IMPACT OF IFRS ON SMEs SECTOR

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1 IMPACT OF IFRS ON SMEs SECTOR Shankar S. Sodha ABSTRACT Being an emerging country Small and medium sizes enterprises (SMEs) perform imperative part in economy of India. SMEs most backing in job angle, GDP perspective and other economical angles. In last few years, because of emergence of the Global Economy and growing integration of world's capital markets and each organisation wants to go internationally for expansion and to lead in the market so there is obliged fairness in accounting angle to check, study and examine the genuine financial position of the organization in the competitive market for organization itself and outsiders like investors, government bodies and others. So IFRS performs vital part to make standardisation in accounting side at international level yet at the same time it is under process to finalize the standard for the SMEs. In the event that any nation need to actualize IFRS successfully then most three perspective considered skill staff, process and technology as it is influenced most furthermore obliged profound learning and time and introductory implementation cost for SME. However in India close around 1,50,000 populace having information in regards to this viewpoint so it is extremely troublesome for the Indian SMEs to adopt the IFRS. For companies which are working domestically only then there is no compelling reason to adopt IFRS since it will build the expense furthermore Indian legislation expected some difference from it. Keywords: IFRS, SMEs, Global 358

2 INTRODUCTION We are increasingly living in a global economy with trade and inbound and outbound investment a fact of life. It s no wonder capital markets have long advocated for globally recognized accounting standards. Currently world get to be little town because of the globalization so there is exceedingly needed to make likeness in every single viewpoint, for the organization IASB has arranged the IFRS for making comparability in books of record of same organization in distinctive nations, It get to be measuring stick dialect of accounting and it is useful for both organization and also investor they come to know the actual financial position of the organization in the worldwide business market. IASB is performed great assignment for small and medium size undertakings however because of certain issue it doesn't work. Business conveys to their stakeholders thought their accounting results, touched base at by utilizing different sets of perceived reporting system and benchmarks. Such a practice guarantees, to the point that reported account related data is reliable, generally comprehended and tantamount to business, inside and crosswise over commercial enterprises. Organizations that don't take after such practices lose their point of interest for increasing funds at lower premium rates; neglect to secure new suppliers, financiers and clients; furthermore in touching base at a procurement or agreeable understandings. So as to actualize these reporting practices over the worldwide, the International Accounting Standers Board (IASB) has distributed universal monetary reporting language in a brief time. Notwithstanding, applying thorough budgetary reporting standers accompanies an expense. Business need to utilize more qualified work force, new courses of action and controls, and preparing right from the records receivable agent, to the monetary controller, the CEO and the audit members. This is more entangled if there should be an occurrence of setting up financial reporting tenets for small and medium Enterprises, prevalently known as SMEs. 359

3 Small and Medium Enterprises (SMEs.) are seen as key players for monetary development, employment creation, advancement of exports and entrepreneurial advancements in any nation. These small organizations regularly rube into inconvenience, not because of the low quality of items, nevertheless insufficient financing, small organizations are not able to raise the funds from banks and other finance related foundations, particularly for their high exposure venture. This keeps them out of rivalry, further debilitating the backing needed for their operations and development. Regularly banks request insurance representation of substances financial related result. Different governments over the globe, as a feature of their development activity for SMEs, has even lessened obstructions on Foreign Direct Investment (FDI) and exports into SMEs. In any case, the effective execution of these activities obliges straightforwardness in reporting substances that can be brought just by embracing Global Accounting Standers. RESEARCH OBJECTIVE 1. To understand the challenges of implementation of IFRS in SMEs 2. To study the factor affect most in the IFRS adoption 3. To understand the impact of IFRS on SMEs in India LITERATURE REVIEW THE Institute of Chartered Accountants of India (ICAI) has decided the strategy for adoption of International Financial Reporting Standards (IFRS) in India with effect from April 1, At present over a 110 countries in the European Union, Africa, West Asia and Asia-Pacific regions either require or permit the use of IFRS. Even in the US, there is an ongoing debate regarding the adoption of IFRS replacing the US GAAP. Now, the International Accounting Standards Board (IASB) that issues IFRS and the Financial Accounting Standards Board (FASB) that issues the US GAAP are cooperating and they have long term projects and short term projects to converge US GAAP into IFRS. 360

4 Indian corporates are likely to reap significant benefits from adopting IFRS. The European Union s experience highlights many perceived benefits as a result of adopting IFRS. There is adverse impact on small and medium size entities (SMEs) in India. Convergence to IFRS is a costly exercise that includes an overhaul of operational and IT processes apart from training costs. The SMEs cannot bear such huge costs. Therefore, a core panel constituted by the government on IFRS decided to exempt SMEs from the first phase of IFRS convergence falling due in The SMEs sector will continue to follow existing Indian Accounting Standards, which may be modified from time to time to make the sector more competent in the international arena. However, it will have positive impact on big Indian corporates. These include: Improvement in comparability of financial information and financial performance with global peers and industry standards. IFRS enhances uniformity in the accounting principles. Foreign investors rely only on IFRS financial statements, hence Indian financial statements will be liked by the foreign investors. The adoption of IFRS is expected to result in better quality of financial reporting. Low cost of raising funds in abroad. Implementation of IFRS in India, will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a company s financial statements. Better access to and reduction in the cost of capital raised from global capital markets arises as IFRS is now accepted as a standard financial reporting framework for businesses seeking to raise funds overseas. The above cited benefits will accrue only to the big corporates in India. The SMEs sector will not benefit much as they do not have necessary set up to cope with the problems that may arise by switching to the more rigorous IFRS. In December 2007, the US Securities and Exchange Commission (SEC) permitted foreign companies listed in the US to present financial statements in accordance with IFRS. This benefits Indian companies listed in the US, as they have to prepare only a 361

