International financial reporting standards adoption and the financial reporting quality by small and medium enterprises: a case of Kampala

Abstract

This study on International Financial Reporting Standards (IFRS) Adoption and the financial reporting quality by SMEs provides empirical evidence on the impact of adoption and use of IFRS on financial reporting quality for Small and Medium Enterprises (SMEs). The study covered SMEs in eight major sectors including: Agriculture, Accommodation & Food Processing, Education, Health & Social Work, Financial Services, Information Communication Technology, Other Manufacturing and Trading. The central region has the largest concentration of businesses in the country and was done in Kampala where 105 enterprises were selected, using the stratified sampling method. Objectives of the study included, establishing the extent of IFRS adoption by SMEs, assessing the quality of financial reporting by SMEs and ascertaining the relationship between IFRS adoption and financial reporting quality by SMEs.

Findings of the study by empirical results indicated that from the correlation analysis, all indicators of financial reporting quality including faithful representation, relevance, reliability, comparability and understandability were positively correlated with IFRS adoption. Faithful Representation, Relevance and Comparability stood out with higher correlation coefficients. From the regression analysis, findings showed that Faithful Representation, Relevance and Comparability had a higher positive linear relationship with IFRS Adoption. This meant that financial statements prepared were convincingly relevant to users and exuded completeness, neutrality, were free from error and could be easily be comparable based on period, similar entities and the industry at large.

On the whole, most SMEs generally on average complied with IFRS, indicating that they had adopted them. IFRS adoption made sense because it enhanced financial reporting quality and therefore should result in even higher adoption levels by SMEs. It was worth noting that more studies needed to be done to link the failure rate of SMEs with financial reporting quality.