INTERNATIONAL FINANCIAL REPORTING STANDARDS AND THE QUALITY OF FINANCIAL REPORTING IN NIGERIA

INTERNATIONAL FINANCIAL REPORTING STANDARDS AND THE QUALITY OF FINANCIAL REPORTING IN NIGERIA

The aim of this study is to evaluate the relationship between International Financial Reporting Standards (IFRS) and the quality of financial reporting in Nigeria.

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The IAS/IFRS (International Accounting Standards/International Financial Reporting Standards) 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). Their adoption represents an essential element to obtain an integrated, competitive, and attractive beyond the European capital markets. 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 (PIEs).

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). According to Ezeani and Oladele (2012), this body was properly recognized in 2001 and later transformed into the International Accounting Standards Board (IASB) which developed accounting standards and related interpretations jointly referred to as the International Financial Reporting Standards (IFRS).

The quality of financial reporting is indispensable to the need of users who require them for investment and other decision-making purposes (Fashina and Adegbite, 2014). Financial reports can only be regarded as useful if it represents the “economic substance” of an organization in terms of relevance, reliability, comparability, understandability, timeliness and simplifies the interpretation of accounting numbers (Kenneth, 2012). Before the IFRS adoption era, most countries had their own standards with local bodies responsible for developing and issuance of the local standards even if some of them align largely with the IAS. In this vein and in the Nigerian context, the Nigerian Accounting Standards Board (NASB) was responsible for developing and issuing standards known as Statements of Accounting Standards (SAS) and in the new dispensation, the body was renamed Financial Reporting Council (FRC) of Nigeria as the regulatory body overseeing the adoption and implementation IFRS (Kenneth 2012). As a result of increasing globalization resulting in more competition, it becomes imperative that countries and companies alike address issues that will make them become more attractive to investors’ capital which is like the proverbial beautiful bride (Essien-Akpan, 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.

Apparently, in a bid to take her own share of the benefits of using a set of accounting standards that not only allows for but also enhance the comparability of financial reports across many geographical frontiers, on Wednesday, 28 July 2010, the Nigerian Federal Executive Council accepted the recommendation of the Committee on the Roadmap to the Adoption of IFRS in Nigeria, that it would be in the interest of the Nigerian economy for reporting entities in Nigeria to adopt globally accepted, high-quality accounting standards by fully adopting the International Financial Reporting Standards (IFRS) in a Phased Transition (FIRS, 2013; Fashina and Adegbite, 2014). In December 2010, following the approval of the Federal Executive Council, the Nigerian Accounting Standards Board (NASB), (now designated as Financial Reporting Council of Nigeria (FRCN)) issued an implementation roadmap for Nigerian’s adoption of IFRS which set a January 2012 date for compliance for publicly quoted companies and banks in Nigeria.

Relatedly, according to Fashina and Adegbite (2014), the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission also adopted this date for compliance and has issued guidance compliance circulars to ensure full implementation of IFRS in Nigeria. The Council further directed the Nigerian Accounting Standards Board (NASB), under the supervision of the Nigerian Federal Ministry of Commerce and Industry, to take necessary actions to give effect to the Council’s approval. As part of plans to meet international standards, the Federal Government has disclosed that the new accounting system, the international financial reporting standard (IFRS) should take off in Nigeria on 1st January 2012, especially with Public Interest Entities. In Nigeria, the government has taken its stand to involve all stakeholders including institutions before it finally decided to adopt the IFRS on a gradual basis. IFRS for SMEs is to be mandatorily adopted as of January 1, 2014. This means that all Small and Medium-sized Entities in Nigeria have been statutorily required to issue IFRS based financial statements for the year ended December 31, 2014.

