Financial Reporting Standards - A Must For Private Sector Development

Representing over 80 per cent of businesses in Ghana and contributing a high percentage of Gross Domestic Product (GDP), Micro, Small and Medium Enterprises (MSMEs) remain a critical sector in Ghana’s quest for economic development.

A robust MSME sector has the potential to generate employment opportunities and income for the poor.

While efforts are being made to overcome the constraints of limited access to finance, markets and business development services for MSMEs, it has also been identified that the MSME sector faces serious challenges in terms of lack of business planning and accounting skills for the preparation of credible bankable proposals, as well as lack of management capacity, entrepreneurial, financial and book-keeping skills to develop an attractive financial proposition for banks.

Again, when it comes to the preparation and representation of basic financial statements, MSMEs are handicapped. In other words, many private business entrepreneurs hardly maintain auditing systems. That is because most of them are unable to keep and produce financial records.

To imbue best business practices in the operations of these MSMEs, best financial reporting standards must be adhered to.

Indeed, the global economy is setting standards which demand transparency and procedures that can be verified. Today, international markets and business activities have become borderless and more globalised, requiring that accounting systems and reporting standards become harmonised across nations.

Currently, the trend in global financial reporting is the adoption of international standards or aligning local standards with international standards — most investors and lending institutions prefer a convergence of basic accounting standards with international standards to create an efficient financial reporting framework.

Also essential in investment climate conditions are high standards of auditing. Auditing enhances the credibility of financial statements and assures stakeholders of accountability on the part of managers and directors.

However, while a multiplicity of auditing standards across the world is said to be a recipe for confusion, error and fraud, a single set of high standards in auditing can be trusted to facilitate clarity across board.

It is against this background that the Institute of Chartered Accountants, Ghana (ICAG) has adopted the International Financial

Reporting Standards (IFRS) for Small and Medium Enterprises (IFRS for SMEs) and the International Standards for Auditing (ISAs).

Issued in 2009, IFRS for SMEs was designed to be applied by entities that will find it difficult applying the full IFRS due to the nature of their size.

IFRS for SMEs is a modification and simplification of the full IFRS which aims to meet the financial reporting needs of private companies and ease the financial reporting burden on private companies through a cost-benefit approach.

IFRS is intended to be used by SMEs which are entities that publish general purpose financial statements for external users and thus do not have public accountability.

While full IFRS was designed to meet the needs of equity investors in the capital market, users of financial statements of SMEs are more focussed on shorter term cash flows, liquidity, balance sheet strength, interest coverage and solvency issues.

In effect, users of SMEs financial statements are, often, not the same as those of public company financial statements and other entities that are likely to use the full IFRS.

The Council of the ICAG resolved in 2005 to migrate from using the Ghana National Accounting Standards to the IFRS as the financial reporting framework due to the flexibility in the latter.

Consequently, as a first step towards the migration, a task force was formed to draw up a programme for the migration.

Upon consultation by the task force with the regulatory bodies — the Bank of Ghana, Securities and Exchange Commission, the National Insurance Commission and the Internal Revenue Service — the ICAG, in collaboration with the regulatory bodies and the Ministry of Finance and Economic Planning, the adopted the IFRS in the country.

To manage the transition, the ICAG offered training to members through a number of continuous Professional Development (CPD) programmes, educated journalists on the effects of the transition on entities’ financial statements and involved staff of accounting firms in teaching the standards.

In addition, entities were also encouraged to view the transition into IFRS as a business issue, rather than an accounting one.

It is important to note that the adoption of IFRS and ISAs is not without implications for the government’s fiscal policy, particularly tax revenue generation.

IFRS prescription for certain income statement items is bound to have a tremendous impact on taxable profit generation determination hence the need for the ICAG, accounting firms, the Ghana Revenue Authority and the taxable entities to dialogue to resolve all issues arising thereof.

SMEs can hardly remain relevant in today’s business environment unless they comply with international standards in financial reporting and auditing.

This, therefore, calls for close collaboration among the ICAG, Ghana Audit Service, Internal Audit Agency and auditing firms to build their capacities,promote and enhance audit practice in Ghana.

The adoption of IFRS for SMEs and ISAs is, therefore, a positive initiative which, however, can only become relevant and meaningful when it is effectively implemented.