CHAPTER 1
INTRODUCTION
Background Information of IFRS
One of the most important aspects in business industries is their ability to manage their financial resources. Having been able to realise the importance of financial reporting, different scholars have provided more efficient financial reporting standards to be followed by various organisations In 1973, the setting for international standard has begun and this has been initiated by the agreement settled by the nine professional accountancy bodies around the world. In this agreement, the International Accounting Standards Committee (IASC) has been established. Representatives from fourteen nations made up the IASC and served as the body for setting the international standards. The Financial Accounting Standards Board (FASB), the International Organisation of Securities Commissions (IOSCO) as well as the European Commission on the other hand functioned as IASC’s observer members. Since its official operation, IASC was able to issue a number of exposure drafts, policies and standards (PricewaterhouseCoopers, 2002).
In 2000, amendments were done on the constitution of the IASC. A group of trustees was also appointed during this period. Later, the name of the IASC was changed to IASB or the International Accounting Standards Board. The constitutional amendments also enabled the organisation to revise its objectives. The objective of the IASB is directed towards the development and application of a common set of accounting standards for all nations worldwide. In turn, this primary goal will enable its participants to optimise worldwide capital markets by making efficient economic decisions (PricewaterhouseCoopers, 2002).
Indeed, the IASB has been in charge for setting international standards for global use. In spite of the unavailability of the international standards for financial reporting, efforts has been initiated by developing a set of IFRS for public companies in the European region, which was put into effect on January 1, 2005. This effort was pursued primarily because of the constant burden of changing accounting standards on all types of company sizes. Standard-setters, such as the IASB then took the necessary step for change (BDO, 2005).
The IFRS have just been applied in Europe, making it quite too early to see its quality. However, the expected outcome is directed for the benefit of major public firms with cross boarder and capital raising transaction and listings on various exchanges (BDO, 2005). In the United States however, the changes on its accounting standards resulted to negative outcomes, specifically by augmenting the burden of private, mid-sized and small companies. Whilst the FASB has been committed in working in coordination with the International Accounting Standards Board, particularly in working out the differences between the IFRS and the U.S. GAAP (BDO, 2005).
Though there were no quality standards for international financial reporting at that moment, the IASB had been doing its responsibility in developing ways for convergence among national standard setters worldwide. In the technical committee statement of the IOSCO (2005), the efforts of the IASB towards this goal have been noted. In this activity, representatives of government bodies in the European Union and accounting organisations had continuously discussed about the planned joint efforts with the national standard setting body of Japan in 2004. In addition, liaison activities with national standard setters have been an ongoing activity since the inception of the Board. In spite of the accounting differences and problems incurred by the national standard setters, the technical committees had expressed its confidence for IASB in overcoming these challenges.
Creating international standards entails a number of factors for consideration. Time should be allotted for developing international standards that are of quality. Moreover, the gradual application of financial reporting standards is helpful in analysing the effect of accounting changes, so as to develop improved and internationally applicable set of standards. Following the introduction of International Financial reporting standards in 2005, managers face an importance choice they can choose to integrate external and internal reporting in ways which might fundamentally change established management accounting practices or they can continue to operate dual accounting systems so that adoption of IFRS restricted to external reporting. It can be said that IFRS revolution would definitely affect how company report their financial statements and may also affect the outcomes of valuation metrics financial analyst’s use to measure and assess company performances.
Currently, numerous countries worldwide are adopting IFRS in 2005 and it is known that Small-medium Enterprises in Hong Kong are also adhering to it In order to enhance their financial reporting approach. Primarily, the main goal of this research study is to analyse the suitability of the IFRS in Hong Kong SME.
The Significance of Hong Kong SMEs
SMEs, as being one of the main forces in economic growth & job creation have a special importance, not only in developed countries but also in developing and emerging economies (Cabbar, 2000). SMEs in most countries have barriers to access to finance, difficulties in exploiting the technology, insufficient managerial capabilities, low productivity and regulatory burdens in their business environment. According to Cabbar (2000), because of the dynamic and productive characteristics of SMEs, they contribute to the growth of the country’s economy and also very effective in social life, as well. Some international researches and analyses have shown that SMEs need management skills, information access systems, technological base of production system to be upgraded, beside their financial needs to be met (Cabbar, 2000).
SMEs have been playing roles such as providing job opportunities, income distribution through business opportunities, rural development, increase investments and development of entrepreneurship (Kotey and Meredith, 1997). At the same time, small firms with limited resources will be expected to perceive its business environment as being different from that of a large firm with more resources and it is also likely to face different environment pressures with regard to market competitiveness (Gyampah & Boye, 2001). Some writers believe that the performance of SMEs is contributed by many factors such as internal and external to the SMEs themselves (Kotey and Meredith, 1997; Pearce and Robinson, 2002). However, there is no comprehensive study on factors that contribute to the development and performance of the SMEs, and in this case, directly relevant to the Hong Kong SMEs.
The IASB has been able to issue some proposals regarding the IFRS for SMEs. This proposal is intended to implement to general purpose of financial statements of SMES. The authorities intended that the implementation of the IFRS by SME is presumed to lead in the financial statements which give a fair and true view of the financial position, performance, and cash flows of small-medium sized enterprises. The SME Framework and IFRS are particularly developed for Hong Kong SMEs which are eligible to prepare financial statements in line with Hong Kong Companies Ordinance and standards.
Research Objective
The main objective of this paper is to assess the suitability of the IFRS in HK SMEs. Specifically this paper attempts to achieve the following objectives:
· To investigate the context of IFRS and its aims and objective in the enhancement of financial reporting standards in Hong Kong SMEs
· To analyze the advantages and disadvantages of IFRS as part of the financial reporting approach of SME.
· To find out problems encountered by SME managers in following IFRS.
