Challenges of introducing IFRS in SMEs


Module NameModule Name: Literature Review_____

Course:BA Accounting

Phase: 1/2/3/4 ( delight cancel as appropriate )

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  • Faculty:BS3234
  • Date:07/07/2014
  • Essay Title:An analysis of the barriers and challenges of presenting IFRS in Small and Medium Enterprises ( SME )
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An Analysis Of The Barriers And Challenges Of Introducing IFRS In Small & A ; Medium Enterprises ( SME ) .

2014

A literature reappraisal submitted in portion fulfilment of A literature reappraisal submitted in portion fulfilment of

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

Abstraction

This survey reveals the barriers and challenges that encountered in the acceptance of IFRS in SMEs, this will give a better apprehension of SMEs, and part to the economic growing by the SMEs operates around universe. And besides addresses the demand of the uniformity in accounting which enable the comparison of planetary trade and entree of capital markets to better and spread out the concern in SMEs. This survey emphasizes on the accounting quality steps ; comparison, fidelity, seasonableness, comprehensibility, relevancy and representation. Besides it revels the ways of successful acceptance of IFRS in SMEs. It besides measured the challenges and barriers in acceptance of IFRS in SMEs.

Recognition

I wish to widen my heartiest gratitude to the Godhead God for the bravery that grant to me, to subject the coursework. I besides wish to widen my gratitude to Prof. the supervisor of the degree plan, who took his valuable clip to portion his cognition, experience and thoughts to finish this work and enable me to better the academic cognition, accomplishments and attitude.

I besides wish to widen my heartfelt grasp to Sumeda Gunarathne, my loving hubby who has invariably promote me, back up me during the authorship of this literature reappraisal. I would wish to thank the establishment, Wisdom Business Academy, Robert Gordon University and support staff who have been supported to do this successful.

Besides wish to thanks my parents and all sympathizers for the support that they extend to me.

Contentss

Chapter 1– Introduction

1.1 What is meant by SMEs?

1.2 What is IFRS?

Chapter 2–Literature Reappraisal

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

2.2 – Barriers and challenges of presenting IFRS

Chapter 3 – Decision

Chapter 4Mention

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

Chapter 1 – Introduction

1.1 What is meant by SMEs?

Small and Medium endeavors ( SMEs ) or Small and Medium sized concerns ( SMBs ) are companies or entities that does non hold public answerability and publish general intent fiscal statements for external users and whose debt or equity instruments traded in a public market or it is in procedure of publishing instruments for trading in a public market or foreign stock exchange or over the counter market.

It seldom comply with official and administrative demands though their activities meant to be legal. Furthermore, SME’s drives towards invention and competition between sectors, plays an of import function in the planetary economic growing and it is of import to prolong the big graduated table industries, particularly in developing states, it acts as an gas pedal towards economic development and stableness within several economic systems. It generates employment, development of substructure, creative activity of better life criterions, and addition of GDP.

In the United States of America, SMEs employ 50 % of her work force, and bring forth more than half of the nation’s Gross Domestic Products. SMEs history for 99.8 % of all companies and 65 % of concern turnover in European Union. The state of affairs is non different in Africa as research reveals that in South Africa, SMEs history for approximately 91 % of the formal concern entities lending approximately 51 % and 57 % of GDP, supplying about 60 % of employment. ( Cornish, 1993, cited in Ikem et al. )

Furthermore, SME’s have the ability to alter quickly harmonizing to the economic alterations and survive in the concern even in the bad economic conditions.

1.2 What is IFRS?

It is a set of regulations which should be followed by comptrollers maintain their books of history which can be apprehensible, comparable, relevancy to the users of internal and external to the concern. It’s designed as a planetary linguistic communication for the concern personal businesss, which fulfill the above measurings across the planetary trade.

This has been begun as an effort of European Union to harmonise accounting, this set of regulations 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 bing IAS and Standard Interpretations Committee criterions ( SIC ) and continued to publish and develop criterions under a new name “International Financial Reporting Standards” . IASB has introduced criterions which is suited for SMEs.

A complete set of fiscal statements should include a statement of fiscal place, a statement of alterations in equity, a statement of hard currency flows, notes to the fiscal statements and a individual statement of comprehensive income or a separate income statement and separate statement of comprehensive income which is replaced by the statement of income and maintained net incomes in instances where the lone motions in equity for the period relate to gain and loss, dividends, mistakes and alterations in accounting policy. These set of statements enables enterprisers to understand the constructs and theories used in International fiscal coverage. ( Abdulrazak, M.J, 2013 )

IFRS for SMEs purposes to supply a simplified, self-contained set of criterions for SMEs, take the picks of accounting intervention ; which means that uniformity of accounting across concern entities, and supply lower limit and simple revelation demands, without upseting their part to the economic growing and stableness of the entity.

