Chapter 1 Introduction

1.1 Background of the study

Financial reporting is a method of communicating the financial affair of the reporting entity to
interested users. As a communication process there need to be establish a common
communication medium for ensuring that the information being communicated is understandable
and logically relevant to the user of information.

According to (International Accounting Standard Board 2010) For a long period of time different
countries were used variety of accounting frame work and it have been creating confusion for
user of financial statements to make sound decision regarding investment issues. In order to
ensure the production of financial information that is useful for decision-making, most countries
have a set of accounting standards used in preparing the financial statements. The use of a
common accounting language by all companies operating in the same economic space allows
different users to monitor the activities of these entities in time and space and, therefore, take
reasonable decisions. Thus, the international accounting standards have become essential to
clarify the financial disclosure and make understanding financial documents conform to a single
source easier and this strengthens the investor’s confidence.

The continuous demand by stakeholders for quality information and greater disclosures is often
one of the reasons advanced for the adoption of International Financial Reporting Standards
(IFRS). IFRS is a single set of high quality, understandable and enforceable global accounting
standards that require high quality, transparent and comparable information in financial
statements and other financial reporting to help participants in the world's capital markets and
other users make economic decisions (International Accounting Standard Board, 2010).

The primary purpose of general purpose financial reporting is to provide information about the
reporting entity that is useful to investors, lenders and other creditors in making decisions about
providing resources to the entity (International Accounting Standard Board, 2010).

1
Recently, the IASB has focused its efforts in attempting to harmonize the financial reporting of
non-listed firms by introducing the IFRS for Small and Medium Enterprises (SMEs) as an
alternative framework that can be applied by eligible entities in place of the full set of IFRSs.
The International Accounting Standards Board (IASB) published an International Financial
Reporting Standard (IFRS) designed for use by small and medium-sized entities on July, the 9th
2009. The IFRS for SME is designed to meet the financial reporting needs of entities that do not
have public accountability and Publish general purpose financial statements for external users
(H. Bohušova, V. Blaškova 2011). This is a self-contained standard, incorporating accounting
principles based on existing IFRSs that were simplified to suit the entities that fall within its
scope.
Adoption of IFRS for SMEs will help in enhancing the quality and comparability of SMEs
financial statement around the world and assist SMEs in gaining access to finance which will not
benefit only the SMEs, but also their customers, client and all other users of SMEs financial
statement and this brings about growth in every business. The IFRS for SMEs will facilitate the
further growth of the SMEs and business sector globally (Solanke a, et al, 2016).
Small and medium sized companies have an important position in the economy, mainly in the
area of employment. SMEs are crucial to most developed and developing economies. SMEs are a
heterogeneous group, possessing different size, sector, or location. Their activities on the
international markets are limited by a great deal of obstacles in comparison to large enterprises
(European Commission, 2003).
Among the Sub-Saharan Africa countries, Ethiopia was among the adopter of the IFRS. On 5th
December 2014 Ethiopia Adopted International financial reporting standard (IFRS) as its
financial reporting framework (Financial Reporting Proclamation 847/2014), with the aim to
contribute to the Government efforts of improving good governance and reducing the level of
corruption and rent seeking behaviors (AABE, 2015).

The accounting and audit Board of Ethiopia plans a three phase transition over a period of three
years for reporting entities in Ethiopia. (AABE, Nov. 2015) The transition plan is prepared on
the basis of Article 54(1) of the Proclamation and anchored on the understanding that the Board
and all stakeholders will follow the milestones and timelines as described in strategic plan of
AABE (AABE, Nov. 2015).

2
Phase 1:
(Mandatory Adoption of IFRS): Significant Public Interest Entities - Financial Institutions and
public enterprises owned by Federal or Regional Governments. July 8, 2016 is recommended as
the date for adoption of IFRS for all financial institutions and large public enterprises. The
choice of July 8, 2016 is anchored on the need to give sufficient period (22 months) over which
to effectively transit to IFRS. (AABE, Nov. 2015)
Phase 2:
Other Public Interest Entities (ECX member companies and reporting entities that meet
Public Interest Entities quantitative thresholds) and International Public Sector
Accounting (IPSA) for Charities and Societies, All other public interest entities (ECX member
companies and reporting entities that meet the qualitative thresholds for PIE) and Charities and
Societies are expected to mandatorily adopt IFRS and IPSAs (for Charities and Societies), for
statutory purposes, by July 8, 2017. This means that all other public interest entities and Charities
and Societies in Ethiopia will statutorily be required to issue IFRS and IPSAs based financial
statements respectively for the year ending July 7, 2018. (AABE Nov. 2015)
Phase 3:
Small and Medium-sized Entities, IFRS for SMEs shall mandatorily be adopted as at July 8,
2018. This means that all Small and Medium-sized Entities in Ethiopia will statutorily be
required to issue IFRS based financial statements for the year ending July 7, 2019. (AABE Nov.
2015)

As we can understand from the above broad road map Ethiopia already implement international
financial accounting standards. The first two phase was already implemented but the last phase is
on the stage of adoption the reporting date is July 7, 2019. Though international financial
reporting standard (IFRS) for SME promise a lot of benefit to the organization and the user of
financial statements, the adoption process is not an easy task there are many factors that affect
the adoption process of international financial reporting standards (IFRSs) for SME.
Consequently, the objective of the paper will be to find out factors affecting adoption of IFRS for
SME.

3
 1.2. Statement of the Problem
The IFRS for SMEs was an outcome of a rigorous process pioneered by the International
Accounting Standards Board (IASB) to introduce a simplified version of the full IFRS with
significantly reduced recognition and measurement principles and disclosure requirements. IFRS
for SMEs have been issued in anticipation that they will be applied by entities that do not have
public accountability but who prepare general purpose financial statements for external users
(IASB, 2009).
Previously numerous studies have been conducted in different country of the world to assess the
adoption challenges of International Financial Reporting Standards for SME such as, An
assessment of the challenges of adopting and implementing IFRSs for SMEs in South Africa
(Sikhwari Rudzani, 2016); Financial Reporting in Small and Medium Enterprises (SMEs) in
Nigeria. Challenges and Options (Charles Emenike Ezeagba, 2017); Influence of Cultural
Factors in Adoption of the IFRS for SMEs (Ema Masca, 2012); The Challenges of Adopting and
Implementing IFRs for SMEs in Ghana: The Case Of SMEs In The Kumasi Metropolis
(Andrews Perprem et. al. 2017). And they conclude that inadequate skills to successfully
implement the IFRS for SMEs, lack of support from regulatory and professional bodies, the
complex nature of the IFRS and excessive costs of implementation of IFRS for SMEs, limited
resources, lack of well-qualified professional staff and professional education are the major listed
challenges for the implementation of IFRS for SMEs in developing countries.
In our country Ethiopia there are a number of studies were conducted with related to IFRS
adoption challenges such as; The Adoption of International Financial Reporting Standards
(IFRS) in Ethiopia: Benefits and Key Challenges (Fikru Fantahun Tesfu, 2012); Relevance and
Challenges of Adopting International Financial Reporting Standard (IFRS) to Developing
Countries: The Case of Ethiopia (Mesay Weldekidan Gebre, 2009).
However, under the knowledge of the researchers there is no literature previously studied by
scholars with related to the adoption challenges of IFRS for SMEs. The topic has been largely
ignored in the literature. The researchers are unaware of any theoretically grounded research that
explains which factor can be affect the adoption process of IFRS for SMEs in Ethiopia especially
in Oromia regional state Bale zone. As a result, to find out the major challenges that can affect

4
the adoption process of IFRS for SMEs in Ethiopia in case Oromia regional state Bale zone the
researchers need to conduct the paper.

