Financial Reporting for Small and Medium-Sized Enterprises (SMES) In Nigeria: A Review of Literature

This paper reviews literature of financial reporting by small and Medium-Sized Enterprises (SMEs) with particular reference to Nigeria. The study justifies the use of International Financial Reporting Standards (IFRS) by Nigerian enterprises. Thereafter, the paper recognises the economic importance of SMEs both globally and in Nigeria. Justification for differential reporting between listed entities and unlisted SMEs was articulated. The paper notes the advantages and challenges related to adopting IFRS for SMEs globally and in Nigeria. It is recommended that further research be undertaken to access empirically the impact and consequences of adopting IFRS for SMEs by unlisted enterprises in Nigeria.


Introduction
The adoption of a single set of International Financial Reporting Standards (IFRS) globally, enhances comparability of financial reports within and between countries (Madawaki, 2012). IFRSs make information more comparable, thereby enhancing evaluation and analysis by users of financial statements, cutting the costs of doing business across borders by reducing the need for supplementary information and thus creating an enabling environment for investors to be able to effectively compare investment opportunities across the global market. With financial reports based on IFRS, users become more confident of the information they are provided, and presumably the reduced uncertainty promotes an efficient allocation of resources and reduces capital costs. For example, a key policy strategy in Globally, SMEs represent well over 95% of all companies in both the developed and developing countries (IFRS, 2009). For example, (i) SMEs are a major driver of the Singapore economy, accounting for 99 per cent of all enterprises in Singapore, employing seven out of every 10 workers, and contributing over 50 per cent of national gross domestic product (Lee, 2012).  (Zhu, Wittman, & Peng, 2012). Almost 99% of businesses in Japan are SMEs, representing the majority of the employed population and accounting for a significant proportion of the economic output (EIU, 2010). Similarly, in Europe, SMEs accounted for a 67% share of total employment in 2010; SMEs created 85% of net new jobs in the EU (EIM Business and Policy Research, 2011). US SMEs in the manufacturing and service sectors are known to have entered into "direct exports". By contrast, large multinational firms trade mostly through foreign affiliates; 73% of foreign sales were committed by exporting SMEs through direct sales leading to the creation of nearly 2 million jobs (USTR, 2010). These indicators point to fact that the SME sector is the backbone of any developed or developing economy around the world. This sector makes an enormous contribution to employment creation and economic output (Chen, 2006;OECD, 2005;Reddy, 2007) and has an enormous economic significance (Tiron-Tudor & Mutiu, 2008). It should follow naturally that accounting information presented by these focal entities is equally important. Taking these into account, we review literature related to financial reporting by SMEs globally and Nigeria in particular.
The paper is structured thus: the next section provides justification for a differential reporting framework for SMEs, followed by a review of IFRS for SMEs highlighting the major differences with the Full IFRS. Section 4 reviews the benefits of and obstacles to the adoption of IFRS for SMEs; sections 5 and 6 address financial reporting by Nigerian SMEs and the challenges confronting Nigerian SMEs regarding adoption of IFRS for SMEs respectively. Section 7 concludes the paper.

Different Reporting Framework for SMEs
The objectives of general purpose financial statements are the same for both listed and unlisted entities.
However, it is acknowledged that the types and needs of users of SMEs' financial statements are different from users of financial statements of listed and/or larger entities (International Accounting Standards Board (IASB), 2004, p. 15). Users of SMEs' financial statements may have less interest in certain aspects of financial statements prepared by listed or other entities with public accountability.
Consequently in 2007, the IASB proposed an Exposure Draft (ED); IFRS for SMEs affirming the fact that the objective of financial statements is "to provide information about the financial position, performance and cash flows of the entity that is useful for economic-decision making by a broad range of users who are not in a position to demand reports tailored to meet their particular information needs".
For SMEs, the IASB took the position that financial reporting should be assessed on the basis of cost and benefit trade-off regarding the information needs of the users of an entity's financial statements (IASB, 2004, p. 15 country in the world to to have used the IFRS for SMEs (Stainbank, 2010). South Africa's pioneer adoption of the IFRS for SMEs was driven by: (1) the urgent need for auditors to express an opinion on financial statements prepared in accordance with an accepted framework of the auditing profession in South Africa, and (2) the need to provide a beneficial framework for SMEs to prepare financial statements (Stainbank, 2010).

