(IFRS) In Nigerian Companies
1Muhammad Muhammed, 1Igodo Ogbonnaya Eze
1Department of Accountancy, College of Business and Management Studies, Jigawa State Polytechnic Dutse - Nigeria
Abstract: The study focused on the adoption process of International Financial Reporting Standards (IFRS) and its impact on companies in Nigeria. Nigeria has embraced IFRS in order to participate in the benefits it offers, including attracting foreign direct investment, reduction of the cost of doing business, and cross border listing. This research is based on the data obtained from literature survey and archival sources in the context of the globalization of International Financial Reporting and the adoption of International Financial Reporting Standards (IFRS). The results of the study indicate that IFRS adoption in Nigeria will have the potential to be beneficial to a wide range of stakeholders. The benefits notwithstanding, there are however, a number of challenges to be faced in the process of adoption of the new standard including the ethical environment in Nigeria, the development of a legal and regulatory framework, awareness campaign, and training of personnel. Recommendations were made to forestall such challenges which include strengthening education and training, establishment of an independent body to monitor and enforce accounting and auditing standards.
Keywords: International Accounting Standard, Accounting Quality, Banking Industry, International Financial Reporting Standard, Nigeria Accounting Standard, Nigeria
Introduction
The International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) consists of a set of international accounting principles, the adoption of which aims at establishing clear rules originally within the European Union to draw up comparable and transparent annual reports and financial statements (Cardozza, 2008). With the increasing internationalization of trading activities amongst countries of the world, necessitated by globalization, the Nigerian Government was persuaded to approve a roadmap to introduce this set of uniform accounting standards initially for public interest entities. Historically, the introduction of an acceptable global high quality financial reporting standards was initiated in 1973 when the International Accounting Standard Committee (IASC) was formed by sixteen (16) professional bodies from different countries such as United States of America, United Kingdom, France, Canada, Germany, Australia, Japan,Netherlands and Mexico (Garuba and Donwa, 2011).IFRSs are single set of high quality understandable standard for general purpose of financial reporting which are principles based in contrast to the rules based approach (Garuba and Donwa, 2011). While some countries have been using these standards for decades, they are however new for transition economies like Nigeria.
As a result of increasing globalization resulting in more competition, it becomes imperative that countries and companies alike to address issues that will make them become more
61
attractive of investors’ capital which is like the proverbial beautiful bride (Akpan-Essien, 2011). Accessibility to capital, both from local and foreign investors, amongst other benefits, is one of the incontrovertible gains derivable from adopting the global accounting standards.
And for companies to avail themselves of this gain, as contended by proponents of IFRS, they have to adopt this set of accounting standards which will arguably help entrench best practices in financial reporting. In Nigeria, implementation IFRS was launched in September 2010, but the successful adoption and implementation of these standards remain a mirage in Nigeria (Akpan-Essien, 2011). The adoption was organized such that all the stakeholders will use the IFRS by January 2014. The adoption was scheduled to start with public listed entities and significant public interest entities who are expected to adopt the IFRS by January 2012.All other public interest entities are expected to mandatorily adopt the IFRS for statutory purposes by January 2013 and small and medium sized entities shall mandatorily adopt IFRS by January 2014, (Jubril & Michael, 2010).
According to Ali-balogun, (2014), the recent adoption and implementation of International Financial Reporting Standards (IFRS) in Nigeria has been intensified due to the forces of globalization which are guiding the regulation of the world financial markets and economies.
He added that “in spite of the opportunities from the adoption of IFRS by most countries, the procedure for adoption of IFRS suffers a setback in Nigeria. These include; cost implication suffered by the users of IFRS, technicality in the method and strategy for adoption, inadequate capacity building for transition, all of which reflected the low level of preparedness by government and users of the standards for smooth transition. This was very evident in a special study conducted by the World Bank group on the observance of stand ards of codes for Nigeria when it was revealed that Nigerian Accounting Standards are inadequate as authoritative guide for preparation of financial statement in Nigeria (World Bank 2004).
More so, the rampant cases of banks that reported good performance and soon collapsed without notice, raised a lot of concerns about the integrity of the financial statement of banks reported under Nigerian statement of accounting standards (SAS). However, implementation of IFRS in Nigerian banks has been motivated due to many problems associated and envisaged in the banking system. These problems are: inaccurate reporting and non-compliance with regulatory requirements, decrease in bank earnings and poor revenue generation, poor return on shareholders’ funds due to operating losses, late or non-publication of annual accounts, lack of comparability of financial statements of different banks, falsification or creative accounting practices, weak corporate governance and falling ethics. As Nigeria now belongs to the League of IFRS-adopting countries with effect from 2012, perhaps persuaded by the gains it promises.