· To examine whether IFRS has a significant effect on SMEs economic performance
Research Questions
Given the aims and objective of this research, this study attempts to answer the following queries:
1. What is the perception of the managers in using IFRS as part of their financial reporting approach?
2. What are the perceived advantages or benefits of IFRS in terms of organisational performance in the context of SME?
3. What are the perceived problems SME managers may face in implementing IFRS?
4. How suitable is the application of IFRS for the financial statements and reports of Hong Kong SMEs
Significance of the Study
The boom of SMEs, especially in most Asian countries, has paved the way for different nations to develop new initiatives to meet the international financial reporting standards. The Hong Kong authorities has considered this in order to cope with the growing needs of a more accurate, suitable and efficient financial reporting analysis approach all over the world. It was noted that there are a number of literatures that discussed how IFRS has been developed to adhere to the needs of the industries, specifically the SMEs. Considering the existence of many SME industries, in the world in general, and in Hong Kong in particular, it is essential that several studies stress this context of investigating the suitability of IFRS in HK SME.
By and large, the purpose of this research study is to investigate the suitability of IFRS in HK SME. In addition, this study will also include the discussion of relevant literature. The outcome of this study will be helpful for the SME industry in various parts of the world and in Hong Kong. In addition, this research study is significant in terms of helping management and marketing students, marketing managers, and the SMEs to know the importance of the perception of the HK SME managers regarding the changes that would be initiated in Hong Kong. . The findings of the study will be able to benefit various SME industries throughout the world. This means that the results of the study will be beneficial to the business, public and private environment since the research will be able to support the previous claims that having a standard financial reporting analysis system can help industries to have a competitive position in the market place. This also suggests that the findings of the research will allow the government institutions and other authorities integrate effective diversification plan for the development of their financial reporting system.
Scope and Limitations
This research will be conducted to be able to analyse and investigate the suitability of IFRS with Hong Kong SME This study will cover the topics on the advantages and disadvantages of the IFRS as a financial reporting approach. The discussion of this study will mainly focus on the analysis of the perception of the managers of SME in Hong Kong. The data that will be gathered for this research will be derived from primary and secondary resources. The primary source of information for this research includes self-administered survey questionnaires, which will be provided to the respondents of the study. The participants for this research will be selected from the chosen HK SME. On one hand, the secondary sources of data will come from published articles from journals, theses, and related studies on financial reporting, particularly IFRS in HK SME.
For this research, the researcher assumed that time will be the greatest limitation to this research, which may affect the findings of the research. As this research will be utilising a small sample of participants, the results may not effectively represent the general population. In this research study, the self-administered semi-structured questionnaires will be used to collect quantitative data and the interviews will be used to provide qualitative insights into the data collected.
Chapter 2
Review of Related Literature
The choice of literature for this study is limited only to those that have a vital contribution about the international financial reporting standards of small and medium industries in Hong Kong. This chapter reviews articles from books and journals on SMEs in Hong Kong and their financial reporting and performance. Specifically, this chapter discusses the nature of the SMEs, their performance and some issues about the topic.
Hong Kong SMEs
Small and medium-sized industries in Hong Kong have been an importance economic aspect of the Country. Small and Medium Enterprises (SMEs)[1] account for over 98% of the total establishments and provide job opportunities to over 1,400,000 people, about 60% of the workforce (Corporate Information, 2001). Amongst the business sectors, the majority of SMEs is engaged in the import and export sector, followed by the wholesale, retail, restaurants, and hotels sector (Exhibit A). These two sectors constitute about 60% of the SMEs in Hong Kong, employing more than half of the workforce engaged in SMEs.
While the large majority of companies in Hong Kong are SMEs, individual businessmen have profited significantly from starting many of the larger corporations that trade today on the Hang Seng Stock Exchange. In fact, many of the founders still own a significant portion of the companies and conglomerates that they or their families started years ago. Of the 800 companies that are currently listed on the stock exchange, one can see from the following table that the ten largest companies have a significant portion of their shares owned by the individual family that started the company.
Exhibit A
Top Ten Hong Kong Companies by Market Capitalisation
Source: Corporate Information – Hong Kong, March 16, 2001
Since the ten largest companies of Hong Kong have a significant portion owned by individual families, it can be concluded that the other companies that are traded on the exchange also have a significant portion held by individual families.
Management in SMEs
Small Medium Enterprise (SMEs) are companies that have needs in terms of operations and operations strategies have been greatly overlooked. Especially in the case of the former, clearly, many SMEs are manufacturers and/or service providers, nevertheless, we will suggest that size and structure in their case does present many unique opportunities and, indeed, hurdles.
The scale of SME operations means they have a relatively low impact on their surroundings and have a limited power to influence environmental forces in their favour this will include both their suppliers and customers. However, their weakness in these areas can be countered by their ability to react quickly to environmental change. Fundamental shifts in social values, consumer tastes, technological developments, managerial techniques, financial markets and so on, have brought about more complex and dynamic commercial environments. For the SME, their less bureaucratic structural arrangements, together with concentration in the power of the owner, allows growth-orientated small ventures to capitalise on opportunities that emerge from such environmental changes.
Small organisations usually thrive in a changing environment, although it must not be unduly complex in terms of the number of variables involved or the speed of their change (Mintsberg, 1979). It is further suggested by Mintsberg (1982) that the SME nimbleness in response to change is due in part to the fact that senior managers or owners formulate strategies that are closely connected with the work of the organisation and with other workers and managers. Control and tactical decision making is not separated and distanced from ownership or senior management. In other words, such firms tend to be task continuous; there is a close link between management, planning, and the work activity. Larger firms on the other hand are task discontinuous; there tends to be a separate and discrete planning and management structure (Networking Development Resource Guide, 1976).
Given the limits imposed by small scale operations, evidence suggests that growth-orientated managers and owners pursue opportunities vigorously, flexibly and with innovation. They will pursue a number of opportunities and often refuse to be constrained by the assets currently under their control. They make tentative investigations of promising projects and frequently assume that the techniques and technologies not currently available can be developed in the near future. In this way riskier opportunities are explored, despite not immediately having sufficient resources to underwrite their opportunities. Managers and owners are prepared to pursue, evaluate and resource new opportunities in the full confidence of their ability to make things happen (Stevenson and Gumpert, 1991).
