EVALUATING THE IMPACT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS ON SMALL AND MEDIUM-SCALE BUSINESSES IN NIGERIA

CHAPTER ONE INTRODUCTION 1.1 BACKGROUND TO THE STUDY The globalization of economic activities has significantly intensified the demand for high-quality, consistent, and internationally comparable financial information. Such information is essential for organizations and investors operating across borders to make informed economic decisions. In response to this global demand, the International Accounting Standards Board (IASB) initiated the development of a unified set of global accounting standards—International Financial Reporting Standards (IFRS). These standards are designed to ensure that financial statements across jurisdictions provide timely, relevant, and reliable financial data to capital market participants and other users of financial reports (IASB, 2007). Anacoreta and Silva (2015) describe IFRS as a globally accepted set of prescriptive accounting rules and guidelines that promote transparency, uniformity, comparability, and public confidence in financial reporting. These qualities enhance the fair presentation of a company's financial position, ultimately facilitating more accurate and comprehensive disclosure. In Nigeria, the adoption of IFRS was seen as a vital step towards aligning domestic financial reporting practices with global standards. Regulatory bodies such as the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC) were therefore mandated to ensure its implementation across both public and private sectors, thereby enhancing compatibility with international market requirements. The origin of the IFRS can be traced to the establishment of the International Accounting Standards Committee (IASC) in 1973, by sixteen professional accounting bodies from countries including the United States, the United Kingdom, Canada, France, Germany, Japan, Australia, the Netherlands, and Mexico. The committee aimed to develop and promote a high-quality set of global accounting standards. To harmonize Nigeria’s financial reporting system with international best practices, the Federal Executive Council (FEC) approved the convergence of the Nigerian Statements of Accounting Standards (SAS) with IFRS on January 1, 2012. In the same vein, the FEC constituted an IFRS adoption committee and resolved that Public Listed Entities (PLEs) and Public Interest Entities (PIEs) should adopt IFRS for the preparation of their financial statements by January 2012. Other PIEs were directed to comply by January 2013, while Small and Medium-sized Enterprises (SMEs) were mandated to adopt the standards by January 2014 (Fowokan, 2011). SMEs are globally acknowledged as vital contributors to economic development and equitable wealth distribution, particularly in emerging economies. Their strategic importance lies in their labor-intensive operations, capital efficiency, and role in employment generation. According to Abdul (2018), SMEs play a crucial part in economic growth, poverty alleviation, and job creation in developing countries. Consequently, there is an increasing need to ensure credibility and transparency in their financial reporting systems. To thrive in an increasingly globalized financial market, Nigerian SMEs require a robust and uniform financial reporting framework. Convergence with IFRS enables these businesses to enhance their access to capital, communicate effectively with foreign investors, and adopt a standardized accounting language. Yoshino and Taghizadeh-Hesary (2019) define SMEs as entities that are not publicly accountable and do not issue publicly traded financial instruments. Nonetheless, due to the pressures of globalization, the IASB developed IFRS for SMEs in July 2012, allowing them to prepare financial statements using simplified, yet internationally recognized, accounting standards. This approach enhances cross-border comparability and financial transparency for smaller businesses. 1.2 STATEMENT OF THE PROBLEM Recently, calls for enhanced transparency in the financial reporting practices of small and medium scale business has persisted. Regulators, standard-setting bodies, and policymakers have consistently expressed concern about the economic consequences of poor financial disclosures. In Nigeria, the banking crisis that spanned from 2008 to 2013 offers a vivid example of the catastrophic effects of inadequate financial information. By 2015, it was estimated that the private and public sectors had collectively lost approximately ₦3 trillion due to deficiencies and distrust in the financial reports provided by affected institutions. Furthermore, global estimates suggest that firms may have lost between 20% and 35% of their operating income as a result of misleading financial disclosures, underscoring the urgency for IFRS adoption (Chinwuba & Killian, 2016). Ekpenyong and Nyong (2014) emphasize that despite being the cornerstone of economic development in Nigeria, many SMEs fail within