The research examines the impact of IFRS adoption on the value relevance of accounting information in Nigerian firms. The used data was obtained from the annual report of the firms for the period 2011 and 2012 (2011 for GAAP and 2012 for 2011 financial statements restated for IFRS), and daily price list on the Cash Craft website. The study is based on the Ohlson model and multiple regression is employed as a tool of analysis. The population of the study consists of firms that are listed on the Nigerian stock exchange during the period under review and census sampling is used to study all the firms. The result reveals that all the explanatory variables statistically but only book value significantly influenced the explained variable but the aggregate value relevance of accounting information reduced in the IFRS period compared to the GAAP.
The study concluded that accounting information published by firms in Nigeria has high value relevance to the investors in making their investment decision on the firms. Specifically, book value has more value relevance than earnings, dividends and cash flow. It is therefore recommended that the management of Nigerian firms should maintain consistent in the measurement of the book value, which will go a long way in increasing market value of the firms. The accounting standards setters should also enhance the quality of the financial reporting in order to increase the value relevance of financial statements on the aggregate.
1.1 Background of the study
The advent of global economies requires investors and analysts to compare firms across countries. To achieve this goal, financial statements remain a key source of information. In that regard, the perceived need for harmonization and comparability in financial statements has led to the emergence of IFRS as the dominant reference for financial reporting in countries around the world (Cormier, 2013). Nigeria has joined those countries in 2012 for organizations that are publicly accountable.
IFRS or IAS, are accounting standards issued by the IASB. A goal of the IASB is to issue internationally acceptable, high quality financial standards. Much research has been undertaken which addresses the question as to whether IAS/IFRS are associated with higher accounting standard quality than the application of local or domestic GAAPs (Barth, Landsman & Lang, 2008). This focuses on one of the measures of accounting quality, namely value relevance. It assesses whether Nigerian firms which applied IFRS in a particular period (2012) showed an increase, decrease or no change in value relevance.
Value relevance has been defined in various studies as the ability of accounting information to summarize information that affects stock values (Francis and Schipper, 1999). Value relevance has to do with the summarization of accounting information that affects stock values in such a way that investors can come up with an informed decision that has to do with an organization.
Therefore, if accounting information is prepared in such a way that it plays the roles expected of it, it will lead to making right and well informed decisions. Value relevance is seen as the proof of quality and usefulness of accounting numbers and as such, it can be interpreted as the usefulness of accounting data for decision making process of investors and its existence is usually by a positive correlation between the market values and book values (Takacs, 2012). Therefore, the relevance of accounting information can be evaluated using its impact on stock prices, the accuracy of analyst forecasts, the cost of finance, the impact on analyst following, the impact on investment strategies.
On the overall, we may infer that IFRS financial statements do offer relevant information to investors, thus providing some potentially useful hints as to what Nigerian firms and markets may expect from IFRS adoption.
Therefore, effective enforcement by institutional and market forces is necessary to ensure that IFRS adoption leads to an improvement in the quality of financial statements. In the Post-IFRS adoption, the rankings of some countries do not change substantially, with earnings quality at the aggregate level not varying substantially. Therefore, while in appearance, firms present their financial statements in a format that looks comparable, but in actual sense, the numbers reported in the financial statements are not necessarily more comparable than they were before IFRS adoption (when GAAP was used) due to major differences in measurement, recognition, audit, and market monitoring practice, to mention a few, which still remain in the post-IFRS adoption. Hence, beyond IFRS adoption, its actual implementation and the enforcement of such implementation play a critical role in ensuring that informational benefits from IFRS flow to relevant users of accounting information.
This research seeks to examine the impact of IFRS adoption on the value relevance of accounting information in Nigeria.
1.2 Statement of the Research Problems
The move towards IFRS confirms the primacy of financial markets (directly or indirectly) in the determination of accounting standards, with the relevance of financial statements being mostly defined in terms of how useful they are to users (Cormier, 2013). Stewardship, or the use of accounting information for contractual purposes, is now relegated to a secondary role in the determination of accounting standards in the IFRS era. The problems identified can be broadly categorized into practical and theoretical problems.
From the theoretical point of view, from previous literature, (see: Francis and Schipper, 1999, Barth, Beaver and Landsman, 2001, Beaver, 2002, Nilson, 2003, Scott, 2003, Chang et al, 2008, Daske et al. 2008, Negah, 2008, Bruggermann et al. 2009, Beisland, 2009, Horton and Serafeim, 2010, Byard et al. 2011, Florou and Pope, 2012, Cormier, 2013 etc.) It can be observed that the evidence concerning the effects of IAS/IFRS on value relevance of accounting is mixed. It is worth remarking also that the literature reviewed here are based on different indicators of information quality and cover different time spans, and so are not readily comparable. It can be deduced from the ways in which value relevance of accounting information can be evaluated.
