International Financial Reporting Standard Fulfillment in Small and Medium-Sized Companies in UAE - Research Paper Example

? IFRS FOR SMEs IN UAE of the Table of Contents Introduction 4 Research Question 5 Literature Review 5 Factors that leadthe SMEs to adapt to the IFRS 5 Need of International SME accounting standards 6 IFRS catering to the financial reporting needs of the SMEs 8 Disadvantages of implementing IFRS in SME 9 A local perspective 10 Research Methodology 11 Research Philosophy 11 Research Approach 12 Research Approach 12 Data Collection 12 Ethical Consideration 13 Conclusion 14 References 15 Introduction International Financial Reporting Standard was issued by International Accounting Standards Board (IASB) for small and medium-sized enterprises in the year 2009. It has been argued by IASB that for small and medium scale enterprises, a global financial reporting standard is required, since the advantages of internationally comparable accounting standards are not only limited to the large businesses, where the equity and the debt instruments are traded in capital markets. Besides that, the users of the financial statement of the SMEs are also benefitted from this, since the information provided can be compared with the international standards as the SMEs are also seen to deal with the venture capital firms, credit rating agencies, customers, suppliers, financial institutions and investors who are operating outside the home countries of the SMEs. However, the extant IFRSs cannot be used to meet the need of SME financial statement comparable to the international standard as they are designed especially to meet the financial reporting needs of the large businesses, that are operating in the globalised financial market and very little in regards to the economic compliance burden on the smaller businesses (Devi, 2003; IASB, 2009; Thompson, Sian & Roberts, 2006). Moreover, the SMEs cannot be considered as the smaller version of large businesses, which suggests the way that users will utilize the financial statement and accounting expertise along with their ability to bear the cost of financial reporting, which also differs from those of the large publicly traded companies (IASB, 2009). There are enough literatures that provide evidences regarding the appropriateness of IFRS for the SMEs (Chand, Patel & Cummings, 2006; Eierle, Haller & Beiersdorf, 2007; MAZARS, 2008; Sian & Roberts, 2008; Fu? lbier & Gassen, 2010; Neag, Masca & Pa?scan, 2009; Van Wyk & Rossouw, 2009) but there is need of additional research, since most of the researches were restricted only to some specific context. Therefore, this research focuses on the advantages and challenges that the SMEs of UAE will face on adopting the IFRS. Research Question The research question that this study will try to answer is the benefits that the small and medium sized enterprises, along with the suppliers of fund, will enjoy due to closure of the information gap. This information gap is produced as most of the SMEs are following non-standardized financial reporting techniques in UAE, which makes the evaluation of the performance of the enterprises more difficult. Literature Review Factors that lead the SMEs to adapt to the IFRS While developing the IFRS for the SMEs, the IASB has taken into consideration the important firm-level aspects. IASB has argued that there is a requirement for the global SMEs to prepare their financial reporting as per the international standards because of the users of their financial statement and the international structure and activities, in which the SMEs are engaged (IASB, 2009). In this context, the board has argued that the extant IFRS fails to meet the need of the financial reporting of the SMEs compared to the international standards, since they are complex in nature and poses significant amount of economic burden and compliance on the SMEs. Therefore, the following sections look at the prior literatures and highlight the characteristics of the firm, which will attempt to find the necessity of IFRS for the SMEs and its appropriateness for financial reporting. Need of International SME accounting standards Due to the international activities of the SMEs and their corporate structure, it has been argued by IASB that need of international SME accounting standards is very essential. Moreover, the SMEs are now involved with a large number of stakeholders such as, the customers, suppliers, financial institutions, investors, credit rating agencies and venture capital firms located outside their home countries. Many of the prior literatures provide evidences regarding the engagement of the SME in international activities, but not to the extent envisaged by the IASB. The study conducted by Eierle, Haller & Beiersdorf (2007), on 4000 large German SMEs, had found that the international activities of the SMEs in Germany mainly comprised of imports, exports and investments in the foreign subsidiaries with large amount of cross-border transaction and large entities. A similar result was found in the survey conducted by the Conseil National de la Comptabilite? (n.d.) on 10000 companies in France, which suggested that most of the French companies were engaged in international activities related to exports and imports. The necessity of international accounting rules for the SMEs does not arise as they are engaged in international activities that involve vendors and customers and they are not really interested in the financial