their first five years due to a host of challenges. These include poor or nonexistent record-keeping, inadequate capitalization, a failure to separate business and personal finances, a lack of clear business strategies, and the inability to distinguish between revenue and profit. These challenges justified the Federal Executive Council’s decision to mandate IFRS adoption by SMEs. Unfortunately, many SMEs in Nigeria continue to struggle with implementing Generally Accepted Accounting Principles (GAAP) due to weak corporate governance, limited transparency, and accountability issues, often exacerbated by incomplete records and administrative inefficiencies (Obazee, 2017). Obazee further notes that a significant proportion of Nigerian SMEs fail to survive their first year of operation, primarily because they are unable to reach their full potential in terms of profitability, growth, and economic contribution. These circumstances highlight the critical need for standardized financial reporting practices through IFRS adoption. Although there is a growing body of literature on IFRS implementation among public companies—such as the works of Josiah, Okoye, and Adeniran (2016), as well as Odia and Ogiedu (2013)—studies on IFRS adoption among SMEs in Nigeria remain sparse. Given the fundamental role that SMEs play in the economy, there is a compelling need to examine IFRS adoption among them with the same scholarly intensity applied to larger, publicly traded firms. This study, therefore, seeks to investigate the impact of IFRS adoption on SMEs in Nigeria, with a specific focus on FrieslandCampina WAMCO Nigeria PLC, Sana. 1.3 OBJECTIVES OF THE STUDY This study is primarily concerned with evaluating the Impact of International Financial Reporting Standards on Small and Medium-Scale Businesses in Nigeria, using FrieslandCampina WAMCO Nigeria PLC, Sana, as a case study. The specific objectives are as follows: 1. To examine the relevance of IFRS to small and medium-sized enterprises in Nigeria. 2. To determine the challenges confronting the adoption of IFRS among SMEs in Nigeria. 3. To investigate strategies for supporting implementation of IFRS in SMEs across the country. 1.4 RESEARCH QUESTIONS The study is guided by the following questions: i. What is the relevance of IFRS to small and medium-sized enterprises in Nigeria? ii. What challenges are encountered in the adoption of IFRS among SMEs in Nigeria? iii. What are the strategies for supporting implementation of IFRS in SMEs across the country. 1.5 RESEARCH HYPOTHESES Null Hypothesis (H₀₁): IFRS adoption has no significant effect on SMEs in Nigeria. Alternative Hypothesis (H₁₁): IFRS adoption has a significant effect on SMEs in Nigeria. 1.6 SIGNIFICANCE OF THE STUDY High-quality financial reporting is a core objective for all enterprises, whether small, medium, or large. This objective can be realized by adopting IFRS, which facilitates effective financial communication. The significance of this study lies in its potential to help managers and accountants in SMEs enhance their understanding and implementation of IFRS. The findings will also benefit investors, employees, and other stakeholders by providing a clearer picture of the enterprise’s financial health. Additionally, this study will contribute to the growing body of empirical literature on IFRS adoption and serve as a useful reference for future researchers exploring similar themes. 1.7 SCOPE OF THE STUDY This study focuses on examining the effect of IFRS adoption on small and medium-sized enterprises in Nigeria. Specifically, it assesses the relevance, adoption challenges, and implementation barriers of IFRS within the SME sector. The geographical and organizational scope of the study is limited to FrieslandCampina WAMCO Nigeria PLC, Sana. 1.8 LIMITATIONS OF THE STUDY A major constraint was the limited availability of literature on IFRS adoption among Nigerian SMEs, which required significant time and effort to gather relevant data and academic sources. Additionally, the scope of the study was geographically and organizationally limited to FrieslandCampina WAMCO Nigeria PLC, Sana. As a result, the findings may not be entirely generalizable to other SMEs across Nigeria or other regions, thereby suggesting the need for broader studies in the future. 1.9 DEFINITION OF KEY TERMS IFRS (International Financial Reporting Standards): A globally accepted set of accounting standards developed by the IASB, designed to ensure consistency, transparency, and comparability of financial statements across international boundaries. IAS (International Accounting Standards): The earlier framework of accounting standards developed by the IASB, aimed at promoting high-quality financial disclosures based on consistent and neutral principles. GAAP (Generally Accepted Accounting Principles): A standard framework of accounting rules and procedures used in the preparation of financial statements, often specific to a particular country or regulatory body.