Academic journal article Academy of Accounting and Financial Studies Journal

The Effects of International Financial Reporting Standards Disclosure for Small and Medium Enterprises (IFRS for SMEs) on Profitability under the Retail Sector

Academic journal article Academy of Accounting and Financial Studies Journal

The Effects of International Financial Reporting Standards Disclosure for Small and Medium Enterprises (IFRS for SMEs) on Profitability under the Retail Sector

Article excerpt

INTRODUCTION

The International Accounting Standards Board (IASB) established the International Financial Reporting Standards (IFRS) in April 2001 with the purpose of employing comparative financial reporting among countries. These accounting standards are principle-based rather than rule-based. Also, the IFRS removed certain discretions that were once present before its promulgation. In the Philippines, it was adopted in 2004 and was renamed to the Philippine Financial Reporting Standards (PFRSs) and the Philippine Accounting Standards (PASs). The Philippine Securities and Exchange Commission mandates publicly-listed companies to apply these standards in the financial statements that they submit. However, full compliance has presented problems to corporations, even the biggest ones. Besides the ever-increasing complexities, the cost of compliance cast significant doubt as to whether it is cost-beneficial to comply.

Considering the challenges of full compliance faced even by the well-established large corporations, it is certain that smaller-scale companies face the same dilemma. Perhaps, it is safe to assume that the degree of difficulty is greater for them because of the limited resources they have. Philippines, as a country, is dominated by small and medium-sized entities (SMEs). In fact, more than 99% of the businesses in the Philippines are classified as SMEs (DTI, 2011). Indeed, the importance of SMEs in nation building is unquestionable as they provide employment to a lot of Filipinos. This trend of being dominated by SMEs is apparent not just in the Philippines, but in the whole world as well. Hence, a set of accounting standards specifically tailored for these entities is of great necessity thereby giving birth to International Financial Reporting Standards for SMEs (IFRS for SMEs) and Philippine Financial Reporting Standards for SMEs (PFRS for SMEs).

Considering that most companies are relatively small to medium in size, complying with all of the provisions seems impractical and costly, and sometimes impossible due to certain circumstances present. The solution to this was the creation of a more simplified version of the IFRS, which is the International Financial Reporting Standard for SMEs. The IASB removed unnecessary requirements which bore little relevance to small and medium entities. This will make financial reporting for them easier and less costly while still maintaining the high quality of information reported. The Philippines welcomed the new standard and officially took effect last January 2010, renaming it to the Philippine Reporting Standard for SMEs (PFRS for SMEs).

Noting that the PFRS for SMEs is just a mere simplification of the Full PFRS, the nuts and bolts of the latter should still be intact to the former. However, the certain accounting treatments, one of which is accounting for provisions, may pose differences in the figures presented in the financial statement. Thus, this may result to variances on financial ratios calculated on both standards. According to Palka and Svitakova (2011) in the "Impact of IFRS for SMEs Adoption on Performance of Czech Companies", the conversion of statements from the Czech Accounting Standards to International Financial Reporting Standard for Small and Medium-sized-Entities showed that the results of the financial ratios were affected by the said conversion. However, it was proven that the overall effect on the financial ratios were insignificant since the average deviation of the financial ratios were too low, which are below 1.5% of the value of the indicators. This paper aims to answer the question, what was the extent of the effect of compliance with PFRS for SMEs on profitability of companies belong to retailing industry?

THEORETICAL FRAMEWORK

Agency Theory

In relation to stakeholder theory, the agency theory assumes that the interest of the principal (the stakeholder) and the agent (the manager) diverges (Hill & Jones, 1992). …

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