1.3. Research Hypothesis

H1: There is a positive relationship between Lack of professional support with IFRS experience
and successful adoption of IFRS for SME.
H2: There is a positive relationship between lack of technical expertise in the accounting and

auditing professions and successful adoption of IFRS for SMEs.

H3: There is a positive relationship between capacity limitations of financial markets and
successful adoption of IFRS for SMEs.
H4: There is a positive relationship between diverse, complications, and controversial issues and
successful adoption of IFRS for SMEs.
H5: There is a positive relationship between economic obstacles and successful adoption of
IFRSs for SMEs.

1.4. Research Objectives

1.4.1. General Objective
The general objective of the study is to investigate the factors that can affect the adoption process
of IFRSs for SMEs in Ethiopia the case of Bale zone.

1.4.2. Specific Objectives

The specific objective of the paper is;
1. To identify the relationship between Lack of professional support with IFRS experience
and successful adoption of IFRS for SME
2. To identify the relationship between lack of technical expertise in the accounting and
auditing professions and successful adoption of IFRS for SMEs
3. To identify the relationship between capacity limitations of financial markets and
successful adoption of IFRS for SMEs
4. To identify the relationship between diverse, complications, and controversial issues and
successful adoption of IFRS for SME.
5. To identify the relationship between economic obstacles and successful adoption of
IFRSs for SMEs.

5
1.5. Scope of the Study
The general aim of the study is to investigate the adoption challenges of IFRS for SMEs in
Ethiopia as a result of large number of SMEs are available in Ethiopia we limit our scope only on
Oromia regional state specifically in Bale zone.

1.6. Significant of the Paper

The paper will have many advantages for all practitioners and academicians by providing useful
information about International Financial Reporting Standards for SMEs and issues related to its
adoption. It would also be useful for organization's management and other concerned parties by
providing information about the theoretical and actual challenges of adopting IFRS for SMEs.
The paper can also be used as an initiation for those who are interested to conduct a detailed and
comprehensive study regarding the adoption challenges of IFRSs for SMEs. And it would enable
the governing body, specifically the higher responsible body, and the managements of companies
to be aware of the challenges of International Financial Reporting Standards for SMEs and give
insight on how to reduce this adoption challenges. And the last but not the least the paper will
add the subsequent knowledge of student researchers regarding the subject area.

1.7. Organization of the Paper

The paper will be organized in to five chapters. The first chapter will be states the general
introduction of the topic. Chapter two will presents the literature review regarding the research
area of International Financial Reporting Standards for SMEs and its adoption and therefore will
set out the theoretical foundations for the paper. The third chapter will be outlines the
methodology part. Discussion and analysis of the results will be present in chapter four. The last
chapter will be draws conclusions and recommendations.

6
Chapter 2. Literature Review
2.1. Introduction
This section presents a review of related literature to International Financial Reporting Standards
and its adoption for SME. It consists of general overview about International Financial Reporting
Standards, benefits and challenges of adopting IFRS for SME, factors affecting the adoption and
development of accounting in Ethiopia. In general, this chapter synthesized existing empirical
research in the area of international accounting standards for SME and ends by summarizing the
review and identifying the gap in the existing literature.
Theoretical literature review

2.2. The Concept of IFRS

2.2.1. What is IFRS?
Yang (2010) defined IFRS as a single set of high-quality, understandable, enforceable, and
globally accepted financial reporting standards developed by the IASB. The IFRS for SMEs was
released in July 2009 by the IASB, tailored for the needs and capabilities of smaller entities
(Pacter, 2007). According to Price waterhouse Coopers (PwC, 2010), IFRS for SMEs is separate
from the full IFRS and is available for any jurisdiction to adopt whether or not it has adopted full
IFRS. In summarizing the definition of the IFRS for SMEs, Pacter (2007) stated that the IFRS
for SMEs is a simplified version of the full IFRS where irrelevant topics to smaller entities have
been omitted and the number of required disclosures has been significantly reduced. IFRS stands
for International Financial Reporting Standards and they are standards for reporting financial
results and are applicable to general purpose financial statements and other financial reporting of
all profit oriented entities. The term IFRS comprises IFRS issued by IASB; IAS issued by IASC;
and interpretations issued by the Standing Interpretations Committee (SIC) and the International
Financial Reporting Interpretations Committee (IFRIC) of the IASB (Hoyle B., et al., 2009,
Baker E. et al., 2009 and Larsen E. 2008). Alistair (2010 cited in Ojeka and Mukoro, 2011)
defined International Financial Reporting Standards (IFRS).

7
A series of accounting pronouncements published by the International Accounting Standards
Board (IASB) to help preparers of financial statements, throughout the world, produce and
present high quality, transparent and comparable financial information. Since 2001 International
Financial Reporting Standards (IFRS) are being developed and approved by the International
Accounting Standards Board (IASB). The IASB is a stand-alone, privately funded accounting
standard setting body established to develop global standards for financial reporting. It is the
successor to the International Accounting Standards Committee (IASC), which was created in
1973 to develop International Accounting Standards (IAS). Based in London the IASB assumed
accounting standard setting responsibilities from the IASC in 2001 (Hoyle B., et al., 2009, Baker
E. et al., 2009 and Larsen E. 2008). One of the basic features of IFRS is that it is a principle
based standard and seeks to avoid a rule based mentality (Hlacuc et. al., 2009). Instead, the
application of IFRS requires exercise of judgment by the preparer and the auditor in applying
principles of accounting on the basis of the economic substance of transactions. The IASB
framework establishes a general requirement to account for transactions in accordance with their
substance, rather than only their legal form. This principle comes through very vividly in many
IFRS. The ISAB intends not to permit choices in accounting treatment, as its objective is to
require like transactions and events to be accounted for and reported in a like way, and unlike
transactions and events to be accounted for differently.
According to IASB (2009), the IASB achieves its objectives primarily by developing and
publishing IFRS and promoting the use of those standards in general purpose financial
statements and other financial reporting. Other financial reporting comprises information
provided outside financial statements that assists in the interpretation of a complete set of
financial statements or improves users‟ ability to make efficient economic decisions. The term
financial reporting‟ encompasses general purpose financial statements plus other financial
reporting. IFRS set out recognition, measurement, presentation and disclosure requirements
dealing with transactions and other events and conditions that are important in general purpose
financial statements. They may also set out such requirements for transactions, events and
conditions that arise mainly in specific industries. IFRS are based on the Framework, which
addresses the concepts underlying the information presented in general purpose financial
statements. The objective of the Framework is to facilitate the consistent and logical formulation
of IFRS. It also provides a basis for the use of judgment in resolving accounting issues (IASB,
2009).
8
2.3. IFRS for SMEs
2.3.1. SMEs Definition
Pacter (2007) defined SMEs as entities that do not have public accountability and that publish
General-purpose financial statements for external users. Holgate (2007) stated that by “public
accountability”, the IASB means listed companies and banks and similar financial institutions.
So a (non-financial) private company, however large, would be an “SME” under this approach.
Simpson (2008) stated that the draft of the IFRS for SMEs and some discussion papers on this
subject have been criticized for focusing on entities that are not defined as SMEs in developing
nations’ term, but are instead more aligned to the United States of America’s definition of an
SME as well as not taking into account the uniqueness and challenges of SMEs in developing
countries. Contrary to the IASB’s definition of SMEs, the Swazi Government in 2002 defined
SMEs.In the Swazi context, SMEs are entities with a total value of assets ranging from E50,000
to E3,000,000, which has a staff population ranging from a minimum of four people to a
maximum of 50 people, and has a turnover of about E60,000 to E3,000,000 per year. For the
purposes of this study, the Swazi definition of SME swill be considered (Seedwell Tanaka and
Muyako Sithole, 2015).

