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Chapter 1
Introduction
Rationale of the Study
It is an indisputable truth that in the prevailing multinational business trading industry, small-medium enterprises (SMEs) are widely known to be an imperative partaker in the worldwide moneymaking economy. It is mentioned as a scholastic conjuncture that the development and expansion of SMEs has direct positive relationship to the economy’s constant progress. Kamilan (2013) specified that many reasons exist as to why a legion of SMEs are in a tight battle for continuous survival. In the contrary, Mwangi (2011) indicated that the principal challenge in producing financial statements of SMEs lies in maintaining its’ forms and records. Furthermore, an incompetent record keeping will probably result to erroneous control of cash and ill administration of asset. This dilemma upholds the difficulty in distinguishing the disparity between private transactions and business dealing (Rankhumise & Tshabalala, 2010).

International Financial Reporting Standards (IFRS) is a well-organized approach that showcases comparability, relevance, reliability and understandability (Kunle, Omoruyi & Hamed, 2011). In the literature of Jermakowicz and Epstein (2010), the concerns of SMEs was not limited to the complications of IFRS, it goes beyond to the frequent change in standards. Moreover, Hoogervorst (2015) was in the same understanding that along with the integration of IFRS lays a material task of being updated of its current changes in standards. As a result, International Accounting Standards Board (IASB) intended to implement remodeling of the IFRS for SMEs under the estimation of once in every three consecutive years. Through this, users of financial statements are secured to have a reasonably fixed set of financial reporting requisites.

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Adegite (2010) emphasized the importance of accounting in the commercial business world as it served the most integral form of communication by recording all the valuable transactions of the entity. A high necessity for efficient employee becomes a challenging part in adopting the IFRS. The occurrence of tedious procedures in enhancing the skills of the subsisting staff and operational management comes along with the meaningful participation of the working personnel in order to warrant a very satisfying transaction of specialized responsibilities. Above all, faithful representation of the economic substance of every transaction must be assured by the preparers engaged in applying IFRS (Tomaszewski & Showerman, 2010).

Publicly speaking, SMEs are remarked for furnishing a non-transparent view of financial information. This is due to some inevitable circumstances which include the complexity of the accounting process, restricted learning in accounting and the misleading assumption that the financial statement is not fundamental. It is also because of the scarcity of finances to invest in hiring an experienced accountant or to possess accessible accounting software as well as the absence of discipline in enforcing the need of accounting books (Hutadjulu & Blesia, 2016).
Based on the aforementioned facts, the researchers are fascinated to discover the factors affecting financial reporting in compliance with PFRS among SMEs in Merchandising Sector in the Philippines particularly in Davao City. In this study, the proponents are challenged to ascertain the comprehensiveness of financial reporting among SMEs (Muinde, 2013). Altogether, this paper aims to serve as a guide to merchandising SMEs in determining the factors affecting their financial reporting.

Objectives of the Study
This manuscript ascertained the factors affecting the compliance on the financial reporting of merchandising SMEs in Davao City.

In particular, this document intended to accomplish the succeeding objectives:
1. To find out the factors affecting compliance with financial reporting standards of merchandising SMEs.

2. To discover the level of compliance with the PFRS on financial reporting of merchandising SMEs.

3. To expose which factors significantly influence the level of compliance on PFRS among merchandising SMEs.

Statement of Hypothesis
Ho: There are no factors influencing the compliance with the PFRS on financial reporting of merchandising SMEs.

Significance of the Study
This research aspired to supply information about the factors affecting the financial reporting among merchandising SMEs in Davao City. This study will give benefit to the following:
Small-medium enterprises. This paper will boost knowledge about the real essence of financial reporting and the factors that may help to improve the quality and performances of Merchandising SMEs.

Financial Statement preparers. The outcome of the research will aid and provide support in the struggle of making financial reports.

Accounting students. This document will elaborate the basic understanding towards the financial reporting among merchandising SMEs in compliance with the PFRS.

Future Researchers. The conclusion of this study will raise additional learning about the factors that affect the financial reporting of SMEs.

Definition of Terms
To embody the same frame of reference, the following terms were operationally defined:
SMEs (Small Medium Enterprises). An enterprise committed to merchandising business located in Davao City.

