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ABSTRACT

Previous studies have paid little attention to the state of International Financial Reporting Standard (IFRS) awareness and adoption in North-Central geo-political zone of Nigeria. This study investigated level of awareness, challenges and adoption of IFRS for Small and Medium Enterprises (SMEs) in North-Central Nigeria with the view of highlighting the implication for financial reporting quality. The outcome variable in the study is financial reporting quality measured by qualitative reporting attributes namely, reliability, comparability and understandability. The explanatory and control variables are IFRS awareness, challenges and adoption, taxation, entity size and ownership structure. From the population of 556 registered SMEs in three randomly selected States in the zone, a sample of 307 SMEs was selected for the study. Data was collected through a self-administered questionnaire. Multiple regression analysis was applied to test the study hypotheses. Results show that the financial reporting practice of SMEs in North-Central Nigeria is not only poor, but also majority of the business entities do not prepare financial reports in line with the guidelines of the IFRS for SMEs. Result further show that IFRS awareness significantly influences understandability, for instance, a unit increase in the level of IFRS awareness will result in the decline of understandability by a unit of 0.0779 (β1=0.0779, p<0.05) indicating decline in the quality of financial reporting; IFRS challenges significantly influences comparability, for instance, a unit increase in IFRS challenges that is an additional challenges facing the adoption of IFRS will result in the decline of comparability indicating decline in the quality of financial reporting by a unit of 0.1679 (β1=0.1679, p<0.05); and willingness to adopt IFRS significantly influences reliability, that is high quality financial reporting, for instance, increases in the level of willingness to adopt IFRS will lead to higher quality of financial reporting among the SMEs indicating that entities that show willingness to adopt IFRS are willing to prepare their financial statements based on the guidelines of IFRS for SMEs (β 1=1.3327, p<0.001). The study concluded that awareness, challenges and willingness to adopt IFRS are major influence on financial reporting quality among the SMEs.
Keywords: IFRS, SMEs, financial, quality, reporting

CHAPTER ONE
INTRODUCTION

1.0 BACKGROUND OF STUDY

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 (Ball, 2006). 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. With the globalization of finance, the adoption of IFRS will enable investors to exchange financial information in a meaningful and trustworthy manner. Adoption of IFRS would facilitate decision-making, there by leading to better accountability and compliance with tax legislation (Kenneth and Gracyna, 2013).
Recently, the IASB has focused its efforts in attempting to harmonize the financial reporting of non-listed firms by introducing the IFRS for Small and Medium Enterprises (SMEs) as an alternative framework that can be applied by eligible entities in place of the full set of IFRSs. This is a self-contained standard, incorporating accounting principles based on existing IFRSs that were simplified to suit the entities that fall within its scope (Christina, Mihaela, & Oana, 2011). Adoption of IFRS for SMEs will help in enhancing the quality and comparability of SMEs financial statement around the world and assist SMEs in gaining access to finance which will not benefit only the SMEs, but also their customers, client and all other users of SMEs financial statement and this brings about growth in every business (IFRS foundation, 2012). The IFRS for SMEs will facilitate the further growth of the SMEs and business sector globally (Mage, 2010). As observed by Kenneth and Gracyna (2013), the adoption of IFRS for SMEs will not only facilitate decision-making, it will also results into better accountability and compliance with tax legislation.
One significant contribution of the adoption of IFRS for SMEs is improvement in the quality of financial reporting among SMEs. Financial reporting quality refers to quality information about an entity’s financial performance and position during a period. Investors and creditors often use information about the past in assessing the prospects of entities (Ahmed, 2011). If 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, entities cannot ascertain whether they are making profit or loss (David, Thomas and Onsongo, 2011).

Studies focusing on the accounting practices of SMEs have provided evidence that majority of the SMEs do not have records of financial statements or the financial position of their business (Karunanda and Jayamaha, 2011; Amaoka, 2013; Adekunle and Taiwo, 2013; Kofi, Adejei, Collins and Christian, 2014). However, none of the existing studies specifically link the adoption of IFRS and financial reporting quality in North-Central Nigeria. This study addresses the limitation. This study will not only provide additional information required to boosting financial reporting quality in North-Central Nigeria, it will also boost awareness of the importance of adopting IFRS for SMEs. The study thus intends to provide answer to the question on the extent of awareness; adoption and challenges of IFRS for SMEs with the view of improving financial reporting quality among SMEs in North-Central Nigeria.
The study will, in its own way, bring to light the question of whether or not the adoption of IFRS will enhance the financial reporting quality of SMEs in north-central Nigeria and will add to the existing literature on the topic. It will also serve as a guide to economic policy makers in making the necessary restructuring of the IFRS for SMEs in Nigeria if need be. It will also be a reference to future researchers who might want to work on some aspects of this topic.

1.1 DEFINITIONS
The importance of the SME sector and the informal sector is acknowledged internationally, but defining an SME is a challenging task, as every country has its own definition. There is no single, uniformly accepted definition of a ‘small firm’ (Storey, 1994).Firms differ in their levels of capitalization, sales and employment, hence, definitions which employ measures of size for example, number of employees,turnover, profitability and net worth, when applied to one sector might lead to all firms being classified as small, while the same definition when applied to a different sector might lead to a different result. SME definitions can be broadly categorized into two, ’economic’ and ‘statistical’ definitions. Under the economic definition, a firm is regarded as small if it meets the following three criteria:
(1) it has a relatively small share of their market place;
(2) it is managed by owners, or part owners, in a personalized way and not through the medium of a formalized management structure and
(3) it is independent in that it is not part of a larger enterprise (Mahembe, 2011). The ‘statistical’definition, on the other hand, is used in three main areas:
(1) quantifying the size of the small firm sector and its contribution to GDP, employment an exports;
(2) comparing the extent to which the small firm sector’s economic contribution has changed over time and
(3) in a cross-country comparison of the small firms’ economic contribution. These definitions, however, have a number of weaknesses. For example, the economic definition, which states that a small business be managed by its owners or part owners in a personalized way and not through the medium of a formal management structure, is incompatible with its statistical definition of, for example, a small manufacturing firm which might have up to 200 employees (Mahembe, 2011).

1.2 HISTORICAL BACKGROUND OF THE INTERNATIONALIZATION OF ACCOUNTING STANDARDS

The first move towards accounting standards convergence was the proposal to create the Accountants International Study Group (AISG) by the professional accountancy bodies in Canada, the United Kingdom and the United States in 1966. This was formed in order to develop comparative studies of accounting and auditing practices in the three nations. The AISG was eventually created in 1967. It published 20 studies until it was disbanded in 1977. Sir Henry Benson put forward the proposal for the setting up of the International Accounting Standard Committee (IASC) at the 40th World Congress of Accountants in Sydney in 1972. After discussions and signature of approval by the three AISG countries and representatives of the professional accountancy bodies in Australia, France, Germany, Japan, Mexico and the Netherlands, the IASC was established in 1973. Sir Henry Benson was the first elected Chairman while Paul Rosenfield was the first secretary of the IASC. By the beginning of the 21st century in only one of the nine original IASC countries (Germany) did even a relatively small number of listed companies used IASs to report to domestic Investors.