2.3.2. Main Differences between Full IFRS and IFRS for SMEs
The changes to full IFRS in preparing the IFRS for SMEs were made as follows: topics omitted,
recognition and measurement simplifications, only the simpler option included, simplified
redrafting, and disclosure reductions (Jerman & Ivankovič, 2011). Among the several differences
between IFRS for SMEs and full IFRS includes the exclusion of topics in IFRS for SMEs such
as earnings per share, interim financial reporting, segment reporting, and special accounting for
assets held for sale. Under IFRS for SMEs, goodwill is amortized and only tested for impairment
when there is a triggering event, instead of being subject to a full impairment test each year.
Development costs are expensed under IFRS for SMEs while they are capitalized under full
IFRS. Table 2 shows some of the other differences between the full IFRS and IFRS for SMEs
(Seedwell Tanaka and Muyako Sithole, 2015).

2.3.3. Framework of IFRS for SMEs

Pacter (2007) stated that when developing the IFRS for SMEs, the IASB extracted the
fundamental concepts from the IASB’s conceptual framework and the principles from the IFRS,
with appropriate modifications in the light of users’ needs and cost-benefit consideration. The
9
first type of modification is the fact that some topics which were seen to be irrelevant for SMEs
were omitted from the IFRS for SMEs. The second type of modification is that while the full
IFRS allows accounting policy options, only the simpler options were included in the IFRS for
SMEs. On the third type of modification, the IASB considered the simplifications of the
recognition and measurement principles in full IFRS to suit the SMEs in the IFRS for SMEs.
Finally on the fourth type of modification, the IASB considered rewriting the IFRS for SMEs in
plain English. Since Small and Medium Enterprises are seen today as the backbone of every
economy throughout the world, in July 2009, International Accounting Standard Board (IASB)
published IFRS for SMEs (Ojeka and Dickson, 2011). The IFRS for SMEs is a self-contained
standard of 230 pages, designed to meet the needs and capabilities of Small and Medium sized
Entities (SMEs), which are estimated to account for over 95 per cent of all companies around the
world. Compared with full IFRSs (and many national GAAPs), the IFRS for SMEs is less
complex in a number of ways (IASB, 2009). It was in 2001 when IASB formally started to
develop accounting standards for the suitability of SMEs while keeping the emerging economies
in focus. For this purpose a discussion paper was formulated in 2004 with the title of Preliminary
Views on Accounting Standards for Small and Medium-sized Entities and the comments were
invited on this discussion paper from around the world. Emphasis and recommendation were
directed to the core elements of any accounting standards which are recognition, measurement,
presentation and disclosure of financial statements. The first exposure draft of IFRS for SMEs
was published by IASB in February 2007, with the aim to provide simple and self-explanatory
set of accounting principles for non-listed companies based on full IFRS. Based on this exposure
draft field tests were conducted by IASB on a sample of 116 small entities from 20 different
countries. On the basis of comments and reviews of exposure draft, and results from field tests
eased the job for IASB in further enhancing and simplifying the accounting standards for SMEs,
and finally launching the official and final version of IFRS for SMEs on 9th July, 2009 (IASB,
2009). IASB in their publication of IFRS for SMEs describe the SMEs as those entities which
are not publically accountable and thus publish financial statements with general purpose for its
external users. These external users refer to the non-managerial owners, current and prospective
creditors and credit-rating agencies. IFRS for SMEs cannot be used by publicly accountable
enterprises because of its limited application designed only for small and medium-sized entities.
Subsidiaries of a big company are not prohibited from using IFRS for SMEs, if they themselves
are not publicly accountable to anyone. Financial statements of SMEs provide their intended
10
users with the information about the firm‟s financial position, its performance and cash-flows of
the firm. Variety of users of these financial statements relies on the information provided in these
statements for their future economic decisions (IASB, 2009). The adoption of IFRSs would
provide the following benefits to SMEs: (IASB, 2007, Ojeka and Dickson, 2011).
1. Adoption of IFRS for SMEs will improve the comparability of financial information of SMEs
at either national or international levels.
2. Adoption of IFRS for SMEs will make easier to implement planned cross ‐border acquisitions
and to initiate proposed partnerships or cooperation agreements with foreign entities.
3. Adopting IFRS for SMEs can help SMEs to reach international markets.
4. Adoption of IFRS for SMEs will have a positive effect on the credit rating scores of
enterprises, these will strength SMEs‟ relationships with credit institutions.
5. Vendors want to evaluate the financial health of buyers before they sell goods or services on
credit. The adoption of IFRSs will enhance the financial health of the SMEs (Seedwell Tanaka
Muyako Sithole, 2015).

2.3.4. Determinants and consequences of IFRS for SMEs application

According to literature’s results that SMEs would benefit in many ways applying IFRS for SMEs
like raising capital, obtaining credit from suppliers, high bidding qualifications for contracts, and
anticipation and planning for the business. Results of recent studies reveal that the
implementation of IFRS for SMEs would be, especially useful for those developing countries
that have already applied the full IFRS as the only reporting framework for their SMEs. IFRS for
SMEs in such countries seems to reduce preparers’ costs and also benefits entities to say no to
those undue over complex accounting regulations which are also intricate for their businesses. It
is also unveiled that the implementation of full IFRS by SMEs in some jurisdiction was an
irrelevance and burdensome reporting framework which led to a massive support in favor of the
implementation of IFRS for SMEs. Literature results that those developing countries which have
implemented the IFRS for SMEs benefit from easy access to finance in terms of either loans and
grants from banks and government, operating a business with government and enjoy appropriate
compliance with tax authorities. SMEs mostly concern about complexity and the high costs
associated with the implementation of IFRS for SMEs, but studies have assured that the benefits
exceed the costs of implementation. However, the implementation of IFRS for SMEs at the onset
would be intricate and endure some costs, but afterward, together with more enhanced
characteristics in terms of quality and comparability,
11
SMEs would sense as they operate with their own local accounting standards. Meanwhile, the
IASB has already established learning materials and training models to make the use and
implementation of IFRS for SMEs uncomplicated and to avoid possible concerns. Overall, the
implementation of IFRS for SMEs in developing countries has led to significant legitimate and
institutional changes, in particular in terms of the improvement of new accounting environment
and regulations. Studies have resulted that many SMEs in developing countries have foreign
business partners and involved in cross-border business activities. Hence, they are eager to
implement the IFRS for SMEs’ financial reporting as the proponents of new international
accounting rules and regulations. Moreover, the implementation of IFRS for SMEs results to
enhanced financial statements in terms of quality and comparability worldwide, as well as
enables SMEs to easy access to financial resources.

