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Kenya’s Small Businesses Lag Behind in Compliance with International Financial Standards
Despite being the backbone of Kenya’s economy, small and medium-sized enterprises (SMEs) are struggling to comply with international financial standards, hindering their growth and access to funding.
The Importance of SMEs in Kenya’s Economy
According to a recent report, over 90% of Kenyan businesses are SMEs, which play a crucial role in job creation and contribution to the country’s Gross Domestic Product. However, these businesses face numerous challenges that slow down their growth, including:
- Lack of proper market information
- Poor management
- Limited access to funding
- Inadequate financial reporting
Funding Challenges for SMEs
SMEs typically raise funds internally through personal savings, contributions from friends and family, and retained profits, with only a small portion raised externally from bank loans and investments. However, this limited access to external funding hinders their ability to scale up and expand operations.
The Role of International Financial Reporting Standards (IFRS)
Experts attribute the lack of compliance with international financial standards to poor bookkeeping and accounting practices among SMEs. The majority of these businesses have not adopted IFRS, which are a set of accounting policies developed by the International Accounting Standards Board to ensure consistency and transparency in financial reporting.
Benefits of Adopting IFRS for SMEs
The adoption of IFRS for SMEs would improve the quality of financial reporting, enhance comparability of financial statements globally, and facilitate access to funding. Simplifications in the IFRS for SMEs include:
- Omitting irrelevant topics
- Restricting accounting policy options
- Simplifying recognition and measurement principles
- Requiring fewer disclosures
- Using “plain English” for easier understandability
Advantages of Adopting IFRS
Adopting IFRS would also give SMEs a competitive advantage, attract investors, and improve their credit rating scores. Good financial reporting practices would enable users of financial statements to make informed decisions, leading to better business practices and compliance with regulatory requirements.
Boosting Decision-Making and Comparison
The adoption of IFRS would facilitate good decision-making, improve the quality of financial reporting, and add a global acceptable look to company reporting practices. It would also boost the comparison of financial statements within the industry, across sectors, and nations, making it easier for international engagements.
Government Support
To address this issue, Kenya’s government has exempted SMEs from Company Income Tax under the new Finance Bill, providing an incentive for them to adopt IFRS and improve their financial reporting practices. It is essential for SMEs to take advantage of this opportunity and adopt IFRS to enhance their competitiveness, attract investors, and access funding to drive growth and development in Kenya’s economy.
Conclusion
In conclusion, SMEs play a vital role in Kenya’s economy, but they face numerous challenges that hinder their growth. Adopting IFRS would improve the quality of financial reporting, facilitate access to funding, and give SMEs a competitive advantage. It is crucial for SMEs to take advantage of government incentives and adopt IFRS to drive growth and development in Kenya’s economy.