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SEMINAR PAPER ON THE ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS AND PERFORMANCE REPORTING OF NIGERIAN DEPOSIT MONEY BANKS


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Abstract

The main objective of the study involved the assessment of the impact of the adoption of International Financial Reporting Standards on the performance reporting of Nigerian Deposit Money Banks using financial ratios, while the specific objectives involved the examination of the effects of the adoption of IFRS on the reported profitability measured by return on equity (ROE), on the reported liquidity, measured by current ratio (CR), on the reported gearing ratio measured by Total Deposit to Equity (TDE), and on the reported interest cover measured by (FCC) of the Nigerian Deposit Money Banks. The globalization of business had necessitated the introduction of International Financial Reporting Standards (IFRS) in order to present a globally accepted and high quality financial statements which will provide reasonably accurate information about a company’s financial performance to investors and other interested parties. However, accounting under IFRS and pre-changeover Nigerian accounting standards hampers the consistency of information in the financial statements due to the application of fair value accounting and thus affects the performance of Nigerian Banks. This study examined the effects of IFRS adoption on the reporting performance of Nigerian listed banks using four (4) key financial ratios (ROE, CR, TDE and FCC). The study covered a period of four (4) years pre-adoption of IFRS and four (4) years post –adoption of IFRS. The study employed an ex-post facto research design. The population of the study constitutes all the 15 Deposit Money Banks Listed on Nigerian Stock Exchange (NSE) as at 31st December, 2019, while eight (8) banks were selected using a purposive sampling technique. Pearson’s Correlation Analysis, Analysis of Variance (ANOVA) and Regression Analysis were used to find the effects of IFRS adoption on financial ratios while paired sample t –test and F-test were used to test the significance of the difference in means and variances between ratios under IFRS and Nigerian Generally Accepted Accounting Principles (NGAAP) respectively. The result of the findings revealed that there is statistical significant difference in ROE, CR, TDE and FCC prior and after the IFRS adoption. Transition in standards has therefore drastically enhanced the reported accounting figures and estimates of Deposit Money Banks listed on the Nigerian Stock Exchange (NSE). Also, IFRS positively influenced the banks’ ROE and TDE, but has significant negative effect on CR and FCC.  The study concluded that IFRS adoption has a significant effect on the financial ratios of Nigerian banks and consequently on their reporting

 

 

INTRODUCTION

The introduction of IFRS has an important implication on the way financial statements are interpreted, and enhancing understanding by which stakeholders, investors, creditors, banks, governmental agencies to employees, and others make the necessary financial comparability Erin, O., Olojede, P., & Ogundele, O. (2017). The interpretation of annual reports of banks prepared under the IFRS regime has a significant impact as stakeholders have access to more financial information as provided by the ratio analysis. A number of indicators, among which are financial performance indicators and values of financial institutions are measurement tools for determining banks’ periodic performance. Most likely, the expansion in globalization within the accounting framework has prompted the adoption of the IFRS in numerous purviews, including Nigeria. Proceeding its adoption, diverse accounting benchmarks were utilized in various nations, a training described by issues of likeness of bookkeeping reports across various locales. The globalization of business had necessitated the introduction of International Financial Reporting Standard (IFRS) in order to present a globally accepted and high quality financial statements which will provide reasonably accurate information about a company’s financial performance to investors and other interested parties that will enable them take investment, credit and similar resource allocation decisions across the globe. (Blanchette, et al, 2011).

With the advent of globalization the world’s capital markets have witnessed rapid expansion, diversification and integration. This has brought about a shift away from local financial reporting standards to global standards. Hence, it is in recognition of the need to have quality financial reports that the adoption of International Financial Reporting Standard (IFRS) is becoming the vogue among countries. (Omowuyi & Ahmed, 2011).

The goal of financial reporting is to make information available for decision making. Diversity in financial reporting in different countries arises because of the difference in legal and tax systems and business structures. The International Financial Reporting Standard is intended to harmonize this diversity by making information more comparable and easier for analysis, promoting efficient allocation of resources and reduction in capital cost. (Ajibade, 2011).

Various nations have been using their own Generally Accepted Accounting Principles (GAAP) and the basic accounting concepts to prepare their financial reports. However, over the years, many and several financial reports have come with discrepancies and differences that render such reports incomparable across nations. Secondly, reconciliation of these reports may not really be possible and thus it becomes difficult to use them to make financial decision across nations. Moreover, the usage of this Generally Accepted Accounting Principles (GAAP) allows for creative accounting and other misrepresentations in the financial reports. It is not surprising, that the recent financial downturn is partly said to be due to difference in financial reports across nations. Consequently, the International Accounting Standards Board (IASB) proposed the accounting standards that will be acceptable all over the world, for example International Financial Reporting Standard (Fajonyomi & Kehinde 2013).

The Roadmap for adoption of IFRS in Nigeria was unveiled by Honourable Minister of Commerce and Industry on 2nd September, 2010. The roadmap has a three-pronged approach as follows.

Phase I: Publicly Listed Entities and Significant Public Interest Entities to take effect on 1st January, 2012. This means government business entities, all entities that have their equities or debt instruments listed and traded in the public markets (a domestic or foreign Stock Exchange or an over-the- counter markets). Examples of entities meeting these criteria include: Nigerian National Petroleum Corporation (NNPC), banks and insurance companies.