Merchandising. A type of business maneuvered by SMEs in the different area in Davao City. It involves marketing of goods and/or services.
Standards. Accounting standards that serves as a guideline in reporting financial statement of the business establishments in the commercial industry as required by the governing body.

Chapter 2
Review of Related Literature
This review of related literature connects substantial ideals from various sources to form an interactive discussion in relation to financial reporting among SMEs. It also deals with the factors on variables integrated with the study.

The most pivotal portion of the existence of a business organization is manipulated by the internal control. In the context of Gahman and Ali (2015), the combination of activities, attitudes, plans, policies, resources, and deeds of the workforce to present a positive assurance in reaching the company’s mission and goals is defined as internal control. It entails the compliance of national authority and jurisprudence, productive and intellectual utilization of resources, trustability and morality of information and safeguarding high valued properties (Alsing, 2014).

Given the situation that the small businesses are a sensitive subject of fraud, these enterprises are expected to show great interest on the internal control functioning as a system which keeps the assets safe and in full capacity. It has been addressed by Jiang (2010) that the major concern of investors and entities lies in keeping the internal control more effective and functional due to the increased risk of fraudulent activities. On the diverse aspect, Shanmugam, Haat and Ali (2012) revealed the justification behind the failure of some SME businesses- non-application of internal control on major accounts such as cash, receivables, inventory, investment, PPE (property, plant, and equipment), payables and sales. This leads to the conclusion of Sankoloba and Swami (2014) that the implantation of internal control and proper usage of accounting function will lessen the opportunity for theft among the jobholders inside the workplace.

It has been written in the book of Bronson, Carcello and Raghunandan (2006), that internal control serves as a tool for measuring the performance of small medium enterprises. Thereupon, the result had pointed out that the significant influence between internal control and the current state of small businesses actively exists.

For multiple rational causes, a solid internal control is demandable notwithstanding of the company’s proportion. Yet, the intensity of internal control varies according to the entity’s size (Doyle, Ge ; McVay, 2007). As a result of non-implication of competent internal control, SMEs are popular as a highly susceptible victim of embezzlement, pilferage, scams and other sundry illegalities among employees (Peterson ; Zikmund, 2004). The most applicable form of resolution to this dilemma is to run-through an examination of the firm itself, then the operating system to achieve a preferable administration and control of company’s properties and resources. The personnel involves particularly the senior management should hold maximum responsibility and accountability that the system works at its finest (Natividad, 2012).

Even before the rise of the monetary crisis, financial reporting complexity has already been argued and discussed. As defined by Peterson (2008) in relation to mapping of standards and transactions towards the financial statement, complexity in accounting is characterized as quantity of doubt. On the other hand, Hassan (2009) showed 3 main denotation involving complexity: first, a challenge towards financial statements users to absorb the topic about economic substance of transaction and overall company performance; secondly, difficulty of the financial statements users to convey information in a proper manner and apply corresponding standards; lastly, the adversity of other party attached in analyzing, auditing, and governing the reporting of financial statements.
In a dynamic and globalized market setting, one of the significant part in the system of interrelated propositions and factors affecting financial reporting is portrayed by complexity. It has been discovered by Sutthirat (2012) that in order to deplete the burden on reporting , SMEs form different side of the world are considering a possible solution of moving into a basic and simpler reporting requirement due to the rapid acceleration of complexity. As a form of reference, IFRS Foundation (2015) announced that the issuance of IFRS for SMEs in July 2009 is a response to the international need for the IASB to its improved global standards for the common good. Kaya & Koch (2015) had rationalized that in comparison to the full IFRS, IFRS for SMEs is simpler and easier.
For several years now, complexity has been attached due to an outcome of various behavioural, cultural, institutional, political and structural elements in financial reporting (Said, 2009). In the report of FRC Task Force (2012), the escalating complex on reporting requirements was because of the nonstop business industry’s complexity itself and currently inevitable. As an argument, the constant expansion in the complete set of standards, regulations and its existing interpretations has made the standards themselves a source of complexity (Palmrose, 2009). Furthermore, Peterson (2008) supported that accounting complexity being costly to financial markets lends support to regulators’ concerns about accounting complexity.