The adoption of IFRS has been argued in contemporary literature to offer numerous financial and non-financial benefits. It is therefore in this connection that Barth et al. (2008) argued that IFRS (and their predecessor IAS) constrain managerial discretion while Daske et al., (2008) submitted that IFRS imposes a more comprehensive and highly detailed set of disclosure requirements than domestic accounting standards. When disclosure is improved upon and managerial discretions, with respect to the treatment of accounting transactions, are constrained, this argument suggests that IFRS will improve accounting quality and engender

better financial reporting practices. Importantly, improved comparability is also one of the value-adding characteristics of IFRS as contended by its advocates. Many countries all over the world, including Nigeria, are now IFRS-compliant. As a corollary, it is now less costly for investors to compare and evaluate firms inside and outside industries and countries (Covrig, DeFond, and Hung, 2007). As Nigeria now belongs to the League of IFRS-adopting countries with effect from 2012, perhaps persuaded by the gains it promises, it, however, remains to be convincingly empirically established the extent to which this set of accounting standards have impacted on financial reporting practices in Nigeria. This study, therefore, is an attempt to provide evidence on the relationship between International Financial Reporting Standards and the quality of financial reporting in Nigeria. To the best of the knowledge of the researcher, no study has been carried out in this area where reliability and relevance serve as measures of the quality of financial reporting. This study, therefore, fills that gap.

1.2 Statement of the Problem

The pre-adoption conformity of national GAAP to IFRS determines the significance, and therefore the benefit of IFRS adoption. However, institutional differences among partner countries can impart the effect of convergence to a set of uniform financial reporting standards, as they can affect the degree to which the new accounting standards are actually enforced and influenced the interpretation of accounting information prepared under IFRS. The regulatory bodies of the government and the accountancy profession of current nations suffer from structural weaknesses and take a permissive attitude towards the neglect of accounting regulations. This study investigates the application of IFRS and how it can reduce information inconsistency and enhance better information flow between all shareholders and bring about a maximum reduction in the cost of preparing different renditions of financial statements where an organization is a multinational. IFRS acts as a guideline on how businesses and firms would actualize their set goals. Thus failure on the part of firms to apply to requirements of IFRS results to information irregularity, lack of transparency, accountability, and discrepancies in financial reports according to IFRS which would, in turn, result in poor financial practices and misleading accounting information that is of little or no importance to any group of users of such information. The preparation and presentation of financial reports according to IFRS play a vital role in attracting foreign investors in the firm in a country like Nigeria.

According to Ball (2006), a system based on IFRS not only better reflects the economic substance of transactions than their legal form, but it also reflects economic gain and losses in a timely and appropriate manner. In addition, still according to Ball (2006), such a system makes the results more informative, it provides better accounting information and reduces the discretion. The accounting standards prescribe regulations, rules, and principles that are supposed to facilitate business practices, but contrary to this, businesses still suffer from problems of instability, insolvency, and little or no profit. Proper application of these rules as given by the various standards issued by IASB will show a real image of a firms’ stand and performance at large.  The various studies carried out on IFRS give a clearer and understandable view of the true performance of firms because of the high quality of reporting involved when compared to the existing GAAP. It is in this light that this study, therefore, attempts to provide evidence of the relationship between International Financial Reporting Standards and the quality of financial reporting in Nigeria.

1.3 Aim and Objectives of the Study

The aim of this study is to evaluate the relationship between International Financial Reporting Standards (IFRS) and the quality of financial reporting in Nigeria. The specific objectives of the study are to:

1. Determine the relationship between Pre-IFRS adoption and faithful representation of financial reporting in Nigeria.
2. Ascertain the relationship between Pre-IFRS adoption and relevance of financial reporting in Nigeria.
3. Determine the relationship between Post-IFRS adoption and the reliability of financial reporting in Nigeria.
4. Ascertain the relationship between Post-IFRS adoption and the relevance of financial reporting in Nigeria.

1.4 Research Questions

1. What is the relationship between Pre-IFRS adoption and the reliability of financial reporting in Nigeria?
2. What is the relationship between Pre-IFRS adoption and relevance of financial reporting in Nigeria?
3. What is the relationship between Post-IFRS adoption and the reliability of financial reporting in Nigeria?
4. What is the relationship between Post-IFRS adoption and relevance of financial reporting in Nigeria

1.5 Research Hypotheses

H0₁: There is no significant relationship between Pre-IFRS adoption and the reliability of financial reporting in Nigeria.