2.4. SME in Ethiopia

Council of Ministers Regulation No. 373/2016 Regulation to Provide for the Establishment
of the Federal Small and Medium Manufacturing Industry: This Regulation is issued by the
Council of Ministers pursuant to Article 5 and 39 of the Definition of Powers and Duties of the
Executive Organs of the Federal Democratic Republic of Ethiopia Proclamation No. 916i20 15.

1. Short Title This Regulation may be cited as the "Federal Small and Medium Manufacturing
Industry Development Agency Establishment Council of Ministers Regulation No. 373/2016". 2.
In this Regulation: 1/ "manufacturing" means a mechanical, physical, or chemical conversion of
a raw material, substance, or component by using machine, equipment or labor into products that
worth better value; 2/ "small manufacturing industry" means an industry having a total capital,
excluding building, from Birr 100,001 to Birr I ,500,000 (One Hundred Thousand One Birr to
One Million Five Hundred Thousand Birr) in the manufacturing sector and engages from 6 to 30
workers including the owner, his family members and other employees;
3/medium manufacturing industry" means an industry having a total capital, excluding building.
From Birr 1,500,001 to Birr 20,000,000 (One Million Five Hundred Thousand One Birr to
Twenty Million Birr) in the manufacturing sector and engages from 31 to 100 workers including
the owner, his family members and other employees; 4/Regional State" means any State referred
to in Article 47(1) of the Constitution of the Federal Democratic Republic of Ethiopia and

12
includes the Addis Ababa and Dire Dawa city administrations; 5 Ministry'1 means the Ministry
of Industry; 6/ any expression in the masculine gender includes the feminine.
3. Establishment of The Federal Small and Medium Manufacturing Industry
Development Agency (hereinafter the "Agency...) is hereby established as an
autonomous federal government organ having its own legal personality. The Agency
shall be accountable to the Ministry.
4. Head Office The Agency shall have its head office in Addis Ababa and may have branch
offices elsewhere, as may be necessary.

2.5. Benefits of adopting IFRS for SMEs

Adoption of IFRS for SMEs will enable true and fair information, and therefore will enhance the
quality and transparency of financial reporting in Turkey. Several prior researchers also pointed
that advantage of a common set of standards to the financial statement users (El-Gazzar et al.,
1999; Joshi & Ramadhan, 2002; Epstein & Jermakowicz, 2007; Ankarath et al., 2010). For
instance, Zeghal and Mhedhbi (2006) indicated that the creation of high-quality information will
be maintained with internationally accepted and recognized financial reporting standards. There
are several discussions about how this high-quality information will be a result of a common set
of standards. The results of those discussions suggest that mandatory adoption of the
international reporting standards instead of national ones will lead to significant benefits in terms
of financial information quality by increasing transparency, enhancing the level of disclosure,
and improving the comparability of financial statements (Jeanjean & Stolowy, 2008). The
Securities and Exchange Commission (SEC) (2000) also reveals that “high quality information
will be provided with three elements: comparability, transparency, and full disclosure.”
Further, Interviewees 1, 3, and 4 also emphasized the importance of the IFRS for SMEs in
accessing international financial resources. This finding is incompliance with prior research
(MerveKilic and Ali Uyar, 2017).

2.6. Challenges of Adopting IFRS

Accounting Professionals across the world have listed various benefits of adopting IFRS. In spite
of these benefits, adoption of IFRS is a difficult task and has many challenges. For example
Iyoha and Faboyede (2011) identified ethical environment and the ability to protect qualified and
competent employees from being poached by other companies as main challenges facing
Nigerian companies. Wong (2004) said that education and training are considered as major
13
challenges militating against the adoption of IFRS. As evidenced by the global experience,
convergence with IFRS would have significant challenges common to all countries and
companies. Additionally, there are also certain specific challenges that are unique to particular
countries (Robyn and Graeme, 2009). With the adoption of the IAS Regulation, requiring all EU
listed companies to prepare their consolidated accounts in conformity with IFRS, EU publicly
listed companies are facing many challenges, including fair value measurements to be considered
to a greater extent (Jermakowicz ,2004; Alexander, 2003). IFRS would also present a challenge
by way of more complex financial reporting requirements and resultant increase in costs; and
availability of resources with expertise in IFRS. Similarly from an overall perspective,
amendments to regulatory requirements and tax laws would be required; and impact on IT
systems and compensation structures would need to be evaluated (Apostolos et al., 2010;
Jermakowicz, 2004; Alexander, 2003). Jermakowicz et al. (2007) examine the challenges and
benefits, including value relevance, of the adoption of IFRS by DAX-30 companies in Germany
based on a questionnaire sent to company executives. They find that most companies agree that
implementing IFRS should improve the comparability of financial statements while the complex
nature, high cost of adopting and lack of guidance for implementing IFRS, as well as increased
volatility of earnings after adopting IFRS, are listed among the most important challenges of
conversion to IFRS (Fikiru Fantahun 2012).

2.7. Empirical Review

The need for a separate standard set for SMEs and usability of the IFRS for SMEs for micro-
sized entities are also explored by prior research. For instance, Bunea et al. (2012) investigated
the views of the accounting professionals about the IFRS for SMEs in Romania. Their findings
showed that a significant percentage of the respondents suggest more simplification on the
current reporting system for a group of entities which will be determined according to criteria,
such as turnover, number of employees, and total assets. Regarding this issue, Albu (2013)
investigated whether the size is relevant in determining the scope of the IFRS for SMEs in
Romania. The findings of the study denoted that using only size as a criterion for setting the
scope of the IFRS for SMEs may cause the exemption of a significant amount of companies and
therefore may lead to compliance issues. Van Wyk and Rossouw (2009) revealed that South-
African accounting practitioners are skeptical about whether the IFRS for SMEs is useful for the
micro-entities and suggested the development of a simplified tier of standards for those

