Effect of International Financial Reporting Standards Practices on Financial Performance among Small and Medium Enterprises in Homa-Bay Town, Kenya

Abstract

Small and medium size Enterprises (SMEs) play an important role in accelerating growth and sustainable development in developing countries. Despite high rate of formation, three out of five SMEs fail due to limited use of recommended accounting practices in their enterprises thus there is need for proper bookkeeping skills and sound knowledge on financial reporting. These SMEs also do not survive beyond two years of their formation citing under capitalization. The main objective of the study was to investigate the effect of international financial reporting standard practices on financial performance among SMEs in Homa-Bay Town, Kenya. The study attempted to: establish effect of book keeping practices; determine effect of auditing; examine effect of annual financial reporting; and evaluate managements' capacity to implement IFRS among SMEs in Homa- Bay Town, Kenya. The study adopted correlation research design and the Target population was 274 SMEs from which a sample of 160 was determined by sample size determination using Fisher's formula. Data was collected using questionnaire whose validity and reliability was established in the pilot test and Cronbach alpha measurement set at not less than 0.7. Quantitative data analysis was undertaken to generate both descriptive and inferential statistics, this was done using Statistical Package for Social Sciences (SPSS). Presentation of data was done in frequency tables and figures and the interpretation made based on the research objective. The study concluded that: book keeping had effect on financial performance among SMEs in Homa- Bay Town, Kenya.; auditing had a contribution effect on financial performance among SMEs in Homa- Bay Town, Kenya; annual financial reporting had a significant effect on financial performance of SMEs in Homa -Bay Town, Kenya and finally International financial reporting standards practices had a significant effect on financial performance among SMEs in Homa- Bay Town, Kenya. Regression findings revealed a strong positive relationship between International financial reporting standards practices and financial performance (R=.748; p value<.05). The study recommends the need for the management of SMEs in Homa- Bay Town, Kenya to embrace book keeping practices in order to achieve improved financial performance. Also the study recommends that auditing was necessary for the SMEs in Homa- Bay Town, Kenya to realize better financial performance. Further, the study recommends that the management of  SMEs in Homa- Bay Town, Kenya to adopt the culture of  annual financial reporting as an IFRS practice so that they may have good financial performance.