It is against this background this paper will examine the adoption process of International Financial Reporting Standards (IFRS) and its impact on companies in Nigeria. The rest of the paper is structured as follows: section two focuses on the review of relevant literature, while section three and four focuses on research design and data analysis and results respectively.
While section five discusses key findings from the results of the analyses, the final section concludes the paper and offer recommendations.
Review of Related Literature
The Concept of International Financial Reporting Standards
International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements. According to Nobes (2006), the term International Accounting Standards convergence is not a new agreement; the thought
62
originally came up during the latter part of 1950, in response to post World War II economic and financial integration and the associated enhancement in capital flow across borders. Prior to this time, efforts were geared towards Harmonization of Accounting Standards. This simply means decreasing dissimilarity in accounting concepts and principles adopted in most capital markets in nations around the world. The international financial reporting standards (IFRS) consist of standards issued by International Accounting Standards Board from 1st April, 2001.
Nwabueze, (2012) as in Ezeani & Oladele (2012) opined that research into the financial regulatory bodies has been scanty over the decades. Few authors have acknowled ged that adherence to financial reporting standards require an organization and institutions to change its culture so as to adapt and take the benefits of adherence to these reporting standards. If organizations or institutions fails to change its culture, then benefits derivable from observing financial reporting standards will not be achieved (Olademeji, 1995).
Aghator and Adeyemi (2009) stated that with the dawn of globalization and increasing demand for transparent, comparable financial information in the markets, the IASC was restructured in the year 2001 by creating the International Accounting Standards Board (IASB), among other changes. The IASB is responsible for developing, in the public interest, a single set of high quality, comprehensive and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements and other financial reporting to help participants in the various capital markets of the world and other users of the information to make economic decisions. Consequently, the IASB has since inception issued a number of IFRS and interpretations.
Aghator and Adeyemi (2009) opined that International Financial Reporting Standards (IFRS) refers to a series of accounting pronouncements published by the International Accounting Standards Board to help preparers of financial statements, throughout the world, produce and present high quality, transparent and comparable financial information. Currently, most financial statements prepared for reporting in Nigeria especially for Public Listed Entities and Significant Public Interest Entities in Nigeria and Other public Interest Entities are drawn up in accordance with requirements of IFRS,with this Nigeria reporting entities are using the same frame work as their peers worldwide, which would enhance the relevance of their reports in the international arena. In recent times, we have seen many countries in Africa as well as in European Union countries adopting IFRS as the financial reporting framework, though this adoption is subjected to some modifications in alliance to countries GAAP to aid credible and reliable information.
However, Givoly, Hayn, & Katz, (2017) studied the value relevance of accounting information, emphatically declared that looking at value relevance of accounting information content from stockholders’ point of view is not the same with that of debt holders. On that note, their information needs differs. Having acknowledged the difference, Givoly et al. (2017) investigated the change in the information content of accounting information over time-based on debt holders needs. The study examined the association between accounting numbers and bond valuation and returns and report that the information content to debt holders has increased over time. However, opposing to Barth, & McClure (2017) assert of constant increase in value relevance of accounting numbers, the study reported that the information content to equity holders has declined. Givoly et al. (2017) ascribed the reported increase information content to debt holders to changes in credit risk and other reporting factors. Umoren, Akpan, and Ekeria (2018) concentrated on quoted financial companies in Nigeria and examined the value relevance of accounting information content of 10 banks, using data that covered from 2007 to 2016. Ordinary least square (OLS) regression was used for data analysis, and result showed an
63
insignificant relationship between earnings per share, book value per share and market price per share both in pre-IFRS and post-IFRS periods. Kwon (2018) investigated the value relevance of accounting information content of companies quoted on the Korea stock exchange.
The study used panel data of large, medium and small companies; the study found that value relevance of book value, accounting earnings, operating income, cash flows and operating cash flows significantly changed pre and post-K-IFRS adoption. Ahmadi and Bouri (2018), in the study of Tunisian banks and financial institutions quoted on the Tunisian Stock Exchange engagement on value relevance aimed at assessing the relevance of accounting information contents for the period of 2010 to 2015 with a sample size of 24 banks and financial institutions.
