Adoption of International Financial Reporting Standard for Small and Medium Entities as a Financial Reporting Framework; A case study of the Greater Kampala Metropolitan Area.

Abstract

The study investigated the adoption of the International Financial Reporting Standards (IFRS) for Small and Medium Enterprises (SME) as a financial reporting frame work. Specifically, the study aimed at establishing the level of adoption of IFRS for SMEs in Kampala Uganda, ascertaining the benefits that SMEs can derive through adoption of IFRS for SMEs and to identify challenges faced by SMEs in Uganda in adopting IFRS for SMEs. The study was guided by a descriptive survey design and adopted quantitative research methodology. A random sample of 40 respondents- SMEs was selected from the population of 137,432 small and medium size entities that operated within the Greater Kampala Metropolitan Area. A sample was selected using a purposive approach and data were collected by the use of a researcher administered questionnaire which contained Likert scale questions. Data was analysed by using Statistical Package for Social Sciences (SPSS) version 16 to get descriptive statistics which were the basis of interpretation and discussion of results. The findings of the study indicated that adoption of IFRS for SMEs was still low according to the statistics received that is to say, Fully adapted=27.5%, not fully adapted=72.5%.The main reason given for not adopting the IFRS for SMEs was found to be lack of skills (77.5%). The study revealed that IFRS for SMEs would help them get financial assistance (combined percentage was 87.5%), and adoption to have benefits like comparability and reliability of the financial statements. Respondents listed a number of avenues through which adoption could be improved and these included, having accounting professional bodies, conducting more affordable awareness workshops on the use of IFRS for SMEs and review of the IFRS for SMEs to reduce the level of complexity. IFRS for SMEs have been a challenge for non-publicly accountable entities to adopt and there are several conceptual and practical issues with IFRS for SMEs. It was established that the framework used to prepare financial statements was mainly full IFRS which was measured at 47.5% and then IFRS for SMEs established to be at 7.5% and the least was UK GAAP at 25%. On the other hand, lack of practical knowledge on converting from traditional accounting standards to IFRS for SMEs, complexity of the standard and costs involved are seen as the main obstacles to adoption of the IFRS for SMEs. In conclusion, there are significant challenges in the adoption of the standard which can be attributed to lack of knowledge of the existence of the standard and for those who are aware of the standard, they do lack the capacity to apply it. The study recommends the need to formalize business operations for SMEs, promotion of business record maintenance, separation of ownership from control of SMEs and mounting of seminars or workshops for personnel on professional development courses and for awareness purposes.