In the business atmosphere today, and in the accounting profession, the manner on how the financial reports are prepared has been significantly affected by the latest developments. As a matter of fact, in the executive summary of the Association of Chartered Certified Accountants (2009), the trust and confidence in the financial reporting system was negatively affected by the growing complexity in the financial reporting standards. The verdict of the regulators come into the conclusion that the serious problems were due to lack of clarity and transparency and taking the lacking out of the picture would improve the financial reporting standards (Antturi, 2014). To manage complexity outstandingly, an applicable option has been suggested by the FRC Task Force (2012): make good use of up-to-date development in the field of information technology and delivery.

Das & Mukherjee (2015) explained that the competency is one of the most vital ideas for business to keep on improving in any day after day job performance starting from task management to recruitment, then training and development to preferement. The capability of utilizing and maximizing personal abilities, attributes, knowledge, practices and skills to efficiency perform specific task or handle a certain position is perceived as competency. Kasim (2015) cited that competency allows an individual to reach excellent performance.

Carnegie and Napier (2010) charted that for a long period of time, people had the perception that accounting is a profession where services are offered with outmost ethical behaviour and great professionalism. Mutiso and Kamau (2013) had identified that in both international and local, significant measures had been established in order to transform the financial statement more dependable and more important.

To achieve the going concern perspective of the business and win over the confidence and trust of the client, professional accountants must provide a high rated quality and satisfying services. Keeping competence within the profession would lead individuals to strive on learning all throughout their job develop analytical skills and updated with the latest changes and improvements (The World Bank, (2016).

In the public accounting practices, practitioners must sustain professional knowledge and expertise and make use of it carefully in accordance with the generally followed Code of Ethics, in order to provide an assurance towards the client as well as the employer a high level of satisfaction in the services being offered (Idawati & Gunawan, 2015).

Financial statement preparers must conform to the disclosure requisite of IFRS. Since the accounting standards only provide guidance to the minimum disclosure requirement, preparers have the discrepancy as to what extent of disclosure it would present (KPMG International Standards Group, 2016). Unfortunately, Mutiso and Kamau (2013) had known that there was non-existence of professional judgment framework that can aid the preparers in making a more consistent judgment, which leaves the preparers with no fundamental basis as to the limitation of transparency that would be enough to understand the financial report.
In the writing of Mutiso and Kamau (2013), there was an affirmative direct relationship between the complexity and the competence level of preparing the financial reports. The accountant with greater experience and qualification articulated higher concerns that preparing financial reports have become more complicated. This could lead to the fact that the more qualified staffs are tasked with the duty of preparing reports using IFRS, since it was considered not that easy (Association of Chartered Certified Accountants, 2009).

Jui and Wong (2013) alleged that the value of professional accountants in the business society in assuring the quality of financial reporting was not emphasized more than necessary. Professional accountants in business mostly set themselves being at the frontier of protecting the financial reporting’s integrity.
On the other hand, Australian Institute of Management (2017) discussed that the financial information produced by the company is a primary responsibility of the management. As such, professional accountants in businesses therefore have the mission of shielding the worth of financial reporting directly at the source where the numerical figures and statistics are produced. A professional accountant with high competency in business is a priceless asset to the company. These individuals utilize a penetrating mind to their job established on the basis of their understanding of the company’s economic status. Professional accountants in business ask tough questions using their skills and intimate perception of the company and the environment in which it manages. Their training ground in accounting permits them to easily adopt a realistic and purposeful approach in solving matters involved (Cooraaf, 2015). Predominantly in SMEs, this is a precious asset to management, where the certified accountants are often the only skillfully qualified members of the team
Theoretical Framework
This research was theoretically based on the proposition of Mutiso and Kamau (2013). Their study gave emphasis on the factors influencing the preparation of financial reports in the banking division. They distinguished some factors that concerns with the financial reporting. They had discerned that the level of exposure, comprehensiveness and complexity in preparing disclosures has a substantial relationship with the preparation of financial reports. Furthermore, they had identified that adoption of IFRS had complicated the preparation of the financial reports as a result of the obscurity in clarifying and relating the standards as well as lack of precision in the articulation of the standards. They also noticed that the expertise of the preparers of financial reports gave birth to an issue that may have a direct effect in the preparation of financial statements. Further concerns which were raised as the root of complexity consisted of lack of pellucid guidance from the line of work, lack of involvement by the preparers in standard setting procedure, amplified number of standards, a sudden change in standards and lack of screening devices for conformity with the reporting standards.
Shahwan (2008) stated that the financial statements should be appropriate and reliable for decision making purposes. Generally speaking, accounting standard is the primary basis to meet those qualitative characteristics by making financial reports done by a skilled personnel. The guidelines in presenting a fair and accurate view of financial performance and statement of financial is located in then IFRS as reported by Financial Reporting Council (2014). It is important to organize and present the financial statements in accordance with the international accounting standards. The users of financial information will benefit from the organization of the standards. Since the degree of usefulness of the accounting information is developed then it is deemed essential (Palea, 2013). Likewise, fulfilling the requisites of the accounting standards catch the attention of investors, makes financial statements more convenient and boosts comparability. Obviously, non-compliance with the standards will result to quite a few of negative outcome and generally will trim down the level and range of financial information’s worth (Sarea ; Dalal, 2015).