The result showed that earnings and book value are statistically significantly with firm value as well as related to the firm stock value. A study by Rahayu, and Razak (2019) concentrated on the impact of the mandatory conversion of IFRS on net income in Saudi Arabia. They used comparability index for assessing the impact of IFRS on net income. They found a negative relationship between the depth of transitional disclosure shown in the reconciliation statement and the impacts on earnings; hence the relationship is not significant. The result shows that the conversion to IFRS leads statistically significant decrease in 2016 net income.
IFRS and Accounting Quality
The adoption of IFRS around the world is occurring rapidly to bring about accounting quality improvement through a uniform set of standards for financial reporting. However, accounting quality is a function of the firm’s overall institutional setting, including the legal and political system of the country in which the firm resides (Bhattacharjee & Islam, 2009). IFRS is contingent on at least two factors. First, improvement is based upon the premise that change to IFRS constitutes change to a GAAP that induces higher quality financial reporting. For example, Barth,(2007) find that firms adopting IFRS have less earnings management, more timely loss recognition, and more value relevance of earnings, all of which they interpret as evidence of higher accounting quality. Existing literatures document improvements in accounting quality following voluntary IFRS adoption (e.g., Barth et al, 2008; Barth, Landsman, & Lang, 2007) suggest that accounting quality could be improved when alternative accounting methods used by managers to manage earnings are eliminated. They compare earnings management for firms that voluntarily switch to IFRS with firms that use domestic accounting standards. They find that after IFRS adoption, firms have higher variance of changes in net income, a higher ratio of variance of changes in net income to variance of changes in cash flows, higher correlation between accruals and cash flows, lower frequency of small positive net income, and higher frequency of large losses.
In a study, Daske et al. (2008) examine the capital market effects of mandatory IFRS adoption.
They find evidence that is consistent with reduced information asymmetry in association with mandatory IFRS adoption. They argue that the effect could be driven by network effects rather than accounting quality improvements.
Adopting IFRS Nigerian with Particular Reference Banking Industry
The Nigerian banking sector is made up of commercial banks and other financial institutions such as finance companies, micro-finance companies, discount houses and mortgage institutions. The Central Bank of Nigeria (CBN) regulates their activities. The CBN has authorized only 21 commercial banks to transact business in Nigeria. Out of these banks, only 15 are listed in Nigeria Stock Exchange (NSE) NSE fact book. Nigeria listed banks and other public and significant public interest entities were required to adopt IFRS for years beginning on or after January 1, 2012. Among the listed companies, the listed banks were the first to
64
complete the transition and have adopted the standard for their reporting (Adebimpe & Ekwere, 2015). Many countries of the world have made the decision to adopt IFRS given by the understanding that IFRS is a product with network effect. As more countries adopt IFRS, it becomes more appealing to others that are yet to consider the adoption.
According to closure rules in IAS 32 and IAS 39 dictating measurement rules for financial assets and liabilities was thus mired in controversy; so IFRS 9 has now solved the problem and meet the user needs. According to Akpan-Essien (2011) the adoption of the IFRS in the Nigerian Banking sector will ensure transparency, better accountability and integrity in financial reporting necessary for addressing the crisis in the financial sector in Nigeria which was responsible for the Nigeria loss of the Foreign Direct Investment (FDI) in the oil and gas sector to countries such as Ghana who have begun oil production in commercial quantity and who are perceived to have better financial reporting standards in place.
Benefits of IFRS Adoption
It is advocated that adoption of IFRS will lead to: greater transparency and understandability, lower cost of capital to companies and higher share prices (due to greater confidence of investors and transparent information), reduced national standard-setting costs, ease of regulation of securities markets, easier comparability of financial data across borders and accessory investment opportunities, increased credibility of domestic markets to foreign capital providers and potentials foreign merger partners, and to potential lenders of financial statements from companies in less-developed economics (Daske et al. 2008). It will also facilitate easier international mobility of professional staffs across national boundaries. For the multinational companies, it will help them to fulfill the disclosure requirement for stock exchanges around the world (Armstrong, Barth, Jagolizer & Riedl, 2007, Covrig, et al., 2007, Daske et al., 2008).
Other benefits include; the lower susceptibility to political pressures than national standards, continuation of local implementation guidance for local circumstances and the tendency for accounting standards to be raised to the highest possible quality level throughout the world.
(Choi, 1998; Alfredson. R, Leo,K , Picker, R , Pacter, P & Radford, J. 2004). The net market effect of convergence is a function of two effects. The first is the direct informational effect - whether convergence increases or decreases accounting quality. The second is the expertise acquisition effect or whether investors become experts in foreign accounting, which depends on how costly it is to develop the expertise. Therefore, ex ante net market effect of convergence is uncertain.