statement of the SMEs (Eierle, Haller & Beiersdorf, 2007). Investors, customers and suppliers are also less likely to rely on the financial statement to finalize their decision needs (New Zealand Ministry of Economic Development, 2002 as cited in Samujh, 2007). Even the previous two researchers did not get any significant reply from the entities that are involved in international activities in favor of international accounting. The entities also lack an attitude to provide financial information that is comparable to the international standards. Sian & Roberts (2008) is seen to provide further evidences regarding the involvement of SMEs in international activities without realizing the necessity of following the international accounting standards, while preparing their financial reports. They conducted the focus group interviews on the preparers, financers and owners of micro entities operating in Uruguay, Poland, Italy, Kenya and United Kingdom. These two research scholars had found that the SMEs in UK do not require any international accounting standards; however, the scenario is just the reverse in case of Kenya. Among these two countries, all the aspects of the SMEs are similar, except that for UK where the SMEs are involved in larger amount of international activities than that compared to Kenya. In case of the other two developed countries such as, Poland and Italy, the national accounting standards for the SMEs are fully complying with the tax laws prevalent in those countries. As a contrary to the research carried out by Conseil National de la Comptabilite? (n.d.), Sian & Roberts (2008) and Eierle, Haller & Beiersdorf (2007), the study of MAZARS (2008) conducted on 1593 SMEs of six European Union countries such as, UK, Spain, Netherlands, Italy, Germany and France, had found that a significant amount of entities, as high as 80 percent, irrespective of their size, showed their support for internationally comparable accounting standards. Thus, MAZARS (2008) found that a greater amount of support is provided by Germany and France regarding the necessity of international financial reporting standards. A similar study was also conducted by Chand, Patel & Cummings (2006) on two developing economies such as, Papua New Guinea and Fiji, along with two developed economies such as, New Zealand and Australia, which suggested that the SMEs are generally seen to restrict their operations within the domestic limits and are less exposed to global environment. So, the requirement for universal financial reporting is less required. However, the researcher has suggested that some type of standard is required to ensure international comparability. For example, a two-tiered model of international SME accounting standards that encompasses the characteristics of the SMEs in both developed and emerging economies, rather than the accounting standards at national level. IFRS catering to the financial reporting needs of the SMEs Most of the literatures have suggested that the modifications made by IASB in the exposure draft of the standards do not fully reflect the needs in the financial reporting of the SMEs, whereas MAZARS (2008) had found in their research that IASB is successful in identifying the accounting needs of the SME and none of the issues in the exposure draft are irrelevant. However, many prior researchers have identified several areas of modifications that are mainly based on the Exposure Draft of IFRS on SMEs such as, investment property, construction contracts, joint ventures, taxation, investments into subsidiaries, mergers and acquisitions, revaluation of the equipments and plants where fair values are to be estimated and market prices do not exist, revaluations in the intangible assets, sale of discontinued operations and business units, investment properties, share based payments and financial lease where the SME acts as the lessor (Conseil National de la Comptabilite?, n.d.; Eierle, Haller & Beiersdorf, 2007; Sian & Roberts, 2008; VanWyk & Rossouw, 2009). It is interesting to note that the studies that have focused on the large SMEs, mostly belonging to the developed countries, have identified issues that pose significant challenges and irrelevancy to the entities. The literatures have raised concerns regarding changes made by IASB in the Exposure Draft of IFRS, which do not provide any option regarding the revaluation of the tangible and intangible assets. The changes also do not permit capitalization option in research and development costs that may adversely affect the standards of the SMEs operating in France. This makes it quite evident that the Exposure Draft, that provides the final version of IFRS for SMEs, is not always relevant to all the SMEs present all over the world. Disadvantages of implementing IFRS in SME The implementation of IFRS is expected to generate many benefits for the SMEs such as a more internationally comparable accounting standard, less onerous, lower the amount of complication and a more stable standard that can be followed year after year with minimum amount of changes. These in turn will allow the organizations to improve their access to the capital, audit efficiencies and works a stepping stone for cross-border trading and initial public offering. However, this implementation has also raised significant amount of challenges for the SME. The two major challenges are cost and time. From the perspective of time; for the SMEs who are adapting to the IFRS for the first time