IFRS for SMEs
In 2009, the IASB issued the IFRSs for SMEs, a self-contained document with no cross-references to the Full IFRS, for use by entities that do not have public accountability. An entity has public accountability under the IASB's definition, if it files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; or holds assets in a fiduciary capacity for a broad group of outsiders. IASB has no quantitative criteria defining an SME; it is not feasible to develop quantified size tests that would be applicable and long-lasting in all the over 100 countries that use IFRS standards.
Furthermore, in applying the IFRS globally, it is hardly possible to define constraints; an entity that is regarded as small in one jurisdiction may be regarded as very large in another, therefore, only qualitative criteria are crucial (Beiersdorf, Eierle, & Haller. 2009).
The IASB's accounting framework for non-publicly accountable entities and others that are not of the size nor have the resources to use the Full IFRS is the IFRS for SMEs; a simplified, self-contained set of accounting principles of 230 pages (but based on the Full IFRS of 2800 pages) that is appropriate for smaller, non-listed companies (Flower, 2004;Pacter, 2008;Sanders, Lindberg, & Seifert, 2013). With the Full IFRS as a starting point, the IASB took cost-benefit considerations into account and made simplifications or modifications to reflect the needs of users of SMEs' financial statements, The modifications included (i) omitting topics that SMEs are typically not likely to encounter (e.g., EPS, interim financial reporting, segment reporting & accounting for assets held for sale); (ii) simplifying recognition and measurements criteria/principles; (iii) eliminating complex options and mandating the simpler options only, (iii) simplifying many of the principles for recognising and measuring assets, liabilities, income, and expenses; (iv) simplifying redrafting, and (v) reducing disclosure requirements (Jerman & Ivankovič, 2011). It is noteworthy that the IFRS for SMEs mandates 300 disclosures compared to 3000 disclosures required by the Full IFRS. Also, Full IFRSs are numbered as they are published and updated almost monthly; IFRS for SMEs are logically structured into 35 sections by topic and updated once every two or three years. Other major differences between Full IFRS and IFRS for SMEs are exhibited in Appendix 1.
While Full IFRS were designed to meet the needs of equity and other investors in listed companies; users of the financial statements of SMEs do not generally have those same needs. Rather, users of the financial statements of SMEs are more focused on shorter-term cash flows, liquidity, financial strength (balance sheet), and interest coverage and solvency and credit worthiness issues (Pacter, 2007). In addition, the ability to compare financial statements prepared in different jurisdictions based on IFRS for SME would encourage more cross-border trade and merger/acquisition activity and lower the cost of raising finance (Stokdyk, 2010;Timothy, 2010 Zeff, 2007). Moreover, IFRS for SMEs includes a number of references to requirements not having to be applied if they require undue cost or effort to determine; significant judgment by preparers of financial statements is required to ensure consistent and high quality application of the standard.
Furthermore, other researches (e.g., Beale, 2010) contend that the IFRS for SMEs is, in most areas, just a cut down version of the Full IFRS; requiring complex accounting treatments to fulfil its objectives of comparability and assigning a numerical amount to all assets and liabilities. Opponents to the application of IFRS for SMEs also stress that for companies operating in just one country that have no need for cross-border comparability, the extra burden IFRS for SMEs impose on small companies would outweigh any potential benefits.

Financial Reporting by Nigerian SMEs
Prior to the adoption of IFRS in Nigeria, all entities (large or small, listed or unlisted) were subjected to the same financial reporting framework; no differential reporting framework was existed between public interest and private entities.

It should be noted that what constitutes an SME in Nigeria is different from the IASB's definition.
According to the Nigerian Roadmap (NASB, 2010), an SME refers to any entity that does not have public accountability and: (1) its debt or equity instruments are not traded in a public market; (2) it is not in the process of issuing such instruments for trading in a public market; (3) it does not hold assets in a fiduciary capacity for a broad group of outsiders as one of their primary businesses, and (4) the amount of its annual turnover is not more than 500 million or such amount as may be fixed by the Corporate Affairs Commission (CAC). Other characteristics of a Nigerian SME are (5) its total asset value is not more than 200 million or such amount as may be fixed by the CAC; (6) no member of Board is an alien; (7) no member of the Board of directors is a government or a government corporation or agency or its nominee, and (8)  which is the basis of IFRSs/IASs.

Challenges of Adoption of IFRS for SMEs in Nigeria
Several challenges have been identified in the literature (e.g., Odia & Ogiedu, 2013;Ezeagba, 2017) regarding the challenges that confront entities adopting IFRS for SMEs in Nigeria.
First, the United Nations (2008) asserted that in developing countries, compliance with IFRS for SMEs is believed to be more difficult than elsewhere because IASB (the standards setters) did not accommodate the peculiarities of developing countries, in terms of their uniqueness and heterogeneous nature (see Simpson, 2008;Oberholster, 1999

Conclusion
This paper reviews literature on financial reporting by private interest entities, particularly the use of IFRS for SMEs in Nigeria. Advantages to entities that adopt the full IFRS by publicly accountable entities and IFRS for SMEs by private entities are justified and discussed. Regrettably, the paper could not discuss empirical evidence demonstrating the extent to which Nigerian SMEs have achieved any practical advantages of adopting IFRS for SMEs. Research studies based on archival "ex post facto" methods are almost non-existent. This may not be unconnected with the fact that SMEs are not obliged to publish their financial reports generally to members of the public; registered but unlisted entities are only obliged to file their financial reports with the CAC. Unregistered "informal" entities do not usually file their financial statements with any regulatory authority at all. Attempts at empirical studies addressing the impact of adoption of IFRS for SMEs in Nigeria (e.g., Efeeloo, Barisua, & Neeka, 2017) are based on ad hoc questionnaires or interviews soliciting the subjects' opinions regarding the impact of adoption of IFRS for SMEs. This paper therefore recommends further empirical "ex post facto" research to access the impact of the adoption of IFRS for SMEs on financial reporting by unlisted Nigerian enterprises.