TABLE OF CONTENTS
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
1.2 Statement of Problem
1.3 Objectives of the Study
1.4 Research Questions
1.5 Research Hypotheses
1.6 Significance of the Study
1.7 Scope of the Study
1.8 Limitations of the Study
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 Conceptual Review
2.1.1 Premise of International Financial Reporting
Standards
2.1.2 Overview of Oil and gas Performance in
Nigeria
2.1.3 IFRS and Corporate Profitability
2.1.4 Effects of IFRS Adoption on Gross Earnings of
Listed Oil and gas
2.2 Theoretical Framework
2.3 Empirical Review
2.4 Summary of Empirical Review
CHAPTER THREE
METHODOLOGY
3.1 Research Design
3.2 Population
of the Study
3.3 Sample Size and Sampling Technique
3.4 Source of Data
3.5 Research Variables
3.5.1 Independent Variable
3.5.2 Dependent Variables
3.6 Method of Data Analysis
3.7 Model Specification
3.8 Decision Rule
3.9 A Priori Expectation
CHAPTER FOUR
DATA PRESENTATION AND
ANALYSES
4.1 Data Presentation
4.2 Data Analyses
4.3 Test of Hypotheses
4.3.1 Test of Hypotheses I
4.3.2 Test of Hypotheses II
4.3.4 Test of Hypotheses IV+
4.4 Discussion of Findings
CHAPTER FIVE
SUMMARY OF FINDINGS,
CONCLUSION AND RECOMMENDATION
5.1 Summary
of Findings
5.2 Conclusion
5.3 Recommendations
5.4 Contribution to Knowledge
5.5 Suggestions for further Study
REFERENCES
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
International
Financial Reporting Standard (IFRS) is the blueprint, pivot and cornerstone for
the preparation and presentation of financial statements for corporate entities
to ensure standardization, globalization and credibility of financial reports
across international borders. Financial statements are vital in showing the
financial status and performance of corporate entities. Statements of
Accounting Standards (SAS) were hitherto used as guide in the preparation and
presentation of financial statements in Nigeria prior to the adoption of
International Financial Reporting Standards (IFRS) in 2012. Thus IFRS
represents a benchmark for the preparation and presentation of financial
statements for business entities in Nigeria post 2011.
IFRS which are issued
by the International Accounting Standards Board (IASB) ensures standardisation
and globalization of financial statements by corporate bodies. Osisioma (2012)
surmises that accounting profession was terribly rocked by a series of
professional misadventures that tore at the heart of the discipline with
financial scandal in Enron,
World down, Global
Crossing, Xerox, Deutsche, Telekon, Qwest, Waste management, Viuendi, Centrica,
Royal Dutch/Shell and Tyco all through the United States, Europe, Asia and the Caribbean
while in Nigeria we had African petroleum, Cadbury among others. Nobes (2011)
affirms that international differences in financial reporting create problems
because many users assess companies on a
comparative basis internationally. Reconciliation from one set of generally
accepted accounting principles (GAAP) to another (especially to US GAAP) were
common until 2007, and they revealed significant difference between countries.
A standard reporting system for listed companies would address these problems.
There would be disadvantage if the whole world had to adopt US GAAP. Therefore,
IFRS have been developed instead. Chukwu & Okoye (2016) affirm that the
IFRS, issued by the International Accounting Standards Board (IASB), is
increasingly becoming the preferred accounting regime among companies in
African countries. Zeff (2007) in Odia (2015) surmises that the accelerated
trend of globalization, internationalization of capital market, increasing
cross boarder listing and the need for comparability of financial reports
accelerated the elimination of international diversity in accounting standards
and promoted the quest for single accounting standards. Fowokan
(2012) highlights that IFRS will bring
about the convergence of national accounting standards. Herbert, Loraver,
Tsegba, Ohanele & Anyahara (2013) assert that the fast pace of
globalization with integration of national financial markets has stimulated the
need for a common financial language, otherwise called IFRS because good
financial reporting makes investment and financial decisions more efficient.