Armstrong et al (2007) found that investors expected net benefits to IFRS adoption in Europe associated with increases in information quality, decreases in information asymmetry, more rigorous enforcement of the standards, and convergence. They find ;
1. An incrementally positive reaction for firms with lower quality pre-adoption information, which is more pronounced in banks, and with higher pre-adoption information asymmetry, consistent with investors expecting net information quality benefits from IFRS adoption.
2. An incrementally negative reaction for firms domiciled in code law countries, consistent with investors’ concerns over enforcement of IFRS in those countries and
3. A positive reaction tours adoption events for firms with high quality pre-adoption information, consistent with investors expecting net convergence benefits from IFRS adoption.
65 Challenges of IFRS Adoption in Nigeria
It is true that IFRS has come with its advantages, but we cannot rule out the fact that it also has some disadvantages. The adoption of IFRS is known to be a herculean task owing to the fact that several challenges are often encountered in the cause of implementation.
In Nigeria, Adejoh & Hasnah (2014) also is of the opinion that IFRS implementation posse’s major challenges for tax practice in Nigeria. For example, capital expenditure incurred is not tax deductible under Company Income Tax Act (CITA) in lieu of this CITA grant capital allowances to deserving tax payers which in some cases may be higher than depreciation expenses instead, IFRS decide to prescribe a tax depreciation rate for repair of plant and machineries. This will significantly affect the income statement and statement of financial position as there will be increase in net worth and increase in profit which may not be the true state of the financial statement. Another major challenge of IFRS implementation in developing countries is the ideal of developed countries wanting to dominant the IASB structure and standards setting process to the detriments of the developing countries through strong lobbying and opposition (Nobes & Zeff, 2008), to further buttress this point, Rahaman, & Mir, (2004) opined that International Financial Reporting Standards are “carbon copies” of standards originating from the UK and the USA with strong orientations towards maximizing shareholders wealth rather than the social functions of accounting.
Most developing countries have weak or even no structures to develop good accounting system and for that reason Ayuba, (2012) said that the first point of call when it comes to accounting issues is crafting and developing meaningful accounting system rather than adopting already structured standards from the developed countries. This ideal of Dominance will continue to pose challenges until it’s squashed because Adopters need assurance of IASB true independence with stable funding, expert staffing, appropriate governance to ensure standards setting process is free from undue influence and politicization maneuvers. This will ensure IASB legitimacy and assure the confidence of market participants and adopting nations around the world (Saudagaran, 2006).
. Also one of the main objectives for proposing the IFRS is to achieve a globalized capital market whereas most developing countries, Nigeria inclusive possesses weaker or no capital, then surely adopting these standards can be disastrous to some degree (Ayuba, 2012).
Theoretical Framework
For better understanding of the research topic and how the concept of attitude and organizational performance can be understood. It is very important and imperative to study a theory. This will help to see the correlation between attitude and job organizational performance. There is no generally accepted theory governing financial reporting disclosure (Schipper, 2007). This study is based on New Institutional Theory. New Institutional Theory has been widely used by various researchers in sociology, political science, business and management as well as information system and technology. The increasing use of institution theory in other research areas is also prevalent over the years. The corner stone year of the new institutional theory would have to be 1977 when John Meyer Published his paper ‘‘the effect of education as institution’’ in the American journal of sociology.
New institutional theory generated new paradigms for understanding how institutional pressures shape organizations and drive organizational change. The foundational pieces of new institutional theory include Meyer and Rowan’s 1977 work that argued that formal structure emerges in organizations as these organizations adhere to institutional norms and beliefs from
66
their larger organizational environment. As an organization adopts these beliefs, they become codified into the rules and practices that comprise an organization’s formal structure. ( DiMaggio & Powell, 1983). In the accounting research area, new institutional theory has been used to explain many case studies in management accounting, auditing and institutional accounting. Accounting as one of the tools to produce information from the organization cannot be separated from the organization norms, value and behaviour. Many longitudinal case study of management accounting use new institutional theory as a powerful tool to understand the behaviour of an organization over time.
The Researchers therefore noted that the fundamental reason or essence of a firm’s Financial Statement being disclosure in compliance with IFRS is to maximize mangers’ and firm’s value at the long run.
Methodology
The purpose of this study is to evaluate the impact of the implementation of IFRS in Nigeria Company. This study has narrowed down it research to the Nigerian Banking sector. The method employed was a case study method. This is done so as to be able to give the research a direction. The study uses the secondary data. Literatures were reviewed on the topic under discussion. Materials were also sourced journals and articles written by writer related to the topic under discussion.
