IFRS in practice, after adoption by Ghana SMEs

Wallace B. Asamoh, Chartered Accountant, London, UK
September 3rd, 2024

Before investors fund a business, they expect a high level of confidence in the financial prospect or health of their target company. In Sub-Saharan Africa, investors will evaluate the business climate, regulatory framework, the legal system, and political stability. Another important factor in the decision to invest is the transparency, readability, and comparability of financial information. Countries like Ghana that have adopted the International Financial Reporting Standards (IFRS) will have an advantage. In 2007, the Institute of Chartered Accountants (Ghana) approved IFRS for listed public companies, then in 2010 for small and medium-size enterprises (SMEs). Since then, Ghana has widened the application of financial reporting with the adoption of International Public Sector Accounting Standards (IPSAS), and the International Standards on Auditing (ISA).

The benefits of IFRS

The adoption of the IFRS means that financial information in Ghana is comparable to those of public companies in 166 jurisdictions around the world. Non-listed corporations and SMEs also benefit from the standards. But unlike listed companies, SMEs do not have to comply with compulsory public accountability requirements. However, they have to produce reliable financial information for their lenders, tax authorities and for shareholders. Empirical research found a positive correlation between the quality of financial reporting and transparency and access to finance¹. Access to finance is an obstacle to SMEs, especially when they want to scale up operations and attract investors².

Public institutions use IFRS, for example, to value sovereign debt obligations. In 2022, the Bank of Ghana used IFRS 9 to estimate credit losses on the bank’s government debt portfolio during the government domestic debt exchange program (DDEP)³. The Institute of Chartered Accountants Ghana, the Banking Association of Ghana and accounting firms, used IFRS to develop a consistent valuation method for impairments and losses during the same DDEP.

SMEs and IFRS

SMEs are the backbone of the economy of Ghana. Elsie A. Awadzie, Second Deputy Governor of the Bank of Ghana, explained that SMEs account for over 92 percent of businesses. Speaking during a banking event on May 10th 2023, she revealed a proportion of SMEs belong to women and young entrepreneurs. She also said that SMEs contribute 70 percent of Ghana’s gross domestic product⁴. Ghana classifies 2.1 million businesses as Micro, Small, and Medium Enterprises (MSMEs). These businesses employ 2.5 million people (or 30 percent of MSME employees), implying an average of 1-2 jobs created per micro enterprise⁵.

IFRS caters to SMEs with standards that incorporate and simplify existing accounting principles. In Ghana, however, SMEs continue to struggle with the effective implementation of the standards. Industry reports and empirical studies found that SMEs face technical, institutional, capacity challenges, as well as cost. Empirical research also suggests that the quality of financial information from SMEs between the Northern and southern regions diverges. A 2023 study by authors, Francis A. Sarpong et al., found that SMEs in the Northern part of Ghana “did not fully comply to the IFRS”⁶. But Clement Oppong and Ali Bruce-Amartey found that “IFRS adoption in isolation does not improve accounting quality but compliance to the standards leads to accounting quality”⁷.

The Institute of Chartered Accountants, Ghana (ICAG) offers IFRS education, organizes related events and hold mandatory continuous professional development⁸. The goal is to stimulate the interest of SMEs and steer them towards modern reporting practices.

Emerging issues and new standards

Environmental issues are changing modern business and economic practices. The IFRS Foundation has responded to the development of the IFRS Sustainability Disclosure Standards. The goal of this Standard is to disclose information about sustainability-related risks and opportunities that affect companies. Two standards encapsulate the new rules. IFRS S1 provides general requirements for disclosure, while IFRS S2 specifies climate-related disclosures and captures climate-specific requirements. The new standards expect companies to disclosure their plans to respond to climate-related risks and opportunities, including climate-related targets and metrics including the impact of various climate-related events. Reporting began on January 1st, 2024.

Temperatures in Ghana have risen by one degree Celsius since the 1960s. This represents an average increase of 0.21 degree Celsius per decade. The rates of increase are potent in the Northern regions of the country compared to the Southern regions (rainforest and coastal, agro-ecological areas). High temperatures cause devastating drought and rising sea levels. Changes in weather patterns cause floods, costal degradation, and soil erosion. Dependence on fossil fuels, plastics and also on non-renewable natural resources inflicts irreversible damage to the environment. This means that IFRS Sustainability Disclosure Standards are not exogenous norms disconnected from the socio-economic realities of Ghana.

The State of Ghana has developed status laws and policy initiatives to tackle the consequences of climate change. Other state and non-state institutions have joined the efforts. For example, the ICAG has adopted IFRS S1 and IFRS S2 for its 361 licensed members and is urging other companies to accept sustainability⁹. The Bank of Ghana and the Ghana Association of Bankers launched the sustainable banking principle in November 2019. The principles guide banks, financial institutions, and stakeholders to integrate sustainability into their business operations¹⁰.

The Ghana Stock Exchange (GSE) launched the ESG Disclosures Guidance Manual for listed companies on November 2nd, 2022. The GSE says that the manual serves as a guide to data collection, analysis, and public disclosure that meets international standards in sustainability reporting.

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