Armstrong, Mary, Alan & Edward (2010) highlight that the increasing growth
in international trade, cross border financial transactions and investments
which unavoidably involve the preparation and presentation of accounting
reports that are useful across various borders have brought about the adoption
of IFRS by both the developed and developing countries. Also Okpala (2012)
posits that IFRS adoption is already an issue of global relevance among various
countries of the world due to the quest for uniformity, reliability and
comparability of financial statements of companies. Hung (2001) asserts that
financial reporting is thus not an end in itself , but is intended to provide
information that is iced in making reasoned choices among alternative uses of
scarce resources in the conduct of business and economic activities. The
premise of the IFRS is to make financial reports more transparent, comparable,
harmonious and reliable. The IFRS represents a global or world GAAP and was
first adopted by EU in 2005. Thus Institute of Chartered Accountants England
and Wales
(ICAEW) (2014)
emphasizes that increased comparability produces benefits in two ways.
Understanding financial reporting imposes a cost on investors, and they may
therefore be deterred from investing in companies that employ financial
reporting systems which they are not already familiar with. If firms in different countries adopt a
common system, investors are more likely to understand the financial statements
of firms in these countries and therefore be willing to invest in them.
Therefore increasing international comparability is expected to lower barriers
to cross – border investments.
Financial reporting
is the mirror which stakeholders use to assess company‟s performance. Chinwuba
& Killian (2011) affirm that IFRS are a principle based set of standards
that establish broad rules and also dictates specific treatments. Also, Cai &
Courtenay (2014) posit that the IFRS are the best breed, high quality and
principle based reporting standards that removes many allowable accounting
alternatives. International Accounting Standard Board (IASB) (2008) highlights
that the primary objective of IFRS based financial reporting is to provide high
quality financial reporting information concerning economic entities, primarily
financial in nature, useful for economic decision making. The evaluation of any
corporate entity and its economic activities is very vital in the assessment of
the entity‟s‟ performance. The management of corporate entities provides
evidence of stewardship showing how resources entrusted at their care have been
utilized through the publication and presentation of financial statements and
reports. Hence financial reporting has become the fundamental base upon which
investors and other users rely on to make investment decisions and to evaluate
corporate performance. To ensure that such reports meet the needs and
requirements of both national and international financial users, several
standards and regulations have evolved overtime. However, due to differences in
cultural, legal, political and other factors among nations thereby leading to
differences in regulatory standards and difficulty in assessing the performance
of multinational corporations, there arose a need to harmonize and converge
into an acceptable single set of standards IFRS to provide a good ground for
global financial reporting and help international market participants. Nigeria
has not been left out of the global moves towards this single set of worldwide
regulations and standards. Consequently, the Nigeria Federal Executive Council
approved 1st January, 2012 as the effective date for convergence of
accounting standards in Nigeria with IFRS.
The NASB now referred to as FRC announced a staged implementation of
IFRS with the expectation that all publicly quoted entities are to implement
IFRS commencing from January 2012 and ending January 2014. The adoption of IFRS
– a guideline created by
IASB, is intended to strengthen the financial reporting
frameworks of firms in Nigeria.
Financial Reporting
Council of Nigeria was empowered to regulate standards in Nigeria under
Financial Reporting Council Act of 2011.
The IFRS are standards
and frameworks adopted by the International Accounting Standards Board (IASB)
with a view towards the convergence, harmonization and internationalization of
financial reporting globally. Invariably, IFRS is seen as an international GAAP
and standards set to assist those involved in the preparation of financial
statements all over the world to prepare and present financial reports that are
seen to be of high quality, transparent and comparable internationally by both
national and multi - national investors. IFRS are seen to be more detailed than
Nigeria standards which were issued in early 1980s with no update in recent
times and due to the continuous increase in Multinational companies
investments, lot of developing countries (including Nigeria) have began to use
IFRS for their domestic listed companies. In Europe and around the world, the
adoption of International Financial Reporting Standards represents the most
important change in accounting regulation in recent years. The IFRS is seen as
a standard that produces a “Network Effect” as it helps to foster increased
comparability of financial statements by multinational investors.