14
companies. Similarly, Aboagye-Othchere and Agbeibor (2012) explored the suitability of the
IFRS for SMEs for small entities in Ghana. They determined that small businesses, whether
micro-entities or SMEs, have limited need for the IFRS for SMEs due to their low level of
international activities. They also suggested the submission of a simpler tier of IFRS for SMEs
addressing the reporting needs of small businesses. Chand et al. (2015) also determined that
standard-setters in Fiji suggest some exemptions for micro-entities to make IFRS for SMEs more
cost effective for them. Since the IFRS for SMEs was promulgated to be adopted by SMEs in
2012, the research regarding Turkey presents findings about the preparedness and knowledge
level of several groups, such as accounting practitioners, auditors, and entities. For example,
Uyar and Güngörmüş (2013) investigated the knowledge level and perceptions of Turkish
accounting practitioners regarding the IFRS for SMEs. They determined that proponents of
stand-alone IFRS for SMEs are significantly higher than its opponents and most of respondents
have little knowledge of IFRS. Kılıç et al. (2014) also explored the knowledge level,
preparedness, and perception of Turkish accounting practitioners about the IFRS for SMEs.
Their findings reveal that most of the respondents made some preparations and have a moderate
level of knowledge regarding this set. Kılıç et al. (2016) analyzed the preparedness level of
Turkish SMEs via a questionnaire survey. They found that most of the SMEs have not made any
preparation for the IFRS for SMEs. The prior findings presented the perceived advantages of the
IFRS for SMEs as enhanced comparability, reliability, and transparency of financial statements
(Siam & Rahahleh, 2010; Albu et al., 2013; Uyar & Güngörmüş, 2013; Kılıç et al., 2014),
effective financial reporting (Kılıç et al., 2014), increase in accessing to national and
international financial sources (Uyar & Güngörmüş, 2013; Kılıç et al., 2014), improvement of
the national business environment (Albu et al., 2013), enhanced efficiency of cross-border
activities (Uyar & Güngörmüş, 2013), ease of rating SMEs by credit rating agencies (Uyar &
Güngörmüş, 2013). Besides, several disadvantages and challenges of the implementation of the
IFRS for SMEs adoption process were also reported by the researchers such as lack of trained
personnel (Uyar & Güngörmüş, 2013; Kılıç et al., 2014), difficulty in understanding the complex
and detailed nature of standards (Quagli & Paoloni, 2012; Kılıç et al., 2014), lack of knowledge
(Kaytmaz Balsari & Varan, 2014), costly adoption process (Kılıç et al., 2014; Chand et al.,
2015), costs arising from possible duplication of reporting (Albu et al., 2013), and training costs
(Albu et al.,There seems to be a general support for differential reporting rules. For instance,
research conducted in Australia, questioning practitioners, suggested that 97% of those
15
questioned supported the need for differential reporting (Holmes, Kent, & Downey, 2009).
Similarly, the AICPA’s research into private company reporting suggested that “GAAP for
private companies should be developed” and that “fundamental changes should be made in the
current GAAP standards-setting process to ensure that the financial reporting needs of private
companies are met” (American Accounting Association’s Financial Accounting Standards
Committee [AAAFASC], 2008, p. 191). However, there is far less consensus on how the
standards for SMEs should be set and the precise entities which fall into this category.The draft
for IFRS for SMEs has generated more discussion than the full IFRS (Shearer & Sleigh-Johnson,
2007) but also the accounting standard could hold a key to better reporting system that will be
unique to the needs of SMEs. The heat illuminates from the view that the IASB has not focused
on the smallest companies (micro-sized entities) in developing the standard; rather, it had in
mind a company with around 50 employees (Pacter, 2007). There have been certain arguments in
favor of and against an international standard for SMEs.The arguments in favor of an
international standard for SMEs have varying reasons from the view that it wouldbe beneficial
for SMEs in some transitional economies especially those required to apply full IFRS as a
resultof World Bank directions (AICPA, 2005), to the view that an international standard for
SMEs would mitigate the cost/benefit argument used against full IFRS and create a defined and
consistent regulatory framework for those small enterprises maturing to a capital market listing
(Barker & Noonan, 2005). Moreover, Baskerville and Cordery (2006) also supported the
internationalization of SME standard when they added that it would be beneficial to any SME
that has users located in different jurisdictions or that wish to use financial statements of other
SMEs and further argued that accounting is about reporting economic events and if the event is
the same across countries then the reporting should be the same across countries. (American
Accounting Association’s Financial Accounting Standards Committee [AAAFASC], 2008, p.
191).

16
Chapter 3 Research methodology
3.1. Description of Study Area
Bale zone with capital of Robe is a Zone in the Oromia Region of Ethiopia. Bale is bordered on
the south by the Ganale Dorya River which separates it from Guji, on the west by the West Arsi
Zone, on the north by Arsi, on the northeast by the Shebelle River which separates it from West
Hararghe and East Hararghe, and on the east by the Somali Region.

Bale zone is the second largest zone in Oromia National Regional State after Borena zone with a
total area of 63,555km2. It shares about 17.5% of total area of Oromia. It has 18 districts, 2 urban
administrative centers, 20 urban kebeles and 351 rural kebeles.

Based on the 2007 Census conducted by the CSA, this Zone has a total population of 1,402,492,
an increase of 15.16% over the 1994 census, of whom 713,517 are men and 688,975 women;
with an area of 43,690.56 square kilometers, Bale has a population density of 32.10. While
166,758 or 26.20% are urban inhabitants, a further 44,610 or 3.18% are pastoralists. A total of
297,081 households were counted in this Zone, which results in an average of 4.72 persons to a
household, and 287,188 housing units. The three largest ethnic groups reported were the Oromo
(91.2%), the Amhara (5.7%) and the Somali (1.44%); all other ethnic groups made up 1.66% of
the population. Afaan Oromo was spoken as a first language by 90.46%, Amharic was spoken by
7.11% and Somali by 1.05%; the remaining 1.38% spoke all other primary languages reported.
The majority of the inhabitants were Muslim, with 81.83% of the population having reported
they practiced that belief, while 16.94% of the population professed Ethiopian Orthodox
Christianity and 1.04% were Protestant.

3.2. Study Design

Research design refers to the program that guides the investigator in the process of collecting,
analyzing, and interpreting observations (C. F. Nachmias & D. Nachmias, 1996). The research
will conduct in the form of a survey. According to Bryman and Bell (2007), a survey is a cross-
sectional design in relation to which data are collected predominantly by self-completion
questionnaires or by self-structured interviews on more than one case and at a single point in
time in order to collect a body of quantitative and quantitative (mixed) data in connection with
two or more variables which are then examined to detect patterns of relationship. A survey will

17
use because it provides a quick, efficient, and accurate means of assessing information about a
population.

3.3. Research Approach

Research approach refer to the methods of data collection, methods of data analysis,
interpretation, methods of communicating findings, validation and the questions to be addressed,
The selected strategy of inquiry equally determines the research methods. As per Creswell
(2003) there are three approaches that are used in conducting a given research. These are
quantitative, qualitative and mixed research approach. Quantitative research approach focuses
primarily on the construction of quantitative data, and quantitative data is a systematic record
that consists of numbers constructed by researcher utilizing the process of measurement and
imposing structure (Kent, 2007). The quantitative research approach employ measurement that
can be quantifiable while qualitative cannot be measured (Bryman & Bell, 2007). In mixed
research approach inquirers draw liberally from both qualitative and quantitative assumptions
(Creswell, 2009).
In the main paper the researchers will use mixed research approach; the rationale for combining
both quantitative and qualitative data is to better understand a research problem by combining
both numeric values from quantitative research and the detail of qualitative research and to
neutralize limitations of applying any of a single approach. According to Creswell (2009) the
mixed research approach uses separate quantitative and qualitative methods as a means to offset
the weaknesses inherent within one method with the strengths of the other method. We plan to
use the mixed method of investigation. This is because the goal of the study is to find out the
major factors that affect the adoption of IFRSs for SMEs which has both qualitative and
quantitative nature.

