMEs is a self-contained standard of about 230 pages which is separate from full IFRSs and is therefore available for any jurisdiction to adopt whether or not it has adopted the full IFRSs. Epstein and Jermakowicz (2010) defined IFRSs as standards and interpretations issued by the IASB. The IFRS for SMEs is considered to be a significant development which may have strong impact on accounting and auditing practice in the future, but the attitude of national regulators and standard-setters is crucial in establishing the limits of this possible impact (Jermakowicz & Epstein, 2010).

The Institute of Chartered Accountants, Ghana (ICAG) adopted the International Financial Reporting Standards for Small and Medium Entities (IFRS for SMEs) in January 2012, to entirely replace the Ghana Accounting Standards (GAS), which was set up in 1993 by the ICAG. The new standards is believed, would enable Ghanaian small companies’ financial statements to be understood in the global market. It would also ensure greater comparability of financial information of companies in Ghana with their peers in other parts of the world, as well as ensure investor confidence in financial reporting. SMEs in Ghana would have to comply with the International Financial Reporting Standard (IFRS for SMEs) by the end of 2013, if their financial statements are to be globally compatible.

The implementation of the standard is important in harmonizing Ghana's financial accounting sector, to assist various users of financial statements in making informed decisions, said Felix Nana Sackey, Deloitte Country Managing Partner. According to Sellhorn and Gornik-Tomaszewski, (2006) whiles countries with strong accountability traditions probably build their strategy regarding the IFRS for SMEs implementation on their national experience, it is argued that, some level of resistance to IFRS adoption and implementation might be experienced in countries not having such traditions. Irvine (2008) regarded the IFRS implementation as a legitimate act because it could affect a country’s reputation as a modern, organized and well-regulated place to do business. However, according to Mark and Thomas (cited in Howorth &Moro, 2006), the movement towards convergence and implementation requires research to provide updated assessment of convergence and impediments to its progress. Rodrigues and Craig (2007), also advise that, countries should evaluate the costs and benefits before making decision to adopt standards which are relevant and useful for them. According to Karlson et al., (2007) IFRS implementation at the firm level is a demanding process that is both time consuming and requires a lot of resources.It is therefore important that the implementation process is not underestimated by business entities (Rippe, 2001) and National Regulators.Against this background, the study seeks to contribute to the issue by providing evidence from Ghana on the extent to which accounting information prepared by SMEs complied with IFRS for SMEs and to investigate the likely implementation challenges, prospects and benefits thereof.

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Item Type: Ghanaian Project Material  |  Attribute: 85 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH50  |  Delivery: Within 30Mins.
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