Phase II: Other Public Interest Entities to take effect on 1st January, 2013. This refers to those entities, other than listed entities (unquoted, private companies) which are of significant public interest because of their nature of business, size, number of employees or their corporate status which requires wide range of stakeholders. Examples of entities meeting these criteria are large not-for-profit entities such as Charities and Pension funds.

Phase III: Small and Medium-sized Entities (SMEs) to take effect on 1st January, 2014. Small and Medium-sized Entities (SMEs) refers to entities that may not have public accountability and their debt or equity instruments are not traded in a public market: they are not in the process of issuing such instruments for trading in a public market, they do not hold assets in fiduciary capacity for a broad group of outsiders as one of their primary businesses, the amount of their annual turnover is not more than N500 million or such amount as may be fixed by the Corporate Affairs Commission. Their total assets value is not more than N200 million or such amount as may be fixed by the Corporate Affairs Commission

  1. No Board members are foreigners
  2. No members are a government or a government corporation or agency or its nominee

iii.     The directors among them hold not less than 51 percent of its equity share capital.

Entities that do not meet the IFRS for SME’s criteria shall report using Small and Medium-sized Entities Guidelines on Accounting (SMEGA) Level 3 issued by the United Nations Conference on Trade and Development (UNCTAD).

The public Listed Entities that pioneered the adoption of IFRS was Oil and Gas Industry (Augustine, 2012).

The difference in financial reports across nations was partly responsible for the financial down turn experienced in the world. For example, in December 2, 2001, Enron Corporation, an American Company, became bankrupt as a result of willful corporate fraud and corruption. Arthur Andersen, one of the “Big Five” accounting firms in the world voluntarily surrendered its licenses to practice as Certified Public Accountants. In 2002, Worldcom, another US based telecommunication company collapsed.

(Bratton & Cunningham, 2002), attributed these corporate scandals to failure on the part of Auditing Firms.  Enron Corporation was an American energy, commodities, and Services Company based in Houston, Texas. It was founded in 1985 as the result of a merger between Houston Natural Gas and Inter North, both relatively small regional companies in the U.S. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff, and was one of the world’s major electricity, natural gas, communications and pulp and paper companies, with claimed revenues of nearly $111 billion during 2000. At the end of 2001, it was revealed that its reported financial condition was sustained by institutionalized, systematic, and creatively planned accounting fraud, known since as Enron scandal. Enron has since become a well-known example of willful corporate fraud and corruption. The scandal also brought into question the accounting practices and activities of many corporations in the United States and was a factor in the enactment of the Sarbanes –Oxley Act of 2002. The scandal also affected the greater business world by causing the dissolution of the Arthur Andersen accounting firm.

 STATEMENT OF THE PROBLEM

Some researches were conducted in developed countries, especially those from European Union, on the impact of the adoption of IFRS on financial performance. However, very little evidence exists in Nigeria to demonstrate how IFRS adoption has impacted on financial performance of entities. This study, therefore, is a response to the need of financial statement users to know the impact of IFRS adoption on financial performance of Deposit Money Banks in Nigeria using financial ratios. The main objective of the study is the assessment of the impact of the adoption of International Financial Reporting Standards on the performance reporting of Nigerian Deposit Money Banks using financial ratios, while the specific objectives include the examination of the impact of the adoption of IFRS on the reported profitability measured by Return on Equity (ROE), on the reported liquidity, measured by Current Ratio (CR), on the reported gearing ratio, measured by Total Deposit to Equity (TDE) and on the reported interest cover measured by (FCC) of the Nigeria Deposit Money Banks.  The main features of IFRS which differ from Generally Accepted Accounting Principles also lead to variances in financial ratios which are the key indicators for measuring bank’s financial performance. These variances in the financial ratios will impair the comparability and measurement of banks performance. Basically, performance, stability and liquidity are essential for the survival of a business. The impact of the adoption of IFRS on these measures may reshape the continued existence of business as users of financial information now depend on IFRS based financial data. If banks are able to report better profits under IFRS, this is an indication that Nigerian GAAP may have been underestimating banks performance which may lead investors to the rational conclusion regarding the business reports. Meanwhile, creditors’ decision to advance further credits will also be affected by the significant differences found between the liquidity measures reported under the standards. More so, prospective investors would rely on leverage ratio as well as return on investments to speculate their fortunes in the firms. Therefore, the overall effect of these changes will affect the financial and economic decisions of various users of financial information.

OBJECTIVE OF THE STUDY

The main objective of the study is to assess the impact of the adoption of International Financial Reporting Standards on the performance reporting of Nigerian Deposit Money Banks, using financial ratios. The specific objectives are to:

  1. assess the impact of the adoption of IFRS on the reported return on equity of Nigerian Deposit Money Banks;
  2. ascertain the influence of the adoption of IFRS on the reported current ratio of Nigerian Deposit Money Banks;
  • ascertain the influence of the adoption of IFRS on the reported gearing ratio of Nigerian Deposit Money Banks and
  1. assess the effect of the adoption of IFRS on the reported fixed interest cover of Nigerian Deposit Money Banks
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Author: SPROJECT NG