Conceptual Framework
This conceptual framework shows the independent and the dependent variables used in the study and how they relate to each other. The variable that the researcher wishes to explain is the dependent variable while the variables that causes changes or influences the dependent variable are the independent variables.
This research aimed to determine the factors affecting the financial reporting among merchandising SMEs in Davao City. Presented in Figure 1 below is the conceptual framework of this study. In this study, the dependent variable is the compliance with PFRS in the financial reporting while the independent variables are the factors affecting the financial reporting of merchandising SMEs.

Compliance with PFRS in the
Financial Reporting of
Merchandising SMEs
Factors affecting the
Financial Reporting of
Merchandising SMEs

Figure 1. Conceptual Framework of the Study

Chapter 3
Method
This chapter presents the procedures and methods used in performing the study. It provides the necessary explanations on the instrument employed in collecting the data and the statistical tools used for the analysis and interpretation.

Research Design
The assessment of information and arrangement of situations for collection in a manner that targets to combine relevance to the research purpose in a financial system manner is called research design (Saleem, Tabusum ; Batcha, 2014). The study adopted the exploratory factor analysis because it identifies the underlying structure of relationships between the variable and the respondent. Owens (2002) stated that this design has the gain of uniqueness due to the impartial representation of population of interests and the information that is being accumulated from different sources and standardization of measurement as identical facts is collected from each respondent. This research design provides the classification of the factors that indicates significant influences in the degree of compliance of PFRS of the chosen merchandising SMEs in Davao City.

Research Respondents
The respondents of this study are the employees in charge of preparing the financial report of SMEs from the different accounting firms in Davao City. A total of 100 financial statement preparers were chosen to answer the constructed survey questionnaires. They are the respondents of this study because the researchers aimed to know the factors that show significant effect on the level of compliance of PFRS of the selected merchandising SMEs in Davao City. Purposive sampling technique was used by the researchers in getting an approximation of the truth. Purposive sampling is a non-probability sampling method and it occurs when the samples are selected based totally on characteristics of a population and the goal of the study (Crossman, 2017). This sampling technique is the most appropriate method since the researchers desire to attain participants from professionals that they think were capable of assembling a representative sample.

Research Instrument
The research instrument used in collecting the data consisted of 2 parts. Part 1 is a constructed questionnaire which identified the factors affecting financial reporting. Part 2 is an adapted questionnaire that determined and measured the compliance of PFRS in financial reporting of merchandising SMEs by the use of nominal scale. The instrument went through modification by the researchers for the appropriation of the items and had been validated by panel of experts.

Data Interpretation
This part includes asking permission to conduct this study and the distribution of questionnaire. This study used primary data in doing the research. Along the process, the following steps were exercised.

1. A letter of permission to conduct a study. The letter of permission was addressed to the selected merchandising SMEs in Davao City.

2. Verification of the questionnaire. The questionnaire was checked by the adviser and the experts. Any desired changes were subjected to modification of the questionnaire that would provide the best instrument for the research.

3. Distribution of the questionnaire. After the approval, the researchers went to the selected merchandising SMEs in Davao City. The researchers provided 3 original copies of the questionnaire to the respondents.

4. Collection of data. The questionnaires were collected and retrieved during the respondents’ convenient time.

5. Interpretation of the data. The gathered data were interpreted and analyzed by the statistician and the results were translated, checked and tallied by the researchers.

