In the context of this article, Small and Medium-sized Enterprises (SMEs) are referred to entities that may not have public accountability and with their debt or equity instruments not traded in a public market. Various studies conducted by academia, professional and governmental agencies confirm the fact that SMEs are the engine of economic growth and development. However, they are mostly unstructured and as a result of globalisation, SMEs are enjoined to adopt the use of International Financial Reporting Standards (IFRS) in presenting their financial statement which is single reporting standard that cuts across borders.
International Financial Reporting Standard (IFRS) refers to a set of accounting standards developed by the International Accounting Standards Board (IASB) to be applied when preparing the financial statement and balance sheet of a company. IFRS was developed in 2001 by the IASB in the public interest to provide a single set of high quality, understandable and uniform accounting standards.
Even though there are many accounting standards in the world, nevertheless to improve adequate financial communication in a meaningful and trustworthy manner the international financial reporting standard is the acceptable way of harmonising accounting practices, and global financial reporting. One significant contribution of the adoption of IFRS to SME is in the improvement of quality financial reporting of the businesses and also help SMEs in international business engagements and financial dealings.
Opinion survey amongst selected entrepreneurs and SME operators in Lagos State which is the SME hub in the country indicated that the majority of the SMEs do not have records of financial statements or keep records of financial position of their businesses. Over 70 percent of the SME operators in the survey, who are merely family businesses at different locations in Lagos State argued that much of the disclosures and information required by full financial statements are not relevant to their micro, small and medium businesses. Some professionals amongst the respondent similarly argued that SMEs do not have “public accountability” hence they do not need to disclose as much information as the listed companies do. Almost all the respondents established that the need for IFRS compliance financial statements is the responsibility of big organisations and multinationals.
However, the simple truth is that the adoption of IFRS for SMEs will help in enhancing the quality and comparability of SMEs’ financial statements around the world and can help SMEs to reach international markets easily. It can also assist SMEs in gaining access to finance which will not benefit only the SMEs, but also their customers, clients, stakeholders and all other users of SMEs’ financial statements. This will on the long run bring about growth in the business operations of these SMEs. More importantly, adopting IFRS will have a positive effect on the credit rating scores of enterprises, this will equally strengthen SMEs’ relationships with credit institutions. While I agree that the inherent problems of SMEs such as poor governance, lack of transparency and accountability, incomplete bookkeeping and records, administrative bottleneck, have prevented most SMEs in Nigeria from benefiting from the advantages of adopting IFRS compliance financial records, it is crucial to be on the path of business growth.
The adoption of IFRS by SMEs is hereby encouraged because it will boost the comparison of financial statements within the industry, and across sectors. It will even open doors of international engagements because the financials will conform with international standard available globally
Investors and creditors often use information about the past in assessing the prospects of businesses. If the quality of financial reporting is poor, it will be difficult to determine correctly the net profit of the business. In the absence of financial reporting, SMEs cannot ascertain whether they are making a profit or loss. If businesses are properly set up and managed and they can easily grow, attract funding and become a large firm and provide much-needed employment and contribution to economic development. Remember that most companies essentially start small as SMEs with less than 200 employees.
There is no doubt that the adoption of IFRS would facilitate good decision-making, thereby leading to better transparency, accountability, and compliance with constituted authorities and for access to funding. Adoption of IFRS will improve the quality of financial reporting of the organisation and add global acceptable look to company reporting culture. Consequently, the adoption of IFRS by SMEs is hereby encouraged because it will boost the comparison of financial statements within the industry, and across sectors. It will even open doors of international engagements because the financials will conform with international standard available globally.
It is hereby suggested that SME operators should see the adoption of IFRS as a top priority in view of the many benefits that are attached to the adoption. In addition, the new Finance Bill exempts small businesses with an annual turnover of less than N25 million from Company Income Tax (CIT). This can be harnessed by SME operators and entrepreneurs with accounts in line with the provision of IFRS. It is, therefore, reasonable to hire a specialist to achieve or streamline this very important aspect of business structure, if it is currently missing in your organisation. Good luck!
Timi Olubiyi
Dr. Timi holds a Ph.D. in Entrepreneurship and Small Business Management. He is a prolific investment coach, Chartered Member of the Chartered Institute for Securities & Investment (CISI) and a financial literacy specialist. He can also be reached on the twitter handle @drtimiolubiyi and via email: drtimiolubiyi@gmail.com.