3.4 Study Subject

The study subject of the study will consists of all registered SMEs operating in the Bale zone
numbering 4568 according to the Bale Zone Micro and Small Scale Enterprises Promotion
Office.
No Type of business Total number
1. Manufacturing 324
2. Construction 230
3. Service 1662
4. Agriculture 1347
5. Trade 822
18
 6 Mining 183
Total 4568

3.5 Sample Size

368 SMEs were selected for the study. The sample size was gotten through the use of the sample

N
size formulae n = 1+ N ¿ ¿ ;
Where n= sample size; N= sample frame and e = error of acceptance which is 0.05 for the study,
(Yamane, 1967).
4568
N= 1+ 4568 ¿ ¿ = 368

3.6. Sampling Technique

The paper will use Stratified sampling technique: Stratified sampling technique is generally
applied in order to obtain a representative sample. Under stratified sampling the population is
divided into several sub-populations that are individually more homogeneous than the total
population (the different sub-populations are called ‘strata’) and then we select items from each
stratum to constitute a sample. Since each stratum is more homogeneous than the total
population, we are able to get more precise estimates for each stratum and by estimating more
accurately each of the component parts; we get a better estimate of the whole. In brief, stratified
sampling results in more reliable and detailed information (Kothari, 2004)
So we will divide the total population in to five strata select sample proportionally as follow:
 We want a sample of size n = 368 to be drawn from a population of size N = 4568 which
is divided into six strata of size N1 = 324, N2 = 230, N3 = 1662, N4=1347 ,N5=822 and
N6 = 183.Adopting proportional allocation, we shall get the sample sizes as under for the
different strata:
¿
 Sample size for stratum with Ni is ni¿ N ×n

324
 Sample size for stratum with N1 (Manufacturing) = is n1¿ × 368=26
4568
230
 Sample size for stratum with N2 (construction) =is n2¿ × 368=19
4568
1662
 Sample size for stratum with N3 (service) =is n3¿ × 368=134
4568

19
 1347
 Sample size for stratum with N4 ( agriculture) =is n4¿ × 368=¿ 108
4568
822
 Sample size for stratum with N5 (trade) =is n5¿ × 368=¿ 66
4568
183
 Sample size for stratum with N6 (mining)=is n6= × 368=¿ 15
4568

No Type of business Total number Sample

1. Manufacturing 324 26

2. Construction 230 19

3. Service 1662 134

4. Agriculture 1347 108

5. Trade 822 66

6. Mining 183 15

Total 4568 368

3.7. Source of Data

The study will be used both primary and secondary data source. Primary sources of data include
interview and questionnaire, whereas secondary sources data will be generated through a review
of relevant documents.
Primary Data: Primary data are original observations collected by the researcher or his agents
for the first time. Mostly we will use the primary data because has he following advantages.
 Greater details.
 More accurate.
 Enhances the investigators’ understanding of the meaning of units in which data are
recorded.
 It indicates schedule, the procedure used in selecting the sample and size of the sample. In
addition to the primary data we will also use secondary data (Kothari, 2004)
Secondary data: Secondary data means data that are already available i.e., they refer to the data
which have already been collected and analyzed by someone else. Secondary data are collected
20
by others and used by others. It is data that has been collected earlier for some other purpose.
The major sources of Secondary data may be published or unpublished sources. In our major
sources of secondary data includes. Books, journals, reports and publications of various
organizations and reports of research scholars in the area. We will use secondary data because of
the following advantage it has.
 Economical
 Saves Time
 Improves an understanding of the problem
 Used as a basis for comparison with the primary data that has been collected.
 Familiarity with secondary data indicates gaps in knowledge (Kothari, 2004).

3.8. Method of Data collection

We will use questioner and interview as data collection tools.
3.8.1. Questionnaire: is a type data collection tool where respondents write answers to questions
posed by the researcher on a questionnaire .we prefer to use questionnaire because the following
advantage.
 Questionnaires are extremely flexible and can be used to gather information on almost
any topic involving large or small numbers of people.
 Lower costs
 Better samples
 Standardization
 Respondent privacy (anonymity)
 It is free from the bias of the interviewers, answers are in respondents own words.
 Respondents have adequate time to give well thought out answers.
 Respondents, who are not easily approachable, can also be reached conveniently.
Questionnaires will be distributed to finance officers and accountants of the selected SMEs in
selected areas of Bale . Finance officers and accountants will be selected as respondents because
they are deemed to be knowledgeable about IFRS for SMEs and could provide important
perspective on its adoption. The response will be expected to help understand the factors that
could explain the adoption IFRS for SME by Bale zone, the perceived and actual benefits and
challenges of International Financial Reporting Standards both for SMEs and for the country at
large. The research evidence will be gathered by using both close-ended and open-ended

21
questionnaires. Mixed questionnaires have many merits; the most important of this advantage is
its considerable flexibility (McNabb, 2005).

3.8.2. Interview
We also plan to use semi-structured interview as additional data collection because it will enable
us:
 To get the detail information from the focal personnel of the organization that will
be purposively selected.
 To explore the current situation in the SME sector in more detail
 To enable interviewees to express their opinions in their own words.
Semi structured interview with financial managers and audit directors of the selected SMEs will
be conducted. It allowed the investigator some degree of flexibility at the time of interviewing
for the pursuit of unexpected line of inquiry.
This will be raised at the study progresses. Questions in the interview checklist will be
constructed based on the review of literature. In the process of preparing, testing and using the
instruments, the following procedures will be followed.
I. The questionnaires and the interview guides will be developed based on literature review
relevant to the issue and the specific objectives.
II. Both tools will be judged for their validity using professionals in the area.
III. In the final study, the questionnaires and interview will be administered both by the
researchers.

3.9. Operational Definitions

We will include Concepts and impressions-whose understanding may differ from person to
person. It is, therefore, important for the concepts to be converted into variables as they can be
subjected to measurement even though, the degree of precision with which they can be measured
varies from scale to scale. To ensure its operationalization, that is, how it will be measured. To
operationalize a concept you first need to go through the process of identifying indicators.
Indicators are a set of criteria reflective of the concept-which can then be converted into
variables.

3.10. Description of the data variables

A variable is a property that takes on different value. Based on the causal relationship variables
can be classified into three.