In addition, in turbulent conditions the variation in demand for final products and services will be reflected in intermittent demands by the SME for resources - the alternative being to hold high levels of inventory. Thus, difficulties in procuring resources will result from (a) changeable demand and (b) lack of power or leverage. SMEs tend to avoid permanent or binding linkages with suppliers and other network contacts. Their flexibility relies upon the transient nature of their relationships with other organisations using short-term, entrepreneurial contracts ability to utilise resources carried by others (Stevenson and Gumpert, 1991). This ability can be solved if the company would be able to adapt to various international financial standards.
In seeking new opportunities and being nimble and fast they need instrumental relationships; in managing their current business they need strong, more permanent relationships. The two are to a degree exclusive. One solution seems to be the development of new ventures alongside existing ones. The flexibility of the SME often allows this type of management operation, with resources being switched between current and new activities (Lawson, 1998). Small and medium-sized firms also suffer a power imbalance when dealing with larger suppliers and customers, with both sides regarding the relationship as somewhat temporary. This arrangement certainly offers greater degrees of flexibility, but is also highly speculative and makes operations planning very problematical.
Another fundamental element in realising the requisite levels of flexibility lies in the reduction of uncertainty. Traditional methods of operation rely heavily upon sales forecasting systems and financial reporting approach which drive all activity. This leads to large amounts of uncertainty and consequent holdings of buffer stocks in order to combat unknown demand. Fast and flexible response, however, reduces forecast reliance and removes uncertainty by applying different operational practices to individual product groups, distribution channels, retailers, etc. Hence, true demand patterns become evident and easier to satisfy.
Specialisation also requires a degree of stability so that the same task can be performed repeatedly and skills can be perfected, specifically in line with doing a financial report or standards However, the strength of the SME is in seeking new opportunities, as such specialist skills can quickly become redundant and the more flexible and adaptive generalist becomes more valuable. The SME resides in a changeable environment, has a small output and is a flexible and responsive generalist organisation. These firms are ideally suited to providing a variety of customised product and service combinations in response to constantly changing customer needs (Lowson, 1998). Small firms have less sophisticated, flexible and organic structures. They tend to adopt what Piore and Sabel (1984) describe as ‘flexible specialisation’.
SMEs although greatly varying in size, growth rates and activities, due to its inherent uniqueness (as they are directly reflective of the ideas and personalities of the owners and not through managers) are all united in their goal towards profitability and efficient asset management. Small to Medium Firms necessitate mastery in accounting in order to manage and control its assets. In this regard, it is important that SMEs must be able to adapt a new standardise approach of financial reporting and consider the use of IFRS.
The Context of IFRS
As the capital markets in the global environment have become increasingly integrated, various countries are moving to IFRS. In 2000, amendments were done on the constitution of the ISAAC. A group of trustees was also appointed during this period. Later, the name of the ISAAC was changed to IAMB or the International Accounting Standards Board. The constitutional amendments also enabled the organisation to revise its objectives. The objective of the IAMB is directed towards the development and application of a common set of accounting standards for all nations worldwide. In turn, this primary goal will enable its participants to optimise worldwide capital markets by making efficient economic decisions (PricewaterhouseCoopers, 2002).
Indeed, the IAMB has been in charge for setting international standards for global use. However, the organisation has encountered criticisms from its observers. One of which was from the secretary of OSCO. The critic basically stated that at present, no high quality standards for financial reporting which can be utilised by all nations worldwide or for the purposes of cross border listing. In spite of the unavailability of the international standards for financial reporting, efforts has been initiated by developing a set of IFRS for public companies in the European region, which was put into effect on January 1, 2005. This effort was pursued primarily because of the constant burden of changing accounting standards on all types of company sizes. Standard-setters, such as the IAMB then took the necessary step for change (BDO, 2005).
Some standards that form part of the IFRS are known by the conventional name of International Accounting Standards which is issued in 1970-2001 by the IASC board. In April 2001 the IASB has adopted all IAS and continue their improvement and calls it the new standards IFRS. Financial Reporting Standards are utilised in different part of the world, which include the European Union, Pakistan, Hong Kong, India, Australia, South Africa, GCC Countries, Hong Kong, and Russia. There is an approximately 100 nations which are currently required or permitted with the use or have regulations of convergence with the IFRS (IASB, 2008).
Adoption of IFRS in Hong Kong SME
Presently, HK has two separate sets of accounting standards HK Financial Reporting Standards (HKFRSs) and the Small and Medium-sized Entity Financial reporting Framework and FRS (SME-FRF & SME-FRS).
Generally, HKFRS are financial reporting standards which are converged with IFRS issued by the IASB. HKFRSs are established to apply to general objective financial statements and other financial reporting of the entire profit-oriented entities. The implementation of HKFRSs, with additional disclosure when essential, is presumed to result in financial statement which gives true and fair view. The SME-FRS and SME-FRF, which are efficiently for accounting periods starting on or after January 1, 2005, were enhanced locally in HK. The measurement base under the SME-FRF is principally historical cost. The SME-FRS and SME-FRF are pertinent to companies incorporated under the HK Companies Ordinance (CO) which meet the standards set out in section 141D of the CO and other entities which have no public accountability and are noted to be SMEs in terms of their size.
Undisputed consent from shareholders is required for the SME-FRS and SME-FRF to be utilised. For industries applying section 141D of the CO, compliance with the SME-FRS and SME-FRF is essential to ensure that financial statements are true and correct in their views. For other entities which qualify for reporting under the SME-FRF the effective application of the SME-FRS, with additional disclosure when needed, would have a financial statement achieving proper presentation appropriate for SMEs.