they need to learn new accounting techniques and terminology, needs to make changes in their accounting software and information system and deal with new concepts and valuation issues. For adapting to these changes and making all the employees aware of these changes the SMEs require enough amount of time. For incorporating the changes throughout the organization in a more effective and efficient way the organization need to train their employees so that they can deal with the new concepts. Moreover, the transition from the traditional way of reporting to IFRS requires making a lot of adjustment in valuation and many other aspects, which requires sufficient amount of time not only in preparation but also in understanding the requirement and the techniques in which the adjustments will be made (Grant Thornton, 2010). The second area of concern is the cost that the organization will incur for implementing the IFRS. The cost that the entity will incur depends on the jurisdiction and entity-specific circumstances. The cost that the entity is expected to incur are as follows: Upfront investment: The organization requires making some upfront investment related to changes in the system, reformatting the financial statements and training the employees. Ongoing training: An ongoing training cost will be incurred by the SMEs but not of substantial amount since the standards will not be upgraded every year as compared to those who are constantly and rapidly changing the financial reporting framework. Disclosure requirement: This cost will be though incurred but in lower amount as disclosures for the SMEs are less that that prepared by following the full IFRSs. Adviser: the full IFRS had more detailed guidelines as compared to the IFRS for SMEs. This leads to absence of detailed guidelines required for preparing the financial statements. Thus, additional experts are required to make changes (KPMG, 2010). A local perspective Many of the industrialized countries have reflected the recent trend of replacement of national regulators by the international regulations such as, the IASB. At present, the audited accounts of the companies operating in UAE are submitted to the national registry in order to make it accessible to the public. This has resulted in limited disclosure and accessibility of the financial information in the region. Moreover, the financial downturn has heightened commercial risks, due to which a greater assurance regarding the reliability and quality of the financial information in UAE is necessary. This is because of the fact that the present financial institutions, that are vital as investors and lenders, have become more selective. The financial community of UAE has recognized the importance of IFRS standards. In this region, though not a mandatory requirement, the organizations are seen to unofficially adapt to the IFRS, as a local Generally Accepted Accounting Principle. However, the companies, which are listed in the stock exchange or operating in the free zone and reporting to Central bank, are preparing their financial statements by implementing the internationally recognized reporting standards. The SMEs who are deciding to adapt to the IFRS for preparing their financial statements are required to comply with the requirements in the similar fashion, like the big multi-national organizations. However, a detailed analysis is required regarding complexities that the SMEs can face, while providing the financial statement as per the standards (Khalifa, 2012; ICAEW, 2010). Research Methodology Research Philosophy The review shows that even though enough existing literature provides an overview regarding the necessity of adapting IFRS by the SMEs related to various countries, yet there is lack of information related to the SMEs in UAE. This research attempts to recognize the advantages and challenges that the SMEs of UAE might face on implementing IFRS while preparing their financial statements. The analysis of the research will be done in a qualitative manner, since it does not aim to find any factor or relationship between two variables and instead intends to find the advantages and disadvantages of implementation, which can be only possible through qualitative research. The research will aim to understand the perception of people towards a particular situation and some of the views will be restricted to certain options. Overall, it involves qualitative analysis and thus, interpretivist research philosophy is most appropriate. Research Approach From the perspective of research approach, inductive seems as the most appropriate. In this method, the process of theory building starts from observation of specific situations and establishes a generalized view regarding the phenomenon. It also initially intends to make observations regarding the views on implementation of IFRS in SMEs of UAE and then finally, deciding on the advantages and disadvantages. Thus, inductive approach is very appropriate. Research Approach In order to accomplish the research objectives, this study will follow a case study and survey research strategy. The case study will be based on analysis presented by various journals in this context. These two strategies are most appropriate in this regard, since it requires the analysis of the previous researches, carried out in this field, along with the present scenario prevalent in the country. Data Collection Data collection is considered as the heart of any research as it provides empiricism