22
(I) Explanatory variable or independent variable: If X may be considered to be the cause of Y,
then X is described as explanatory variable (also termed as causal or independent variable) and Y
is described as criterion variable (also termed as resultant or dependent variable). In some cases
both explanatory variable and criterion variable may consist of a set of many variables in which
case set (X1, X2, X3, …., Xp) may be called a set of explanatory variables and the set (Y1, Y2, Y3,
…., Yq) may be called a set of criterion variables if the variation of the former may be supposed
to cause the variation of the latter as a whole (Kothari, 2004).
(II) Dependent variables: The dependent variable is the variable that is the effect or is the result
or outcome of other (independent) variables (Neumann, 2007). In this study the dependent
variable is the adoption of IFRS for SME.
(III) Extraneous variables: several other factors operating in real-life situation may affect
changes attributed to independent variables. These factors, not measured in the study, may
increase or decrease the magnitude or strength of the relationship between independent and
dependent variables. In our study the dependent and independent variables are:
The independent variables are
 Lack of professional support with IFRS experience
 Economic obstacles
 Lack of technical expertise in the accounting.
 Capacity limitations of financial markets
 Diverse complications and controversial issues and dependent variables is adoption of IFRS
for SMEs.

3.11. Hypotheses Development

Hypothesis is the tentative statement of fact that is yet to be verified by the researcher. In the
study in order to address the specific objective which is about factors that could affect adoption
of IFRS for SMEs one dependent variable against five independent variables will investigated.
Variables examine and their measurements will formulate from the existing literature. The
dependent variable is the adoption of IFRS for SMEs, while the independent variables are
professional support with IFRS experience, technical expertise in the accounting and auditing
professions, Capacity limitations of financial markets, diverse complications and controversial
issues and Economic Obstacles. The description of both dependent and independent variables
with related hypothesis is discussed below.

23
3.11.1. Dependent Variable
The dependent variable is the variable that is the effect or is the result or outcome of other
(independent) variables (Neumann, 2007). In this study the dependent variable is the adoption
of IFRS for SMEs as per the dead line set by AABE.

3.11.2. Independent Variables

3.11.2.1. Lack of Professional Support with IFRS Experience
According to Iyoha and Faboyede (2011), the adoption of International Financial Reporting
Standards is largely driven by a number of factors which include among others professional
support with IFRS experience and self-enforcement by companies. This is the major problem of
implementing IFRS in Ethiopia. There are many reasons for losing qualified professionals even
in other field of studies let alone a new reporting standard like IFRS. Since IFRS is a
new reporting system, companies might not get ample qualified professionals to get job done. In
addition the complex nature of IFRS in its application might take some time to understand the
reporting standard.
H1: There is a positive relationship between Lack of professional support with IFRS experience
and successful adoption of IFRS for SME.
3.11.2.2. Lack of technical expertise in the accounting and auditing professions
The issue of the complexity of the international standards has been persistently discussed since
the inception of the IFRS implementation process. A number of studies have identified that the
complex nature of the full set of IFRS poses several practical difficulties, particularly in
developing economies (Alp & Ustundag, 2009; UNCTAD, 2007a; Wong, 2004). Moreover, lack
of technical expertise in the accounting and auditing professions and the potential knowledge
shortfall in dealing with international standards has been widely articulated (Alp & Ustundag,
2009; UNCTAD, 2007a). The IFRS for SMEs are deemed to be a less complex and simplified
version of the full set of IFRS, but as far as the intended users of the new standard are concerned,
several arguments have been made about the incongruity and the burden of IFRS for SMEs. For
example, having experienced several difficulties in adopting full IFRS in 2005, Australia is more
concerned about the possible transition issues that may arise during the implementation process
of the IFRS for SMEs (AASB, 2010a). The transition process from local GAAP/full IFRS to the
IFRS for SMEs may impose certain difficulties on business practices, processes and systems,
which often turn out to be costly, complex and prolonged for small entities to take on. Australia
is of the view that the IFRS for SMEs still appear to be complex in the recognition and
24
measurement requirements (AASB, 2010a). Deloitte Touche Tohmatsu (Australia) reports that:
The approach of effectively adopting IFRS for all entities in Australia from 2005, albeit with an
overlaid ‘reporting entity’ concept, has meant that a lot of the ‘pain’ of adopting IFRS has
already been incurred in the Australian context. Compared with IFRS, the IFRS for SMEs does
not result in a substantial reduction in complexity in the recognition and measurement
requirements — and in fact many ‘simplifications’ may be more onerous in practice (e.g.
introduction of ‘uncertain tax position’ accounting for income taxes), be counterintuitive (e.g.
mandatory amortization of goodwill over a 10 year period) or may ultimately be adopted in
‘IFRS proper’ (e.g. rewrite of financial instruments requirements). Furthermore, there are as yet
no widely accepted interpretations of contentious issues under the IFRS for SMEs, a position
similar to the original IFRS transition in 2005, with all the uncertainty this brought on transition
(AASB, 2010a).
H2: There is a positive relationship between lack of technical expertise in the accounting and
auditing professions and successful adoption of IFRS for SMEs.
3.11.2.3 Capacity limitations of financial markets
The practical implementation of IFRS for SMEs would also be challenging, because the capacity
limitations of financial markets, institutions and regulatory authorities vary across the globe. The
prominent professional accounting networks such as PWC (2011), Ernst and Young (2010) and
KPMG (2010) demonstrate the possible problematic sections of the IFRS for SMEs that could
develop with so-called capacity limitation issues. As specified by Section 26 Share Based
Payments of the IFRS for SMEs, if the fair value of shares in equity-settled share-based
payments is not observable, and obtaining entity specific market data is impracticable, the
directors should use their judgment to apply the most appropriate valuation methodology (see
Table 2). Since the full IFRS (IFRS 2 Share Based Payments) allows using “Intrinsic Value” in
the absence of a reliable estimate of fair value, the IASB believes that the simplified valuation of
share-based payments would be appropriate for SMEs. However, (PWC, 2011) points out that
only in rare situations it is unable to estimate the reliable fair value. Furthermore, the Institute of
Chartered Accountants Australia (ICAA, 2012) points out that “an intrinsic value model would
require a valuation to be conducted on the SME's shares in any event. It is difficult to see any
simplifications here”. Therefore, ICAA (2012) suggests that it is necessary to specify valuation
models for SMEs to determine the fair value. The technical challenges in fair value-based

25
measurement requirements in IFRS have, however, been a major issue of concern. More
specifically, differences in the liquidity of capital markets and the lack of availability
of recent capital market information of different economies would be challenging issues, for
which practitioners need to seek alternative sources of measurement. The accurate estimation
and consistent application of those alternative measurements would nevertheless be a
confronting issue (Alp & Ustundag, 2009; Mala & Chand, 2012; UNCTAD, 2007).
H3: There is a positive relationship between capacity limitations of financial
markets and successful adoption of IFRS for SMEs.
3.11.2.4 Diverse Complications and Controversial Issues
The discussions on issues in the financial reporting convergence process have been motivated
since the inception of the implementation process of the full set of IFRS. There have been
several functional complications reported in the convergence process of IFRS by countries that
have adopted IFRS (Alp & Ustundag, 2009; UNCTAD, 2007; Wong, 2004). Conversely, due to
the recent publication of the IFRS for SMEs and the slow take-up of the new standard by various
jurisdictions across the globe, the consequences of adopting the IFRS for SMEs are still
presumed to be impending. Diverse complications and controversial issues in adopting the IFRS
for SMEs have been reported by many jurisdictions, especially from the developed countries.
Taking examples from the implementation of the full set of IFRS and the IFRS for SMEs
context, the next section provides a holistic view on the problems experienced and the possible
challenges in implementing IFRS for SMEs across the globe. To evaluate the problems posed by
the implementation of IFRS for SMEs, this discussion applies where relevant, decision useful
theory and pecking order theory.
H4: There is a positive relationship between diverse, complications, and
controversial issues and successful adoption of IFRS for SMEs.
3.11.2.5 Economic Obstacles
The current logistics cannot be used to support the introduction of IAS/IFRS. Apart from the
changes and implications of accounting nature, the transition to IAS/IFRS requires technical,
human and financial resources at the level the standardization body as well as at the level of the
company. The process related to the transition of local standards to IAS/IFRS is considered
expensive and complex due to the complexity and the absence of a guide that could direct
businesses. The costs of transition to IAS/IFRS can be classified into two categories, costs of
adoption and implementation and costs related to the use of IAS/IFRS (Jopson, 2005) (as sited
by Salem Boumediene 2016).
26
H5: There is a positive relationship between economic obstacles and successful
adoption of IFRSs for SMEs.

