Most businesses in Africa are Micro, Small, and Medium-sized Enterprises. This is because they are not accountable to the public and their published financial statements for external users are general purpose. This is because:
- Their debt and equity instruments are not traded in the public market; neither are they in the process of issuing such instruments in the public market for trading; nor
- They do not hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.
Almost 90 percent of businesses are SMEs, they are the driving force of the economy. These businesses play an important role especially in job creations and contribution to Gross Domestic Product. However, SMEs face challenges that slow down their growth. These challenges include inaccessibility to proper market information, poor management, lack of capital, and limited access to funding.
Sources of funding for SMEs
As a result of the challenges SMEs face, most of their funds are raised internally. Their start-up capital and operating funds are mainly raised from personal savings, contributions from friends and families, and retained profits. A very small portion of their fund is raised externally from bank loans and investments.
Why SMEs don’t attract funding
SMEs find it difficult to attract investors, both local and international. This in turn makes their growth very slow. A number of them are unable to continue as a going concern within no time. What these businesses lack, apart from poor management and inadequate information, is proper books of accounts and financial records. Most SMEs have not adopted the International Financial Reporting Standards, which are a set of accounting policies developed by the International Accounting Standards Board to be applied when preparing the financial statements of a company. Adoption of the International Financial Reporting Standards by the SMEs would result in the improvement of quality financial reporting of the businesses and also help SMEs in international business engagements and financial dealings.
While SME operators argue that IFRS standards are complex and mostly not relevant to their operations, they are permitted, and in some jurisdictions required to adopt IFRS for SMEs. This is a small standard made specifically for small companies. It is intended for companies that are not accountable to the public. It is based on IFRS standards with modifications and simplifications to reflect the needs of users of SMEs’ financial statements and cost-benefit consideration. IFRS for SMEs standards have the following types of simplifications from full IFRS standards:
- Some topics from full IFRS standards, which are irrelevant to SMEs are omitted;
- Some accounting policies options in full IFRS standards are not allowed as a more specified method is available for SMEs;
- A lot of the recognition and measurement principles that are in full IFRS standards are simplified;
- Fewer disclosures are required; and
- The full IFRS standards have been redrafted in ‘plain English’ for easier understandability and translation.
Importance of IFRS for medium enterprises
Adoption of IFRS by SMEs has benefits that include attaining competitive advantage, attracting investors, and gaining access to financial assistance in today’s world. It will help in enhancing the quality of comparability of SMEs’ financial statements globally as well as help SMEs to reach international markets easily. It also assists SMEs in gaining access to finance which will not only benefit the SMEs but also their stakeholders and all other users of SMEs’ financial statements. This will in the long run bring about growth in the business operations of these SMEs. Essentially, adopting IFRS will improve the credit rating scores of enterprises.
Investors and creditors often assess the likelihood that a business’s future will be positive or negative using information about the past from financial statements and records. If the quality of financial reporting is poor or in their absence, investors and creditors will find it had to assess the business or even trust them enough to extend credit.
Besides, the adoption of IFRS would facilitate good decision-making, thereby leading to better practices and compliance with constituted authorities and for access to funding. It will improve the quality of financial reporting of the business and add a global acceptable look to company reporting practices. Users of the financial statements have more confidence inconsistent and proper financial records. The adoption of IFRS by SMEs will boost the comparison of financial statements within the industry, and across sectors and nations. It will even make it possible for international engagements because the financials will conform with international standards available globally. By adopting the IFRS for SMEs, these businesses can take advantage of the new Finance Bill, as they are exempted from Company Income Tax.