Discussion of Findings
One of the finding of on the study was on the effect of IFRS implementation on the reported profitability of banks, it was discovered that IFRS has positive effect on the profitability of banks going by the net profit margin calculated. This was in agreement with the study of Ahmadi and Bouri (2018), who studied Tunisian banks and financial institutions quoted on the Tunisian Stock Exchange engagement on value relevance aimed at assessing the relevance of accounting information contents for the period of 2010 to 2015 with a sample size of 24 banks and financial institutions. The result showed that earnings and book value are statistically significantly with firm value as well as related to the firm stock value. However, it contradicts the result of Umoren, Akpan, and Ekeria (2018), who concentrated on quoted financial companies in Nigeria and examined the value relevance of accounting information content of 10 banks, and whose result showed an insignificant relationship between earnings per share, book value per share and market price per share both in pre-IFRS and post-IFRS periods. The result of this study is also in agreement with Kwon (2018) who investigated the value relevance of accounting information content of companies quoted on the Korea stock exchange. The study found that value relevance of book value, accounting earnings, operating income, cash flows and operating cash flows significantly changed pre and post-K-IFRS adoption.
It was also gathered that the implementation of International Financial Reporting Standards (IFRS) has significantly influenced banks’ earnings going by the return on assets calculated.
This was in line with the study conducted by Adebimpe and Ekwere (2015) on IFRS adoption and value relevance of financial statements of Nigerian banks. They found out that equity value and earnings of banks are value relevance to share prices under IFRS than under the previous Nigerian SAS. It however, agrees with the findings of this study. Moreso, the result of this study contradicts the study of Rahayu, and Razak (2019) who concentrated on the impact of the mandatory conversion of IFRS on net income in Saudi Arabia. They used comparability index for assessing the impact of IFRS on net income. They found a negative relationship between the depth of transitional disclosure shown in the reconciliation statement and the
67
impacts on earnings; hence the relationship is not significant. The result shows that the conversion to IFRS leads statistically significant decrease in 2016 net income.
Conclusion and Recommendations
From the study, we can see that Nigerian listed deposit money banks have implemented the provisions of IFRS framework. This therefore shows that IFRS implementation in Nigerian banks has a significant effect on the shareholders’ equity. This was based on the return on equity of banks calculated. Also, IFRS has a positive effect on the reported profitability of banks. This was based on the net profit margin of banks calculated. The changes occurred as a result of the introduction of the fair value in IFRS. This concept has a significant effect on the reported profitability of banks, because with fair value, you have impairment loses both on assets and financial instruments. The loan loss provision under IFRS also contributed to changes in the profitability of banks. Under Nigerian general accepted accounting principles loan losses were provided for using cost model. This makes the managers of these banks not to engage in income smoothening.
Conclusively, the adoption of IFRS continues with many countries setting timetable or roadmap for adoption expecting to reap the benefits of IFRS adoption. Nevertheless, there are numerous challenges a country must confront and overcome. A critical assessment of countries where IFRS has been adopted and implemented reveals that countries like Nigeria which has just adopted IFRS or those countries about to adopt or converge their local GAAP with IFRS must be adequately prepared. IFRS has a significant effect on the earnings of banks. This was in line with the return on assets calculated. It showed a positive effect on the return on investment of banks. This will boost the level of confidence of global investors and investment analysts in the financial statements of Nigerian banks.
It is therefore on this note that the following recommendations are made on how to better improve the standards of organizations in Nigeria in the adoption and the implementation of the IFRS policies. These recommendations are:
There should be enlighten campaigns on the potential impacts of adopting IFRS by the regulatory authorities presently in Nigeria, since the effective date of implementation has been embarked upon. A rigorous capacity building programs should be embarked upon by all regulatory bodies and training institutions in order to provide the needed manpower for IFRS implementation.
Also, companies should prepare adequately on all fronts for the implementation of IFRS.
Companies should endeavour to use the opportunity presented by the adoption of IFRS to improve their business process and procedures. Companies that are required to adopt IFRS should also be involved in capacity building by organizing conferences and seminars for members and staff of the company on IFRS.
In addition to the above mentioned recommendations, Nigeria’s adoption of IFRS should be supported as a matter of urgency to enable full attainment of the country’s economic potential.
As the time table for the adoption of IFRS in Nigeria has been determined, the need to properly re-evaluate the activities of the major institutions connected with the implementation of the new standard should be urgently considered.
Furthermore, at the moment in Nigeria, IFRS is not in the syllabus of the students in tertiary institution, IFRS should be included be included in the syllabus of Accounting Department in