3.12 Theoretical Framework

Theoretical framework explores, describes, explains, analyzes and presents fact, principle and
provisions of phenomena for better and background understanding of such phenomena (Frank,
1979). To achieve part of the research objective and to test the research hypotheses, the study
will use the theoretical framework. We interested to answer this question. Do these variables
truly in any way affect the adoption of IFRS for SMEs or not.

Factors affecting the adoption of IFRS for SMEs

Dependent variable
Independent variables

Professional support
with IFRS experience

Technical expertise in
the accounting and
auditing professions
The adoption
of IFRS for
SMEs
Capacity limitations of
financial markets

Diverse complications
and controversial issues

Economic Obstacles

3.13. Data Quality Assurance

The quality of data will be assured when the data that will be collected become:
27
Relevant- Unit of measurement should be the same as that in the problem at hand. The concepts
used should be the same as are envisaged in the problem. The data should not be obsolete.
Reliability: The reliability of data can be ensured by assessing the following points.
 Who collected the data
 What were the sources of the data
 Were they collected by using proper method
 At what time were they collected
 Was there any bias of the complier
 What level of accuracy was desired? Was it achieved?
Accuracy: Another method through which the quality of data will be ensured is accuracy of data.

This will be achieved through:

 Consulting the original source.
 The context in which data have been collected,
 The procedure followed and
 The extent of care exercised in their collection.
Sufficiency: Sufficiency plays indispensable role in ensuring data quality. Because if the data are

inadequate, then compliance with the preceding requirements will be useless

(Kothari, 2004).

3.14. Plan for Data Analysis

Data after collected it must be analyzed and interpreted. Technically speaking, processing
implies editing, coding, classification and tabulation of collected data so that they are amenable
to analysis.
As explained in the preceding part, the researcher s is designed to follow a mixed method. To
this end, both qualitative and quantitative analyses will be used. Data that will collected using
questionnaire will be analyzed through descriptive statistics, frequency distribution, correlation
and multiple linear Regression using EView software. It will helps to describe what the data look
like, where there center (mean) is, how broadly they will be spread in terms of one aspect to the
other aspect of the same data (Leedy, 1989). The EView will be used to find out percentages,
mean values, frequencies, correlations, etc. as main means for summarizing the data. Data will
be collected from the interview and reviews of documents will be interpreted qualitatively. In
28
analyzing the data from interviews, narrative approaches including quotations from respondents
will be the term analysis refers to the computation of certain measures along with searching for
patterns of relationship that exist among data-groups. Thus, “in the process of analysis,
relationships or differences supporting or conflicting with original or new hypotheses should be
subjected to statistical tests of significance.

We will also undertake certain statistical technique that helps us to determine the relationship
between variable in the study.
3.14.1 Partial correlation: Partial correlation enables us to control the possible effects of another
confounding variable. Because partial correlation 'removes' the effect of the confounding
variable, allowing us to get a more accurate picture of the relationship between two variables of
interest.
3.14.2. Multiple Linear Regressions Analysis: It will enable us to predicting an outcome variable
from several predictor variables.
Multiple Linear Regression Model
IFRSi = β0+ β1PSii+ β2 EOii+ β3TEii+ β4CLFMIi+ β5DCi
Where:
 IFRSi = Adoption of IFRS for SMEs in Bale .
 B0 = The intercept term constant which could be equal to mean if all slope coefficients
are Zero
 β1, β2, β3, β4, β5 = the vectors of coefficients associated with each independent variable
which measure the change in the mean value of the dependent variable, per unit change.
 Psi = professional support with IFRS experience.
 EOi = Economic Obstacles.
 TEi = Technical expertise in the accounting.
 CL = Capacity limitations of financial markets
 DC = Diverse complications and controversial issues

3.14.3. Discriminant function analysis

It is used when you want to explore the predictive ability of a set of independent variables, on
one categorical dependent measure. That is, you want to know which variables best predict group
membership.

29
3.15. Validity of the Study
Validity refers to the degree to which a study accurately reflects the specific concept that the
researcher is attempting to measure or describe. In order to keep the validity of the study,
researchers should be concerned with both external and internal validity. Internal validity refers
to the extent to which the researcher can demonstrate that he has reliable and adequate evidence
for the statement (Grix, 2004). External validity on the other hand stands for the extent to which
the conclusion is generalized to the population (Yin, 1994).
Yin (1994) suggested using multiple sources of evidence as the way to ensure construct validity.
This study will use multiple sources of data including document review, interview and
questionnaire that helps to cross validate the data.

30
 4. Work plan and Budget Breakdown

4.1 Work plan (Time Table)

This activity is proposed to be completed in 6 (Six) months. Starting from January, 2020
expected to end in end of June, 2020. Major activities and their corresponding time are in the
following table:
Table 4.1. Work plan for activities (January, 2020 – June, 2020)
Month of the Year
No Activities to be carried out
January February March April May June

1 Material Collection

2 Data and sample Collection

3 Analyzing Samples

4 Data Coding, Entry and clearing

5 Data Analysis

6 Thesis Writing

7 Submission of Draft thesis

8 Report Circulation for Comments

9 Thesis Submission
31
10 Presentation

4.2. Budget Breakdown

The budget of the study describes as follows:
Table 4.2. Budget Breakdown for activities
4.2.1. Transport expenses

NO Person Departur Destinations Total Cost (Birr)

e

1 Researcher Bale robe Different Woreda Town in Br, 2400

s Bale zone

Br, 2400

4.2.2. Equipment and Supply (Stationary Materials)

No Items Quantity Measure Unit Price Total Price
1 Blank paper 200 page 0.50 Br, 100
2 Pen 13 pcs 6 78
3 Calculator 1 pcs 200 200
4 RW-CD 4 pcs 30 120
5 Flash disc 1 pcs 300 300
6 Type cost 120 page 7 840
7 Binding cost pcs 100
8 Copy cost 500
Subtotal Br, 2238
4.2.3. Miscellanies Expenses:
Miscellanies Expenses 1500
Grand Totals Br, 6138

32
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