The exposure Draft of the proposed IFRS for SMEs which is presently under consultation by the IASB is noted to implement to general objective financial statements of SMEs. Small and Medium Sized enterprises are defined within the Exposure drafts are entries which do not have public responsibility and publish general purpose financial statements for external users. Even if the definition of SME does not include quantified size measurement, the ED recognises that individual discretion, in deciding to adopt IFRS for SMEs, may select to conduct a quantified size measurement.
It is intended that the application or implementation of the IFRS in these companies, with additional disclosure when needed, is assumed to result in the financial statements which gives a fair and true view of the financial position, cash flows of the SME and the financial performances. These tests bases under the proposed IFRS for SME are link to the mix of fair value and cost utilised in HK FRS. As compared with the international financial reporting standards, with which HKFRSs are congregated, the proposed IFRS for SME permits more selections, preferences, includes some measurement and recognition implications, and needs less disclosure. As compared with the SME-FRF & SME-FRS, which is based principally on the conventional cost, the proposed IFRS for SMEs would, universally, need or permit more use of fair value and need more disclosure. In the light of this proposed IFRS for SMEs, the question now faced by HK is whether this proposed IFRS for HK SME, upon its implementation, should be considered to replace the proposed IFRS for SMEs and SME-FRS or whether this could be retained.
The choice of the HK will be dependent on which standard will work effectively for SMEs in HK. to be able to have fairer comparison, their choice must be made without regard to the differences in terms of the qualifying standard between those set out in the IASB proposed IFRS for SMEs and those in the SME-FRF SME-FRS.
Chapter 3
Research Design
To achieve the objective of this study, the researcher opted to use descriptive method of research was utilised. The purpose of employing the descriptive method is to describe the nature of a condition, as it takes place during the time of the study and to explore the cause or causes of a particular condition. The researcher opted to use this kind of research considering the desire to acquire first hand data from the respondents so as to formulate rational and sound conclusions and recommendations for the study.
According to Creswell (1994), the descriptive method of research is to collect information or data regarding the present existing situation or phenomenon. Descriptive research has as its purpose developing a better understanding of a phenomenon in detail. Descriptive studies usually have as their purpose the first two aims of normal science as described by Kuhn (1970, pp. 25-26): “attempts to increase the accuracy and scope with which facts are known” or “determination of those facts that can be compared directly with the predictions from theory”. The aim of descriptive research is to clarify the nature of a phenomenon in a specified, static context while viewed from a specific, fixed perspective.
Two types of data were used: the primary and the secondary data. The primary data were derived from the answers respondents gave in the self-administered questionnaire prepared by the researcher. In addition, the information obtained from the interview also provided primary research data that supported the study. The secondary data on the other hand, were derived from the findings stated in published documents and literatures related to the research problem. These were based from the recent literatures related to employee retention and motivation and the concepts cited by the respondents.
In terms of approach, the study employed both qualitative and quantitative approaches. The quantitative approach focused on obtaining numerical findings was used with the survey method. The interview on the other hand, made up the qualitative approach of the study as this focused on personal accounts, observations, description and individual insights of the respondents. This study employed the combined approach so as to overcome the limitations of both approaches.
Participants
The respondents have been chosen came directly from managers of SMEs in Hong Kong. All of these participants were selected through random sampling (Saunders, Thornhill and Lewis, 2003). This sampling method is conducted where each member of a population has an equal opportunity to become part of the sample. As all members of the population have an equal chance of becoming a research participant, this is said to be the most efficient sampling procedure. In order to conduct this sampling strategy, the population is defined, the members of the populations then listed down, and then members are selected to make the sample. For this purpose, a self-administered survey questionnaire in Likert format was given to the respondents to answer[2].
In this regard, the dissertation will consider 80 managers from different SMEs in HK. Managers of the SMEs have been chosen to ensure that the data and information that will be gathered is pertinent.
Research Instruments
For this study, two research instruments were used to evaluate the suitability of IFRS to Hong Kong SMEs. These research instruments included the survey questionnaire methods. A self-administered questionnaire was distributed to the selected managers of SMEs in Hong Kong. The questionnaire given to the respondents aimed to assess the suitability of the IFRS as part of the financial management of SMEs and other relevant issues. In addition, this also aims to evaluate the problems and perception of the managers regarding IFRS adoption of HK SMEs as perceived by the respondents in terms of the mentioned aspects above. This focus of the assessment was based on the principles introduced by various authors.
The questionnaire was structured in such a way that respondents will be able to answer it easily. Thus, the set of questionnaire was structured using the Likert format with a five-point response scale. A Likert Scale is a rating scale that requires the subject to indicate his or her degree of agreement or disagreement to a statement. In this type of questionnaire, the respondents were given five response choices. These options served as the quantification of the participants’ agreement or disagreement on each question item. Below are the designated quantifications used in the questionnaire:
5
Strongly Agree
4
Agree
3
Uncertain
2
Disagree
1
Strongly Disagree
Statistical Treatment
The following are the statistical treatment used for this research study:
1. Percentage. Percentage is used as descriptive statistics, which is relating a part to the whole. This is used in describing some personal characteristics of the respondents of the study such as age, gender and others. The formula in computing percentage is as follows:
n
Percentage = -------- x 100 ;
N
n – number of responses
N – total number of respondents
2. The Likert scale was used to interpret items in the questionnaire. These responses were based on the respondents’ assessment of the current investment process model. There were instances that the respondents were asked to rate the effectiveness of implementing the phases in the investment process.
The range and interpretation of the five-point scale are shown in Table 1.
Table 1: The Five-point Likert Scale
Scale
Range
Interpretation
5
4.50 – 5.00
Strongly Agree
4
3.50 – 4.49
Agree
3
2.50 – 3.49
Uncertain
2
1.50 – 2.49
Disagree
1
0.00-1.49
Strongly Disagree
3. Weighted mean was used to measure the general response of the survey samples, whether they agree to a given statement or not.