H0₂: There is no significant relationship between Pre-IFRS adoption and relevance of financial reporting in Nigeria.

H0₃: There is no significant relationship between Post-IFRS adoption and the reliability of financial reporting in Nigeria.

H0₄: There is no significant relationship between Post-IFRS adoption and relevance of financial reporting in Nigeria.

1.6 Significance of the Study

This study is significant to business managers, investors, government, educators, accountants, auditors, ad scholars in the accounting discipline. This study tries to identify a setting in which financial reporting quality remains constant and further examines the conceptual basis for the importance of the international dimension in financial reporting.

This study seeks to provide practical and theoretical significance to the field of accounting in the area of financial reporting practices in Nigeria. It would serve as a source and guide to scholars and researchers in carrying out their research on a similar topic. It would bridge the gap in knowledge and bring more understanding of the quality of financial reporting as a result of adopting IFRS.

The findings of this study will assist regulatory authorities such as Nigerian Stock Exchange (NSE), Security and Exchange Commission (SEC), and Financial Reporting Council (FRC) to ascertain and measure the level of compliance to the IFRS.

1.7 Scope of the Study

The scope of the study is subdivided into three namely:

1. Unit Scope: This study focuses on public limited liability companies in Nigeria.
2. Content Scope: This study covers IFRS and the quality of financial reporting Nigeria, the pre and post-adoption to IFRS. It also covers the effect and exerts of IFRS compliance on the reliability and relevance of financial reporting.
3. Geographical Scope: the area of coverage of this study is Port Harcourt, Rivers State, Nigeria.

1.8 Limitation of the Study

Every research study has certain constraints that fall short of the ideas which the researcher has established or ascertained, knowledge of these constraints is essential for an appropriate interpretation of the finding. However, one of the major constraints in this study is a measurement of variables, the study examines the effect and exert with a study on the Nigerian setting; analysis result would be limited to Nigeria as there are other economies in the world which when examined may prove differently. Furthermore, there is another limitation of generalization as the study as this study focuses on a particular population therefore could be sample error which may limit its conclusion.

1.9     Definition of Terms

Adoption: This is the act or process of giving official acceptance or approval to something such as an idea or plan.

Quality: Is a distinguishing attribute, superiority in kind, peculiar, and essential characteristics of a product or service.

Financial Statements: Provisions of financial information and data about an entity to external and internal users that would enable such users to make economic and viable decisions and for assessing the effectiveness of the entity’s management.

Turnover: This is how quickly a business collects cash from accounts receivables or how fast the company sells its inventory.

Earnings Per Share: Is the portion of a company’s profit allocated to each outstanding share of common stock. Earnings Per Share serves as an indicator of a company’s profitability.

Comparability: This is the ability of financial information (statement) to be presented in a consistent manner over time and in a consistent manner between entities to enables users to make significant comparisons.

Financial Reporting Quality (FRO): This is the faithfulness of the information conveyed in the financial reporting process.

Relevance: This is the level of usefulness of an idea, object, or thing, in general, has as to the current happenings.

Exert: This is the use of influent, authority in a strong or determined way especially in other to produce a particular result or effect.

Accounting Standard: These are guidelines and rules on how accounting information should be prepared and presented to the understanding of its users and to effectively state the financial position(s) of firms in all its dealings.

1.10   Organization of the Study

In chapter one, the study was introduced and its subject matter was highlighted, the statement of the research problems, its objectives, questions, hypotheses, the significance of the study, the definition of the terms used in the research work, and its scope.

Chapter two reviewed the relevant literature on the subject area of this study, the theoretical framework, conceptual framework, and empirical framework of the study was further discussed.

In chapter three the research methodology adopted in handling this research work was reexamined. This includes the research design, sampling procedures, and determination of sample size, data collection method, a measure of variables, techniques, and instruments for analyzing data.

In chapter four data was collected, presented, analyzed, and interpreted.

In chapter five the research study was summarized, concluded and various suggestions for further studies on the subject matter of this research work were highlighted.