Statistical Tools
The methods below were the statistical tools used as equipment in analyzing and interpreting the aggregated data.
Frequency/Percentage. This tool was used for the determination of factors affecting the compliance with PFRS among Merchandising SMEs.
Mode. This tool was used to measure the level of compliance with PFRS in financial reporting of Merchandising SMEs.

Chi-Square. This tool was used to identify which factors significantly influence compliance to PFRS.

Chapter 4
Results and Discussion
This chapter presents the analysis, presentation, discussion and interpretation of the data collected from the administered questionnaires. Statistical tables and figures obtained from the analysis were included for basis of interpretation.

Table 1
Factors Affecting the Compliance to the PFRS Financial Reporting of Merchandising SMEs in Davao City
FactorsFrequency
Accounting Measurement 50
Accounting skills of the preparers 49
Business Interest 17
Choice of Accounting Policies 38
Competency of the Preparers 49
Complexity of the Standards 51
Cost of Hiring Accounting Professionals 30
Potential Earnings Manipulation and Fraud 18
Increased number of Standards 25
Internal Control of the Entity 54
Lack of Clear Guidance from the Profession 11
Lack of Financial Data 60
Lack of Monitoring Skills 30
Lack of participation by the preparers in the
standard setting process 22
Personal interest of the SME 16
Poor governance of the management 16
Poor record keeping 62
Others: Recording 3

Illustrated in Table 1 are the factors affecting the compliance of financial reporting among merchandising SMEs in Davao City. The factors listed were determined by conducting an informal study, asking the factors from various accounting firms and its clients and by gathering information from the internet. It was accurately determined by the researchers except for recording which was also one of the factors that influenced compliance to PFRS (Metcalf, 2017).

Recording was cited by the respondents as one of the factors affecting the compliance of financial reporting. The economic facts permit owners to decide whether or not the commercial enterprise is working at a profit and whether the business was able to meet its commitment as they fell due. The capability of SMEs to appropriately and reliably measure their financial performance and position will be restricted if the information are inaccurately recorded (Dawuda & Azeko, 2015).

Elmaleh (2007) argued that financial statements cannot be beneficial if they were primarily based on unreliable and faulty recordings of transactions. The statements full of erroneous figures may look satisfactory, but in reality were riddled with inaccuracies. Deliberate dishonesty and incompetence are the two fundamental sources of unsound financial statement.

Financial statements make it easier for the management to make educated decision-making and strategic planning. The above-mentioned points emphasize why it is imperative that companies try to maintain the accuracy of their financial statements. In generating these statements, following GAAP or other applicable accounting standards is a critical factor in ensuring they present the real economic image of the business to management and external stakeholders (Kumaran, 2015).

Table 2
Compliance with the PFRS in the Financial Reporting of SMEs
Standards Descriptive Level
1 Moderate
2 High
3 High
4 High
5 High
6 High
7 High
8 High
9 High
10 High
11 High
12 High
13 Low
14 Moderate
15 None
16 None
17 None
18 None
19 High
20 High
21 High
22 Moderate
23 Low
24 None
25 High
26 High
27 Low
28 High
29 None
30 High
31 High
32 High
33 High
34 High
35 High
36 Low
37 Moderate
38 High
39 High
40 High
41 High
42 High
43 High
44 High
45 Moderate
46 None
47 None
48 None
49 None
50 None
Table 2 presents the compliance of merchandising SMEs with the financial reporting standards. It shows that 30 out of 50 standards were highly complied by the selected respondents, 5 moderately complied, 4 lowly complied and there were only 11 standards which they did not comply with.

Deaconu, Popa, Buiga and Fulop (2009) did not advise a unique standard for SMEs for all accounting systems because of the cultural variety that has more potent effect in the SMEs that generally have no global relations and no strong need for a common language.
In the study of Dang-Duc (2011), he exposed that SMEs’ compliance with accounting standards is limited. He found out that compliance with accounting standards became a huge issue and SMEs perceived limited understanding about the said matter. The primary drivers of the businesses’ compliance with accounting standards are legal requirements and the external users’ perception of accounting information.