The formula in computing weighted mean is as follows:
4. T-test
T-Test
The t-test is the most commonly used method to evaluate the differences in means between two groups. For example, the t-test can be used to test for a difference in test scores between a group of patients who were given a drug and a control group who received a placebo. Theoretically, the t-test can be used even if the sample sizes are very small (e.g., as small as 10; some researchers claim that even smaller n's are possible), as long as the variables are normally distributed within each group and the variation of scores in the two groups is not reliably different. As mentioned before, the normality assumption can be evaluated by looking at the distribution of the data (via histograms) or by performing a normality test. The equality of variances assumption can be verified with the F test, or you can use the more robust Levene's test. If these conditions are not met, then you can evaluate the differences in means between two groups using one of the nonparametric alternatives to the t- test.
The p-level reported with a t-test represents the probability of error involved in accepting our research hypothesis about the existence of a difference. Technically speaking, this is the probability of error associated with rejecting the hypothesis of no difference between the two categories of observations (corresponding to the groups) in the population when, in fact, the hypothesis is true.
Some researchers suggest that if the difference is in the predicted direction, you can consider only one half (one "tail") of the probability distribution and thus divide the standard p-level reported with a t-test (a "two-tailed" probability) by two. Others, however, suggest that you should always report the standard, two-tailed t-test probability. When testing for a relationship between two variables, sometimes there is a 3rd variable, which we are not interested in at the moment, which influences our results.
So, the null hypothesis (Ho: x and y are independent), can also be written as:
Ho: mD= 0, where mD = population mean of difference scores
df = N - 1, where N = the number of pairs of participants
Assumptions of the Tests
One last note: It is important to know the assumptions we make in using the 2 sample t-test.
- Characteristics of the Dependent Variable: It is assumed that y is interval, continuous, and normally distributed.
- Homogeneity of Variance: We assume that the variances are equal for both groups in the population. If the sample estimates are vastly different, such as 9:1 or 3:1, then you probably have violated this assumption. As you can see, the two sample estimates have to be very different from each other before we worry about the assumption.
Results of the survey were presented in tables. Excerpts from the interview were integrated based on the analysis outline. Relevant literatures to support the findings are also included.
Chapter 4
Data Presentation and Analysis
This chapter presents the data gathered from the questionnaire, researches, and interviews conducted by the researcher from different managers of SMEs in Hong Kong. The general population for this study is composed of 80 managers from SMEs in Hong Kong which are considering the application of IFRS as part of their financial reporting approach. These managers were also interviewed.. The findings of the study are presented in different sections. Part One presents the profile of the respondents of this study. The object is to determine the suitability of IFRS in HK SMEs. This is the manner unto which the study accounts the factors and the perception on the criteria themselves.
The conduct of this study entails a detailed account of the demographic profile of the respondents. It is assumed that the attributes of the respondents influence their behavior and answers on the survey questions. For a clearer presentation, the findings of the survey are presented in graphs and tables. To give an appropriate flow of discussion, findings are also divided into sections. Section one gives a summary of the demographic profile of the participants used in the study. This profile was categorised according to the respondents’ age, gender, educational background, and length of stay in the company. The discussion of the perception of managers who took part in the study about determining the suitability of IFRS in SMEs in HK will be discussed in the next section. The third section will discuss the view of the managers about IFRS and other relevant issues.
Demographic Profiles
This part will discuss the demographic profile of 80 individuals who answered the survey questionnaire sent by the research. The description of the respondents includes their gender, age, educational background, length of stay in the company
Gender of the Respondents
Figure 1
Figure 1 show the distribution of the employees who participated in the study in terms of gender. Out of 80 respondents, it shows that 43 (54%) were female and 37 (46%) were male. This may indicate that female employees of Hong Kong SMEs are more interested to participate in surveys than male employees.
Figure 2
The figure above presents the statistics regarding the age of the respondents or managers who took part in the study. Herein, it shows that the age of 40% of the respondents was ranging from 23--30 years old. Other respondents compromised the following division, 25 (31%) belongs to 18-22 years old, 15 (19%) are 31-40 years old. this indicates that SMEs gives opportunity for retaining good employees.
Educational Background
Figure 3
The figure above displays the educational background of the respondents. It shows that 49 or 61% of the respondents has been graduated with a Bachelors Degree and 39% have attained post-graduated degree. These further indicate that most of the managers of SMEs have been hiring knowledgeable assets in the company.
Length of Stay in SME
Figure 4
The figure above shows the distribution of the respondents in terms of their length of stay in the company. Herein, it shows that 51% of the respondents are staying in the company from 6-12 years and 35% are staying in the company for 13-19 years and 14% are servicing the company below 5 years. The result indicate that majority of the respondents are knowledgeable enough to the system of SME, specifically in terms of its financial reporting and accounting department.
Part 2: Perceptions of Respondents
This part of the paper will provide the discussion and analysis of the perception of respondents based on the likert scale (Chapter 3). It should be noted that the participants of this research were presented a set of attitude statements in order for them to express their agreement or disagreement with the use of five-point likert scale, wherein 5 connotes to a strong agreement and 1 for strong disagreement. This will provide a greater understanding about the observations of the following respondents towards their working force.
Perception about the Application of IFRS
In their Respective SMEs
Figure 5
The figure above presents the respondents’ perception on the initiation of IFRS in their respective SMEs as part of financial reporting approach. Herein, 25 (31%) have said that they strongly agreed on applying IFRS in their respective SMEs, 24 (30%) have said that they agreed on the consideration of IFRS in HK SMEs. 15 (19%) are uncertain on whether they will consider IFRS and 16 (20%) shows their disagreement and strong disagreement upon of using IFRS in the SMEs of Hong Kong.
Perceived Advantages and Benefits of IFRS in SMEs
Table 2
Statements
5
4
2
2
1
Weighted Mean
Interpretation
1. The application of IFRS by SMEs will significantly improve the comparability of entities within an industry and across different industries, regardless of where the reporting entity is domiciled.
