"Borrowing Costs and Financial Reporting Quality of Small and Medium Scales Enterprises in South-East, Nigeria"

Abstract

This study hinges on the effect of borrowing cost (IAS 23) on the financial reporting quality of Small and Medium Scales Enterprises (SMEs) in South East Nigeria. This is because the measurement of borrowing cost in the financial reports of most SMEs operators in Nigeria is highly incomprehensible even after IFRS implementation in Nigeria. This unsatisfactory disposition reveals that SMEswith high-debt-ratio are prone to manipulate earningsin order to increase their reported earnings and avoid the debt covenant default which all togetherundermine the financial reporting quality of these firms.Most SMEs still subscribe to indiscriminate treatment of borrowing cost while the effect of borrowing cost on financial reporting quality is equally not known with certainty. To this end, the study evaluates the effect of borrowing cost on value relevance, faithful representation, comparability and understandability of the financial reporting of SMEs in South East Nigeria. To this end, primary data were elicited from 284 respondents. Hypotheses were tested using the Analysis of Variance and it was discovered that appropriate measurement of borrowing cost enhances the recognition of interest and other expenses incurred by an entity connected with borrowing cost. It also engenders the predictive and confirmatory value of the accounting numbers and helps SMEs to avoid all forms of misrepresentation and biasin their financial reports.