Chapter 2–Literature Reappraisal

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

Assorted states use different funding and accounting methods in concern, which limits the comparison and impede the entree of planetary investings ;

IFRS for SMEs purposes to supply a simplified, self-contained set of criterions for SMEs, take the picks of accounting intervention ; which means that uniformity of accounting across concern entities, and supply lower limit and simple revelation demands, without upseting their part to the economic growing and stableness of the entity, to increases comparison of fiscal coverage effectivity, understand the fiscal place of different companies. It is of import to understand the fiscal statements in order to pull foreign investors to the state, therefore it should be written in a linguistic communication that users can understand & amp ; non merely the linguistic communication barrier construction of the fiscal statements is of import to compare, if non so investors need to travel through test transition to hold a better apprehension, as the companies which owned by foreign investors normally compare the figures with place states. ( Cited in StruhaA™ova , K. et al. )

Besides its purpose at protecting involvement of stakeholders and cut down the load on SMEs by supplying alteration to the IFRS one time every three old ages.

In the research carried out by Neag, R. et al stated that the purpose of proposal for a Directive of the European Parliament and of the council on the one-year fiscal statements, amalgamate fiscal statements and related studies would be to better comparison EU broad.

Further, the writers Neag, R. et Al besides stated that on their research, IASB is concern on fight of community capital markets to accomplish the convergence of the criterions used in fixing fiscal statements, with the debut of new IFRS restrictions will be narrowed and it could be used across globally, for cross-border minutess or listing. And besides stated that, the chief focal point of debut of IRFS for SMEs to accomplish the efficient and cost-efficient operation of the capital market, while keeping the assurance in the fiscal market and protecting investors. This enables free motion of capital in equal markets in the place state and planetary capital markets.

Furthermore, understand and comparison of fiscal statements supports to do the wise investing determinations, and It will facilitates the enlargement of concerns to the Earth, through planetary partnerships, harmonising and engagement, taking at transparence, accounting quality and decrease of cost of capital. ( Pownall and Schipper 1999, cited in Abdulrazak, M.J, 2013 )

Based on these, quality of accounting will be measured by assorted facets such as fidelity in representation, comparison, seasonableness, comprehensibility and value relevancy. Its serves the intent of publically traded companies but non proprietor managed concerns and it has been a turning demand of uniformity in accounting methods when trading across different states ( Brookfield, 2001 cited in Abdulrazak, M.J, 2013 ) .

Introduction of IFRS for SMEs will take to the convergence of methods used in rating of assets of the concern across Earth. ( UNCTD, 2008, cited in Abdulrazak, M.J, 2013 ) Since, there has been a turning demand in the regulative governments such as the revenue enhancement system for proper accounting for little and average endeavors. Regulatory environment has been among the most prevailing challenges confronting little and average endeavors. This has led to an increasing force per unit area for little and average endeavors to carry through the demands of accounting ( Mirza, Holt, & A ; Knorr, 2011 cited in Abdulrazak, M.J, 2013 ) .

2.2 – Barriers and challenges of presenting IFRS

Since SMEs are non publically listed companies, user of their FS are chiefly focus on short term hard currency flow and liquidness and solvency of the company. So that, full IFRS need non to be introduced for their accounting, it need to be governed by a separate set of criterions.

The other chief challenge for SMEs in presenting IRFS would be the immense load on coverage, in footings of cost and other resources and this coverage process is really much clip devouring. ( Evans and confederates, 2007 cited in Neag, R, et al. ) , Further, in their research emphasized that low involvement will be given by the external users for this extra cost incurred and the cost associated in readying & A ; publication of fiscal statements, which will give unneeded exposure of the house.

Though, IFRS execution is dearly-won, bit by bit it will turns into an advantage of fixing fiscal statements, that can be apprehensible by the users on a competitory market, as it is written in a planetary linguistic communication. ( Keasey and Short, 1990 cited in Neag, R, et al. ) .