52
28
0
0
0
4.65
Strongly Agree
2. Adopting IFRS can make it easier for SMEs to implement planned cross-border acquisitions and to initiate proposed partnerships or cooperation agreements with foreign entities.
51
29
0
0
0
4.64
Strongly Agree
3. IFRS can simplify the sale of the reporting entity itself, either as a whole or on a piecemeal basis.
62
18
0
0
0
4.78
Strongly Agree
4. IFRS information can help SMEs involved in buying / selling goods or services across national borders to initiate new relationships with customers and suppliers.
48
31
0
1
0
4.58
Strongly Agree
5. IFRS can strengthen SMEs’ position in negotiations with credit institutions and reduce the costs of borrowing because of the positive effect it can have on credit ratings.
56
24
0
0
0
4.70
Strongly Agree
6. Internationally-active SMEs can profit from group-wide application of IFRS: it can facilitate faster and more cost-effective preparation of financial information. If both parent and subsidiaries (i.e. all individual companies in the group) apply IFRS, it means there is no need for a second set of financial statements for group accounting.
62
18
0
0
0
4.78
Strongly Agree
7. It also reduces the risk of misunderstanding and facilitates the more efficient collation of comparable, decision relevant information from all group companies.
48
31
0
1
0
4.58
Strongly Agree
The table above presents the distribution of the respondents on their perception with regards to the possible benefits and advantages of IFRS in SMEs. Herein, it shows that majority of the respondents strongly agreed on the given statements. The managers of the SMEs have strongly agreed the application of initiation of IFRS by SMEs will have a significant effect on the improvement of the comparability of entities within the company and also across various industries, regardless of where the financial reporting entity is located.
This means that the manger of the SMEs realise the importance of having various information that they can use to compare their financial reporting and statements. It can be perceived that the managers can enhance their financial reporting through the information provided by other industries.
In addition, they also strongly agreed that the adoption of IFRS can make it easier for their respective SMEs to initiate planned cross-border acquisitions and to implement proposed partnerships or coordinated agreements with foreign companies. One of the perceived benefits of IFRS is its ability to enable companies to collaborate with other companies in international level. With this, SMEs are able to expand their business both in local and international level.
The SME managers in this research also strongly agreed that IFRS will enable them to simplify the sale of the reporting industry itself, either as a piecemeal basis or as a whole. For the managers, having a simpler financial reporting approach easily enables them to determine the aspects of the financial report than needs improvement. In addition, they are also able to know which information is sufficient or not.
Furthermore, they also strongly agreed that IFRS information and data which can help them in terms of involvement in buying and selling products or services in international market to implement new relationships with buyers and suppliers. The realisation of creating a market niche outside Hong Kong is one of the goals of the SMEs. In this regard, through the help of IFRS, the managers are able to have enough information for considering partnerships and collaboration with international buyers and suppliers.
The strongly agreed that IFRS can strengthen the position of SMEs in negotiations with credit industries and reduce the costs of loans due to the positive effect it can have on credit ratings. Having an intensive financial reporting, the manager believed that considering or using IFRS will enable them to minimise credits and loans from other industries, which in return, creates a strong financial performance for the company. Through IFRS, the managers strongly believed that their company will be able ot profit more since it can facilitate rapid and more cost-effective preparation of financial statements and lastly, they believed that IFRS may also reduced the risk of misunderstanding and facilitated the more effective gathering of comparable and decision related data from all group entities.
The strong agreement of the respondents with the given statements shows that they are able to realize how important the application of IFRS with their respective SMEs is.
Problems facing managers in implementing IFRS
Table 3
Statements
5
4
2
2
1
Weighted Mean
Interpretation
1. Issues over the high costs of complying with full International Financial Reporting Standards have prompted many Countries.
52
28
0
0
0
4.65
Strongly Agree
2. IFRS adoption may negatively affect the SME performance and operations during the transition period.
51
29
0
0
0
4.64
Strongly Agree
3. The inherent complexity of the IFRS standards also faces users of financial statements with problems of comprehension which are complicated, given the historically different cultural approaches to accounting from one country to another, by the need for translation from the English.
62
18
0
0
0
4.78
Strongly Agree
In terms of the problems faced by the managers in applying IFRS, it can be said that most of the managers strongly agreed on the given statements. For them, one of the problems that they will face is the issues of over the high costs of complying or adhering with full IFRS, specifically for industries which are lacking of financial resources. It is noted that SMEs only constitute smaller financial assets as compared with other corporations. In this regard, the integration of IFRS with their financial reporting approach may be costly for the managers. Furthermore, they also strongly agreed that IFRS initiation may negatively affect the operations and performance of SME during the transition period and the inherent complexity of IFRS also challenge managers to the financial statements problems of, specifically in terms of comprehension which are complicated, given the historically various cultural approaches to accounting from different countries by the need for translation from the English. IFRS initiatives aims on having an effective and efficient financial approach that meets the accounting standards set in international level. The managers believed that integration of the IFRS will have negative effect on their performance since not all SMEs have the capability on easily adapting to IFRS, specifically during the transition period. In addition, cultural differences may also affect SMEs implementation to IFRS for the perception that some of the provided standards may not be applicable for the SMEs in Hong Kong
Applicability/Suitability of the IFRS in SMEs in HK
Figure 6
The figure above presents the perception of the respondents regarding the suitability or applicability of IFRS with their respective SMEs. Herein, it shows that 35 (44%) out of 80 respondents perceived that IFRS is suitable for their respective SMEs. On one hand 24 (30%) perceived that IFRS will be suitable for their financial reporting approach in their SMEs. Out of 80 respondents 13 (16%) are still uncertain on whether they would implement IFRS as part of their financial reporting or not while 5 (6%) and 3 (4%) perceived that IFRS is not applicable and strongly not applicable with their SMEs. This result indicates that although SME management are aware of the possible benefits of IFRS within their company, some are still hesitant on applying IFRS as part of their financial reporting system.