Also, if IFRS adoption does offer relevant information, through more detailed notes as compared to the domestic GAAP, it will be difficult to disseminate the information contained in accounting numbers themselves from the additional information provided in the notes or other financial disclosure. This implies whether the ‘quality versus quantity” of accounting information under IFRS has improved compared to domestic GAAP.
From the practical perspective, while the value relevance of accounting information has focused on the developed markets in North America and Europe, developing markets especially in Nigeria have been relatively neglected. Some of the few published are Oyerinde (2009), Abubakar (2010 & 2011), and Abiodun (2012), and even at that, the study either focused on the relationship between earnings and book value (Oyerinde, 2009), restricted to a particular industry (Abubakar, 2010 & 2011), or used a different analysis such as simple descriptive statistics (Abiodun, 2012). It was also identified that the value relevance studies conducted in Nigeria so far have been on the adoption of local GAAP (SAS).
Due to the analysis above, the following questions can be raised:
- What are the relevant variables to be used to measure the value relevance of accounting information?
- What relationship exists between the variables and value relevance of information?
- Does IFRS adoption impact significantly on such variables, thereby affecting its value relevance?
- Is the IFRS effect driven by better measurement or better disclosure?
1.3 Objectives of the study
The main objective of this study is to examine the impact of IFRS adoption on the value relevance of accounting information in Nigeria. To achieve this, the following objectives will need to be considered:
- To identify the variables to be evaluated to measure the value relevance of accounting information.
- To find out the relationship between the variables and value relevance of accounting information measurement.
- To find out if IFRS has impacted significantly on such variables thereby affecting the value relevance of accounting information.
- To assess whether the IFRS effect is driven by better measurement or better disclosure.
1.4 Research hypotheses
The following hypothesis will be tested in order to validate the research
- H0 There is no significant difference in earnings stated in IFRS financial
statements relative to financial statements prepared using Nigerian GAAP.
- H0 there is no significant difference in book value stated in IFRS financial
Statements relative to financial statements prepared using Nigerian GAAP.
- H0 There is no significant difference in cash flow from operating activities
stated in IFRS financial statements relative to financial statements prepared using Nigerian GAAP.
- H0 There is no significant difference in dividends stated in IFRS financial
statements relative to financial statements prepared using Nigerian GAAP.
1.5 Scope of Study
This study provides insight into the effect of IFRS adoption on value relevance of accounting information in the Nigerian companies and it covers a period of 2011 and 2012 (that is 2011 for domestic GAAP and 2012 for 2011 financial statements restated for IFRS). The choice of this period is necessitated by adoption of IFRS in Nigeria for publicly accountable companies.
The sample consists of 70 companies out of the total companies listed on the Nigerian Stock Exchange between 2011 and 2012. The companies are selected based on the following criteria:
- The company had been listed on the Nigerian Stock Exchange during the period and the firm has the necessary financial statement data.
- Besides, investment analysts are the primary users of financial accounting reports and if accounting information is value relevant to them, then, it would be considered as value relevant to other individual investors.
1.6 Significance of the Study
The significance of this study in Nigeria can thus be summarized as follows:
- The findings generated in this study may be used to test the existing theories under extreme conditions not present in developed economies where most of the prior studies were carried out;
- The investors are supplied with information to help them make good investment decisions;
- The findings and conclusion may enable the national standards setters to know the nature of demand placed on accounting information by their local investment community, stakeholders and public before they rush into adapting a unified set of accounting standard;
- The research is important to the Financial Reporting Council of Nigeria (FRCN) as it acts as a feedback channel to the board on which accounting number is most widely used for equity valuation in Nigeria and
- This study fills the gap in literature by investigating the impact of IFRS adoption on value relevance of accounting data in the Nigerian companies.
- The results generated should also provide useful evidence to developed and other developing countries. This research provides a guide as to which accounting data is or is not valued by investors, which should help the preparers of accounting information and standards setters to further enhance value relevance of the most widely used accounting number. As a result, in preparing accounting for investment decision, they should reduce information overload in Integrated Reports (IR).
- It will also serve as a guide for future research to be done in this area.
1.7 Limitations of the study
However, the results obtained in this study are subject to various limitations. They are;
- Market inefficiencies: this can be as a result of shares being overpriced or underpriced at the time frame used for the research which can be caused through internal or external factors.
- The fact that results may not be generalized to other countries
- Time frame: This implies that the long term effects of IFRS is not being examined.
- Significant economic events occurring during the period of time under examination.
Inherent weaknesses due to the sample size being used, its selection and the volatility of the data (e.g. share price)