With the development of former little and average houses, it will be passed to the class of publically traded companies, which involves utilizing IFRS, old cognition and experience in IFRS in SMEs would be a obvious advantage. ( Cited in Neag, R, et al. )

With the addition of globalisation of capital markets, it generates a higher demand on fiscal statements which could be extremely comparable. ( Pasekova , M. et al. )

The job faced by SMEs in following full IFRS, is that the content of the most IFRS will non be relevant to SMEs.

Majority of enterprisers are hold onto cultural and attitudes towards the IFRS, seek the IFRS system as a complex one, and besides high cost involved in subscription fees and other disbursals in keeping dependable accounting packages which supports IFRS. ( Madawaki, 2011, cited in Abdulrazak, M.J, 2013 )

Besides, Abdulrazak, M.J, 2013 stated that bulk of the SMEs possesses small cognition of the accounting theories and constructs which can be adopted in their administrations.

Apart from the remotion of cultural and other transverse state differences, it influences concern patterns, but it is most likely induce extra indirect costs of harmonisation, in SMEs accounting this cost causes direct costs by coercing 1000000s of European houses, e.g. , adjust their accounting systems, developing cost of accounting staff, besides stated that SME fiscal accounting harmonisation can merely be successful, if the benefits of harmonisation exceed the direct and indirect costs of harmonisation. ( Fulbier, R.U. , and Gassen, J. , 2010 )

Furthermore, Abdulrazak, M.J, 2013 besides discuss about the demand of qualified staff for the intents of accounting in the administrations, which would be a barrier or a challenge in presenting IFRS in SMEs.

The regulative organic structures should ease preparation and educational plans on IFRS in order to promote enterprisers to travel into the unvarying coverage method, in add-on it enables the accomplishments and cognition of the enterprisers in fiscal direction. This will ensue in right acceptance of accounting rules and patterns, increases comparison due to the uniformity. ( Neag, Masca, & A ; Pascan, 2009 cited in Abdulrazak, M.J, 2013 )

Tax of governments use the fiscal statements in finding the revenue enhancement that need to be paid by the entities, which the companies must keep proper accounting records and comply with the IFRS and accounting patterns, which would be a major challenge for little and average endeavors. ( Holt, 2010, cited in Abdulrazak, M.J, 2013 )

In the research by Neag, R, et al highlighted, IFRS for SMEs would convey no peculiar benefits particularly to companies which operate locally as there is a small demand for an international comparison.

StruhaA™ova , K. et al stated in their research, the challenges faced in describing in the state of Czech, presently they are utilizing GAAP, Czech revenue enhancement statute law and cost related to describing under IFRS.

Baldarelli, M.G. , Demartini, P. , Skare* , L.M, 2007 stated in their research that all costs need to be incurred for the execution, but it makes fiscal describing more utile for both direction intent and bank’s recognition determinations

Holban, I. , stated in his research on “Reflection on the Value Under IFRS for SME’s” , Evolution of transnational companies affected, due to the complexness of the business- direction since IRFS has focus on the step of just value in a different manner. The term “fair value” widely discussed in the measuring of reappraisal exercising, during the geting phase of the entity, with the debut of IFRS for just value measuring to be new names for the entry value and current cost has been emerged. i.e. reproduction cost and replacing cost. Reasonable rating, utilizing of the market information should be carried out in order to warrant the subjective statements, users of fiscal information demands amplification of general application.

Chapter 3 – Decision

Adoption of IFRS is disputing and dearly-won for the SMEs as it does non hold a sound accounting coverage system, every bit good as the knowing staff and less part of enterprisers. Lots of research has been taken topographic point in order to turn to the restrictions and ease the acceptance procedure in SMEs both in developed and developing states, which could be identified as deficiency of resources, clip, cognition, committedness. Besides pointed out by been enormously perpetrating on coverage construction and systems, the opportunity of been loss of focal point on the concern, hereafter of the entity, invention. Chiefly, the cultural and attitude barrier of the enterprisers obstruct the new alteration.

Research contained assorted consequences for the acceptance of IFRS in SMEs.

Most of the researches have revealed that there is greater demand of uniformity in fiscal coverage across the planetary trade, which enable to travel the investings from state to state. Further scrutinies can be carried out to turn to the challenges of acceptance of IFRS in SMEs in order to smooth the initiation without upsetting the part by the SMEs to the universe economic growing.

Chapter 4 – Mentions

Abdulrazak, M.J 2011, ‘the consequence of following international fiscal coverage criterions on quality of numbering studies of little and average endeavors in Nairobi County’

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

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

Fulbier, 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 & amp ; Management Vo. 1 No. 2

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

Pasekova , M. , Mullerova , 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