Chapter 5
Summary, Conclusions and Recommendations
Summary
In this chapter, the data gathered from the SME managers are presented and analysed. This chapter discusses the results of the structured survey questionnaires given to the 80 chosen respondents. Prior to the initiation of the survey and the interview process, the purpose, the importance, and objectives of the study were relayed to the chosen respondents.
They were also assured that all the information they had provided are solely for the purpose of the study while their identities would remain confidential. All questions asked in the survey questionnaire and interview process pertain only to the respondents’ insights regarding the assessment of the suitability of IFRS in Hong Kong SMEs.
Primary data and secondary data have been used in this study, wherein the primary data came from the 80 respondents from Hong Kong SMEs who has been randomly selected and 3 managers for the interview. Secondary data were gathered using journals, internet articles, and books regarding international financial reporting standards, accounting standards and Hong Kong SMEs.
In order to analyse the gathered data from the Likert questionnaire, the weighted mean of each survey item was computed. The result is then compared to the developed scale to interpret the obtained value. Based on the analysis, it can be said that IFRS is suitable to the SMEs in Hong Kong. Herein, it can be noted that the IFRS should be followed strictly by Hong Kong SMEs and new SME standards should be considered.
Conclusion
It can be said that the emergence of standard financial reporting of different business aspects has paved the way for adapting IFRS in different companies. It has been found that the number of competitive moves increased as IFRS usage increased for different companies in the world. It becomes more important to manage relationships as competition increases through the use of this accounting system. It can be stated that the most effective financial reporting approach for SMEs is a collaborative one with their business strategy and their organisational objectives and corporate responsibility. On one hand, IFRS has been considered an important aspect of most business operations, particularly those who deal with directly with international investments and acquisitions. This type of business setting is very much evident in different industries and now being considered in SMEs . As mentioned, the goal of this paper is to determine the suitability of IFRS with Hong Kong SMEs in terms of financial reporting aspect and to examine the benefits and problems that can be encountered by the managers upon adapting IFRS.
.
In order to analyse the gathered survey results, the weighted mean for each survey item was computed and compared to a Likert scale for interpretation. The results were then subdivided into categories for clearer presentation and comprehension. The results of the interview were incorporated to the values acquired from the survey. Relevant literatures were also integrated to support the gathered findings. Based from the data gathered, a number of important conclusions can be drawn out:
1. The selected respondents are familiar with IFRS as part of their business strategy. These techniques include the use of standard financial statements that enables the company and external environment to easily understand the current economic and financial conditions of the industry.
2. In terms of benefits, the participants of this study strongly agreed in most of the Statements. The majority of the respondents strongly agreed that investment and enhanced relationship in overseas or international partners benefits are considered as one of the most significant advantages gained from using IFRS. This is then followed by the improvement of the relations among the target market and suppliers of the company and the enhancement of the different business abilities of the company. In turn, these significant developments benefited the companies as sales improved and competitive advantages and relationship increased.
3. In spite of the beneficial effects of IFRS application, certain difficulties have been perceived by the managers Among several problems; the companies appear to be most affected by the high cost factors. With limited resources, the SME managers were unable to adapt fully the IFRS within their industry. This in turn, has affected their opportunity to acquire greater market shares and quality financial reporting system. The managers are also having problems when it comes to the transition period since IFRS tends to be complex for some managers.
This research study was conducted in order to determine the suitability of IFRS with SMEs in HK. Based on the collated and analysed data the IFRS has evolved to encourage direct interaction between service provider and users in financial information in market environment since accountants have more complete information about financial information of specific entities. To make it clear, HK has been able to adapt IFRS through their HKFRS and the country has supported the adoption of international standards as part of their adherence to improve financial reporting among small and medium sized entities. Although, national standards-setting served well in Hong Kong when it was a reasonably self-contained economic entity and the profession could adapt to the cultural homogeneity of the profession and of its constituents. With the movement to an international economy and more vibrant international trade and commerce, it is imperative that Hong Kong capitalised on its capacity to combine itself within that global landscape. Given Hong Kong’s modest capital market delegation on the global market, a recognition that international standards-setters can be receptive to divergent needs, and that HK SMEs re able to re-define the breadth and depth of economic aspects– one that is less highlighted on supposed uniqueness and distinctiveness, there is growing consensus on the weakening of the support and justification of the national standards of Hong Kong. Hence, with this result, Hong Kong decided to adapt IFRS to adhere to the battle cry of SMEs in a standardised financial reporting to help them improve their financial statement. While there will be increasing atrocities for the accounting profession, it can be viewed that the profession will be well served by the movement of HK to follow IFRS. It will be great for mobility and will bolster consumer confidence in the products and services that the SMEs will provide. In addition, the SMEs in Hong Kong has also adhered to the growing demand for a common financial reporting language and the push towards globalising of financial markets and foreign trade, national standards-setting would also tends to competitive disadvantage relative to international market.
Recommendation
Every business endeavor or venture is constantly faced with financial management problems to which the owner or manager should be able to attend to in order to take the business to success. Key financial decisions normally confronts the managers in issues and problems that concerns financial investments they usually provide answer to the problems regarding the assets on which the company of firm needs to put money and how a chosen investment should be financed. All the plans of the company will be put to waste if the organisation has no effective system of financial control that will monitor the investment that it ventures on. If outputs are expected, there should be immediate application of the advantages that the organisation gained. This will provide the black and white transparency which the company can study to serve as guide in the future investment as well as the management plans and strategies that it will employ.
As the nature of financial management becomes more and more complex in this information and efficient communication era of international business, finance managers face a wide array of challenges, opportunities and options to enhance the investing and financing activities of the organisation as well as to minimise the inherent risks and circumstances of the financial decisions that will be made. The challenge now for the financial managers is to explore the options and take advantage of the opportunities while taking caution in managing the financial information given through the use of standardised systems like IFRS.