5 single set of IFRS compliant financial statements, reducing financial and compliance costs. However, the perceived benefits from IFRS adoption are based on the experience of IFRS compliant countries in a period of mild economic conditions. The current decline in market confidence in India due to big corporate failure (Satyam) as well as overseas, coupled with tougher economic conditions, may present significant challenges to Indian companies. Two separate sets of accounting standards under section 211(3c) of the Companies Act have been agreed upon by the core group for convergence of Indian Accounting Standards with IFRS. For banking and insurance companies there will be a separate roadmap. The core group committee of the government finalised the road map for IFRS convergence in India. The ICAI said that all entities having net worth in excess of Rs 1,000 crore will have to follow IFRS. The list also includes all NSE and BSElisted companies, insurance entities, mutual funds, venture capital funds and all scheduled banks having operations outside India. In addition to the above, there are several impediments and practical challenges to adoption of and full compliance with IFRS in India. Several laws and regulations governing financial accounting and reporting in India need to be amended. In addition to accounting standards, there are legal and regulatory requirements that determine the manner in which financial information is reported or presented in financial statements. For example, the Companies Act, 1956 determines the classification and accounting treatment for redeemable preference shares as equity instruments of a company, whereas these may be considered to be a financial liability under IFRS. There are certain sections in the Indian Companies Act that override the provisions of IFRS. There is a shortage of professionals with practical IFRS conversion experience and therefore many companies will have to rely on external advisers and their auditors. There is an urgent need to address these challenges and work towards full adoption of IFRS in India. The most significant need is to build adequate IFRS skills and an expansive knowledge base among Indian accounting professionals to manage the conversion projects for Indian corporates. (The Economic Times) 362

6 RESEARCH METHODOLOGY DATA COLLECTION Primary Date Structured questionnaire Secondary Data Information regarding IFRS disclosure in financial statements has been collected from checking Annual Reports of companies taken under study. Internet websites, Books on IFRS, Magazines, Reports etc. SAMPLE SIZE A sample size of 50 was chosen from the selected experienced chartered accountant of SMEs of Gujarat region for the study. DATA ANALYSIS AND INTERPRETATION AREA OF PROBLEMS NO OF RESPONDENTS RANK Lack of understanding of IFRS 50 1 Lack of expertise 4 2 Lack of financial resources 30 3 Insufficient time to prepare the accounts 20 4 Lack of precedence 15 5 Insufficient number of accounting staff 5 6 Insufficient information systems

7 AREA FOR POSSIBLE IMPROVEMENT STRONGLY AGREE AGREE NEUTRAL DISAGREE STRONGLY DISAGREE Accountability Transparency Efficiency Comparability Policy setting Budget setting Decision-making Internal reporting Financial management From the above table it can be concluded that 50% of the total respondents strongly agree with IFRS improved Comparability where 30% of the total respondents strongly agree with IFRS improved internal reporting and financial management, 20% of the total respondents strongly agree with IFRS improved Accountability, Transparency and Policy setting. None of the respondents strongly agree with the IFRS improved Budget setting and Decision-making process. 70% of the total respondents agree with IFRS improved Decision-making and Accountability where 50% of the total respondents agree with IFRS improved Transparency and Financial management, 60% of the total respondents agree with IFRS improved Budget setting, 40% of the total respondents agree with IFRS improved Efficiency, Comparability, Policy setting and Internal reporting. 40% of the total respondents neutral with IFRS improved Efficiency where as 30% of the total respondents neutral with IFRS improved Transparency, Policy setting, Budget setting and Financial management, 20% of the total respondents neutral with IFRS improved Decision-making and Financial management, 10% of the total respondents neutral with IFRS improved Accountability, Comparability. 10% of the total respondents disagree with IFRS improved Efficiency, Policy setting Budget setting and Decision-making. None of the respondents strongly disagree with the any area improved by IFRS adoption 364

8 It also can be concluded that all respondents believe that lack of understanding of IFRS is the main problem faced by organization to implement IFRS followed by lack of expertise, Lack of financial resources. 40% of the total respondents believe that insufficient time to prepare the accounts is the main problem faced by organization to implement IFRS where as 30% of the respondents believe that lack of precedence is one of the key problems faced by organization to implement IFRS. Only 10% of the total respondents believe that insufficient number of accounting staff and insufficient information systems is one of the key problems faced by organization to implement IFRS. SUGGESTIONS IFRS must complete the criteria for the SMEs perfectly. The balance sheets prepared under IFRS tends to be more useful due to its layout and the consistency, and the level of complexity compared to GAAP that tended to be more detailed Need to educate chartered accountants IFRS should be implemented in SMEs in India in different phases with flawless instruction in form of Help center as training provided by them is not enough. CONCLUSION SMEs are critical part for Indian economy and if IFRS will be impulse in future then it will influence parcel to the SMEs in different viewpoint however Indian economy and legitimate frame work perform indispensable part in this angle and take more time as it is under implementation. The company which is working domestically then there is no need to adopt IFRS since it build the expense in terms of documentation, training to the staff. Indeed blue-chip organization confronts the challenges in beginning so there is doubtlessly for SMEs in trouble confronting and India set aside an excess of time for nearby standard reception so it s extremely entangle to embrace the worldwide standard in SMEs in short run. 365

9 REFERENCES 1. Help SMEs adopt new accounting rules Apr 7, 2010, 05.57am IST The ECONOMIC Times Kenneth n Goldmenn is IFRS becoming the international language of accounting the world accounting April 2008 Page L shankari, Globalization of diverse accounting standards accounting world February 2008 page Lingisetti venu, Global accounting standard for SME Accounting world November 2009 page no SK Chaudhary and KR swain, IFRS Accounting world March 2009 page