The effect of International Financial Reporting Standards (IFRS) on profitability performance of SMEs in developing countries: a case of Uganda

Abstract

With an ever growing importance of SMEs in developing countries like Uganda, where they account for over ninety percent (90%) of the private sector output and contribute greatly to around seventy percent (70%) the GDP of the country, like in all other developing nations, their performance can no longer be ignored owing to the fact that majority of them fail before their first birthday due to a number of reasons. This study sought to find out how International financial reporting standards do affect the performance of SMEs in developing countries with particular interest in Uganda. Despite the existence of the so many facets to performance of SMEs, this particular study looked at it from a profitability point of view. With a broader aim of trying to find means of how to stem the ever growing and a high failure rate of SMEs, as earlier studies have indicated that majority of them always fail within their first year of existence. While those that survive the failure, remain struggling throughout their business lives .The results from the primary data collected in this study revealed a significant value of 0.00 which is less than 0.05 confidence level from Pearson’s correlation. An implication that SMEs applying IFRSs are performing better from profitability perspective, a view many business and management scholars didn’t look at closely, a gap that this study has sought to close. Policy makers in developing countries are grappling with the problem of SME failure rates. It’s high time, they advocated for a compulsory and full compliance of SMEs to IFRSs, as this study has already highlighted it as a possible solution for the future, which might save a number of SMEs from possible failure, hence stabilizing many emerging economies.