In order for Hong Kong to ensure the effectiveness of the initiation of their IFRS to adhere on the growing trends in the capital and international market, it is recommended that the management of SMEs of Hong Kong focus on the following issues in their effort to follow and apply IFRS and integrate it as part of their business financial reporting approach.
ü Improve the quality of financial reporting system by adhering or cloying to the IFRS
ü Increase management awareness of IFRS to ensure that the adoption will be successful.
Reference
BDO (2008). "Financial Reporting by Private, Small and Mid-Size Companies" Available at: http://www.bdo.com Accessed: April 3, 2008
Cabbar, Y. 2000. Black-Sea Economic Cooperation Workshop on Internet, E-commerce and SMEs. Speech delivered at the Heaquarters of the BSEC Permanent International Secretariat. Available at [www.unce.org]. Accessed: April 3, 2008
Creswell, J.W. (1994). Research design: Qualitative and quantitative approaches. Thousand Oaks, California: Sage.
Facing the Challenge of IFRS adoption (2008). http://www.ey.com/global/content.nsf/South_Africa/27_Jul_06_Facing_the_challenge_of_IFRS_adoption. Accessed: April 3, 2008
Gyampah KA and SS Boye, 2001. “Operations Strategy in an Emerging Economy: The case of the Ghanaian Manufacturing Industry”, Journal of Operations Management, Vol 19, pp 59-79.
IASB: IFRS around the world, http://www.iasb.org/About+Us/About+IASB/IFRS+Around+the+World.htm, Retrieved on April 3, 2008
Implementing International Financial reporting Standards (IFRS) in Russia (2008). http://www.oecd.org/dataoecd/16/26/35118918.pdf. Accessed: April 3, 2008
Kotey, B and Meredith, G.G, 1997. “Relationship Among Owner/Manager Personal Values, Business Strategies, and Enterprise Performance”, Journal of Small Business Management, Vol 37, pp 37-62.
Lowson R.H. 1998. Quick Response for SMEs: A Feasibility Study, United Kingdom: The Textile Institute.
OICV-IOSCO (2008). "Statement on the Development and Use of International Financial Reporting Standards in 2005". Available at: http://www.iosco.org/pubdocs/pdf/IOSCOPD182.pdf Accessed: April 3, 2008
Pearce II, J.A and Robinson Jr, R.B, 2000. “Strategic Management: Formulation, Implementation and Control”, Richard D Irwin Inc., USA.
Piore M.E. and Sabel C. 1984. The Second Industrial Divide: Possibilities for Prosperity. New York: Basic Books.
Price Water House Coopers (2008). Online available at https://www.pwc.com/gx/eng/about/svcs/corporatereporting/IFRSforSMEs.pdf Retrieve April 21, 2008
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Appendix
Appendix 1
Research Questionnaire
Assessment of the Suitability of the International Financial Reporting Standards in Hong Kong SME
The researcher is conducting a study on analysing suitability of the IFRS in HK SMEs and the relevant issues. To enable the researcher to make the necessary conclusions and recommendations for this study, it would be very much appreciated if you answer all the items in the questionnaire.
Information given will be treated in strictest confidence.
Thank you.
Part I. Demographic Profile
Directions: Please fill up in all the necessary information about yourself. Don’t leave any item unanswered.
a. Age ________
b. Gender
Male ( ) Female ( )
c. Marital Status
Single ( ) Married ( )
d. Educational Attainment
Part 2: Perception of the Respondents
Direction: Check the number corresponding to your answer
5 - Strongly Agree
4 - Agree
3 - Uncertain
2 - Disagree
1 - Strongly Disagree
1. What is your perception about the initiation of integrated resort in Hong Kong? Give your reasons.
( ) Strongly Agree ( ) Agree ( ) Uncertain ( ) Disagree ( ) Strongly Disagree
2. What are the perceived advantages or benefits of IFRS in terms of organisational performance of HK SME?
Statements
5
4
2
2
1
1. The application of IFRS by SMEs will significantly improve the comparability of entities within an industry and across different industries, regardless of where the reporting entity is domiciled.
2. Adopting IFRS can make it easier for SMEs to implement planned cross-border acquisitions and to initiate proposed partnerships or cooperation agreements with foreign entities.
3. IFRS can simplify the sale of the reporting entity itself, either as a whole or on a piecemeal basis.
4. IFRS information can help SMEs involved in buying / selling goods or services across national borders to initiate new relationships with customers and suppliers.
5. IFRS can strengthen SMEs’ position in negotiations with credit institutions and reduce the costs of borrowing because of the positive effect it can have on credit ratings.
6. Internationally-active SMEs can profit from group-wide application of IFRS: it can facilitate faster and more cost-effective preparation of financial information. If both parent and subsidiaries (i.e. all individual companies in the group) apply IFRS, it means there is no need for a second set of financial statements for group accounting.
7. It also reduces the risk of misunderstanding and facilitates the more efficient collation of comparable, decision relevant information from all group companies.
3. What are the perceived problems facing managers in implementing IFRS?
Statements
5
4
2
2
1
1. Issues over the high costs of complying with full International Financial Reporting Standards have prompted many Countries.
2. IFRS adoption may negatively affect the SME during the transition period.
3. The e inherent complexity of the IFRS standards also faces users of financial statements with problems of comprehension which are complicated, given the historically different cultural approaches to accounting from one country to another, by the need for translation from the English.
4. How applicable/suitable IFRS to SMEs in HK?
( ) Very Applicable ( ) Applicable ( ) Uncertain ( ) Not applicable ( ) Strongly Not Applicable
[1] Manufacturing enterprises with fewer than 100 employees and non-manufacturing enterprises with fewer than 50 employees are regarded as SMEs in Hong Kong.
[2] Liker technique is an instrument used to know the agreement or disagreement of the respondents to the given statements.
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