to the research. This is the most crucial step in the process of research as it links the theory with practice. Due to this fact, in the beginning of the research, the existing conceptual frameworks are highlighted that helps in providing the existing knowledge related to the field. The present research will be based on both primary and secondary data collected from various sources relevant to the study. The primary data will be collected by conducting survey on the executives in banks, audit firms and educators. The survey will be done with the help of questionnaire, comprising of both open and close ended questions. The close-ended questions will restrict the answers within certain options or involve the Likert scale, which ranges from strongly agree to strongly disagree. These questions can be quantified using number and help in analyzing in a quantitative manner. Since these questions restrict the views of the respondents, for a better analysis, certain open-ended questions will also be incorporated. These open-ended questions will provide enough opportunity to the respondents to present their views in an elaborated manner. The research gives higher importance to views that are collected from the three-sets of respondents, since they are closely linked to the SMEs of UAE. Therefore, while collecting the data, four mangers from five reputed banks will be approached. The audit firms will include two local and two internationally recognized firms along with educators operating in the field of finance. The survey will be conducted by sending the questionnaire to the participants through mail. Ethical Consideration Before conducting the survey, consent forms will be sent to the participants explaining them the main objective of the research. The survey will be conducted only with their informed consent. The identity of the participants will not be disclosed in any manner. This is done to avoid any physical, mental or financial harm to the survey participants. The participants will not be forced by the researcher to provide their views in support of certain theories or interest of the researcher. Conclusion The increasing international activities and structure of the SMEs have made incorporation of certain standardization, in their financial reporting, necessary. IFRS has been recognized internationally and implemented in large organizations. This research focuses on its implementation in small and medium sized organizations in UAE. This is expected to help the investors and other stakeholders, but some challenges have also been recognized by the prior researches. The outcome and recommendations provided by this research will be of great help in order to improve the present scenario of the SMEs in UAE. References Chand, P., Patel, C. & Cummings, L. (2006). Relevant standards for small and medium-sized enterprises: the case for the South Pacific region. Istanbul: IAAER 10th World Congress of Accounting Educators. Conseil National de la Comptabilite?. (n.d.). IFRS for SMEs: Survey of the Expectations and Needs of SMEs Including Field Tests. Retrieved from Devi, S. (2003). A Framework for Differential Reporting: A Response to ISAR’s Accounting and Financial Reporting Guidelines for Small and Medium Sized Enterprises. Kuala Lumpur: Confederation of Asian and Pacific Accountants. Eierle, B., Haller, A. & Beiersdorf, K. (2007). Final Report on the Survey on the ED-IFRS for SMEs among German SMEs. Retrieved from Fu? lbier, R.U. & Gassen, J. (2010). IFRS for European small and medium-sized entities? A theoretical and empirical analysis. Universitat Bayreuth. Retrieved from Grant Thornton. (2010). Focus on: IFRS for SMEs Ireland. Retrieved from < http://www.internationalbusinessreport.com/files/gti_ibr_ifrs_for_smes_focus_ireland_final.pdf>. IASB. (2009). International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs): Basis for Conclusions. London: International Accounting Standards Board. ICAEW. (2010). Adopting the international financial reporting standard for small and medium-sized enterprises (IFRS for SMEs) in the UAE. Retrieved from Khalifa, R. (2012). Towards a policy model for strengthening the accounting and auditing profession in a fragmented regulatory context: Some preliminary evidence from the UAE. Journal of Economic and Administrative Sciences, 28(1), 39-52. KPMG. (2010). The IFRS for SMEs: Considering the alternatives. Retrieved from < https://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/IFRS-for-SMEs-O-201001.pdf>. MAZARS. (2008). The IFRS for SMEs accounting standard: perceptions and expectations across Europe, Frankfurt, a.m. Retrieved from Neag, R., Masca, E. & Pa?scan, I. (2009). Actual aspects regarding the IFRS for SMEs – opinions, debates and future developments. Annales Universitatis Apulensis Series Oeconomica, 11(1), 32-42. Samujh, R.H. (2007). IFRS for SMEs: a New Zealand perspective. Waikato: The University of Waikato. Sian, S. & Roberts, C. (2008). Micro-entity financial reporting: some empirical evidence on the perspectives of preparers and users. International Federation of Accountants. Retrieved from Thompson, P., Sian, S. & Roberts, C. (2006). Micro-entity financial reporting: perspectives of preparers and users. International Federation of Accountants. Retrieved from Van Wyk, H.A. & Rossouw, J. (2009). IFRS for SMEs in South Africa: a giant leap for accounting, but too big for smaller entities in general. Meditari Accountancy Research, 17(1), 99-116. Read More