According to Linient (2014), when entities do not observe compliance with the standards, they were exposing themselves to various financial risks. Financial statements are susceptible to a number of manipulations by the management. On the other hand, Barth (2008) was of the opinion that being in compliance with the IFRS will improve the informational environment as well as enhancing the ability of financial analysts to provide more accurate forecasts.

Lima, de Lima and de Carvalho (2010) also argued that there was a statistically vast relationship between the compliance disclosures and market liquidity variables, it implied that businesses with excellent compliance to the requirements have greater liquidity and lower trading costs, and their share price is not prone to the influence of individual investors.

Additionally, Alfaraih (2009) said that compliance with the financial reporting standards, relevance of book values and earnings are absolutely correlated. This indicated that companies with higher level of compliance to IFRS disclosure requirements would have more relevant book values and higher earnings compared to businesses that do not comply with the financial reporting standards.

Table 3
Significant Factors affecting Compliance with the PFRS Financial Reporting of Merchandising SMEs in Davao City
Chi-squared valueP-valueInterpretation Decision on Ho
0.990496 0.00 No significant influenceAccept
Lastly, Table 3 shows that the identified factors affecting financial reporting do not have significant influence on the level of compliance of merchandising SMEs on PFRS resulting to acceptance of the null hypothesis.

The outcome of the study contradicted with the results of Budaraj and Sarea (2015) and this may be due to the various factors affecting compliance with financial reporting standards and the diverse situation of sample companies. Conversely, Street and Bryant (2000) studied the factors linked with the extent of compliance to financial reporting standards and they found no significant relationship.

Chapter 5
Findings, Conclusion and Recommendations
This chapter presents the summary of the findings, the conclusions drawn from the results and the recommendations of the study.

Summary of Findings
The results are summarized as follows:
1. Poor-record keeping was identified as the most compelling reason why merchandising SMEs cannot comply to PFRS while lack of clear guidance from the profession was known to be the least motive in complying with the standards.

2. Majority of the merchandising SMEs had high compliance to the financial reporting standards.

3. The factors affecting the financial reporting have no significant influence with the level of compliance on PFRS among merchandising SMEs resulting to acceptance of the null hypothesis.

Conclusions
In proportion to the statistical result, the null hypothesis had been accepted which means that there are no factors influencing the level of compliance with the PFRS among merchandising SMEs. Thus, being informed about the factors will not affect their financial reporting in accordance to the prescribed standards. Additionally, the findings of our study revealed that merchandising SMEs have high level of compliance to PFRS. Furthermore, the study concludes that poor-record keeping, lack of financial data, internal control of the entity, complexity of the standards and accounting measurement are the factors affecting financial reporting. These five factors have the potential of improving the compliance of merchandising SMEs with the financial reporting standards. Keeping accounting documents is essential for making decisions. Business adjustment and records also help to enhance business efficiency and productivity for effective business performance. This paper also uncovered that most SMEs did not have a well-designed and effective set of internal control procedures and their failure to properly keep financial records could also be attributed to it. Internal control procedures that are well-designed and effectively implemented guarantees good financial control and records. In addition, the more complex the standards are, the greater the extent of non-compliance. Finally, this research contributed information to preparers and academics in accounting about the reasons behind non-compliance of most merchandising SMEs. This study also opened up possibility of further studies on this topic.

Recommendation
In view of the findings and conclusions drawn from the study, the researchers suggest the following recommendations:
Small and medium enterprises (SMEs) may ensure that complete and accurate business records are kept because they are essential for the preparation of financial statements. Develop training programs and courses aimed at small business owners and their respective staffs and hiring knowledgeable and skilled workers will ensure that the small business owners are equipped with adequate business knowledge with respect to the record keeping of their business.

There is a need for the Financial Statement preparers of the SMEs to embrace proper accounting records keeping practices by setting up the right record keeping system. They may use electronic record keeping system for an efficient way to keep financial records and make it easier to capture information, generate reports, and meet tax and legal reporting.
The accounting students could be well-informed about the topic about SMEs specifically the factors affecting the compliance of financial reporting and the importance of record keeping, accurate financial data, internal control and accounting measurement in relation to the financial reporting standards.
The researchers recommend the future researchers to use other potential variables from different context in the form of focusing their study to the reason behind the factors presented in the study. They could also expand the scope of the study by changing their target respondents into the other sector/s of business.

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