In Nigeria, the oil
and gas industry is believed to be one of the leading sectors capable of
propelling economic development of the nation. It provides funds for capital
market participants and promotes investment. Hence an increase in investments
in the banking sector is expected to lead to an improvement in the performance
of the economy. However, for any investor to commit funds to the industry,
relevant financial reporting information must be provided regarding the
performance of such entity. The
financial statements and reports can only provide such a guide and satisfactory
information to potential and prospective investors through effective
regulations and standards. In line with this, the Nigerian oil and gas and
other public entities in the financial service industry that are required by
law to file returns to regulatory authorities were mandated to adopt IFRS since
January, 2012. Prior to the mandatory adoption of IFRS by oil and gas in
Nigeria, the Companies and Allied Matters Act (CAMA, 1990) as amended till
date, Oil and gas and Other Financial Institution Act (BOFIA 1999) as amended,
Central Bank of Nigeria Act (CBN Act 1999), Nigerian Security and Exchange
Commission Act of 2003 as well local and international standards including
professional pronouncements must be complied with by oil and gas in the
preparation and presentation of their financial reports. For instance, Part 1,
Schedule 2 of CAMA 1990 outlines the form and content of published corporate
financial reports. Nowadays, as earlier stated, all oil and gas financial
reports must be presented and published in conformity with the requirements of
IFRS. According to Iyoha & Faboyede, (2011), the widespread adoption of
IFRS has been promoted by those who proposed that the benefits are far more
than the costs. This notwithstanding, many countries have faced tremendous
challenges following their decision to adopt IFRS. Following the adoption of
IFRS in Nigeria, all commercial oil and gas listed on the Nigeria Stock
Exchange were mandatorily required to prepare and present their financial
reports under IFRS by January, 2012. Since then, there were high expectations
that this adoption will improve the quality of financial reporting, improve
corporate performance of oil and gas, attract more investors and improve the
reporting framework in Nigeria. Although there are studies conducted in Nigeria
on the mandatory adoption of IFRS in Nigeria, several studies actually
researched on the effect of such adoption on the performance of the banking
sector. Hence with few years after its adoption and due to dynamic nature of
IFRS, country specific, period specific, industry specific and sample specific
this research study intends to use robust performance indicators to investigate
the effect of IFRS adoption on the performance of oil and gas listed on the
Nigeria Stock Exchange (NSE).
1.2 Statement of Problem
IFRS effects vary
from country to country and firm to firm. IFRS is country, firm and period
specific. Institute of Chartered Accountants England and Wales (2014) asserts
that on many issues that arise from the European Union‟s adoption of IFRS, the
evidence is unclear and different researchers arrive at different answers. This
is usually because they have applied different tests or looked at different
samples or at different periods. But such apparent contradictions make it
difficult for the reader of research to draw conclusions. Often the results are
unclear because of confounding factors. The adoption of IFRS in the EU was not
a laboratory experiment. The world outside continued to change as IFRS came
into effect in the EU and some of the changes were induced by the EU itself as
it sought to reform its financial services and capital markets. Disentangling
the effects of all these changes is one of the challenges of accounting
research, and different researchers arrive at different conclusions as to which
changes had which effects. In a bid to
ensure that financial reports are prepared in such a way that it provides
adequate and relevant information it is important that the preparers are
provided with a basic framework that will guide the preparation of such
statements. Several studies have been carried out to examine the extent to
which IFRS improve financial reporting quality and provides additional
information to users. The findings from these studies however showed
conflicting results. Iyoha & Faboyede, (2011), emphasis that financial
statements apart from providing information on the financial position of an
entity, also provides other information such as cost of equity financing, cost
of debt financing, liquidity and profitability position of the firm, amongst others.
However, Armstrong, Mary, Alan, Edward & Riediel (2010) highlight that
single set of accounting standards cannot reflect the differences in national
business practices arising from differences in institutions and culture.
Multinational
investors want financial statements and reports that are comparable with those
in other parts of the world for making strategic decision. As such, many
foreign investors will require their subsidiaries in Nigeria not to present
their reports in local standards but to report in accordance with IFRS so that
the parent company can comply with the reporting requirements in its domain
territory. It is expected that following IFRS adoption by the Nigerian Oil and
gas, the complications of the subsidiaries having to prepare different sets of
records for reporting locally and internationally will be reduced, thereby
facilitating business compliance globally. Before the global convergence to
International Financial Reporting Standards (IFRS), different countries of the
world have had their respective accounting standards, developed, issued and
regulated by their respective local bodies. In Nigeria for instance, the
Nigerian Accounting Standards Board (NASB) was responsible for developing,
issuing and regulating accounting standards since 1982 till July 20th, 2011
when the Financial Reporting Council Bill was signed into law. Therefore, prior
to IFRS adoption, the pattern of financial reporting varies amongst nations and
regions. Kamal & Bhuiyan, (2003) posit that this variation impedes
accountability and comparability of financial reporting among different
countries. Hence, the International Financial Reporting Standards (IFRS) was
developed as a result of the necessity for standardization. Indiael (2015)
reveals that the existing empirical crams and conclusions on the impact of IFRS
on corporate entities are mixed. This indicates the pressing need for
empirically tested studies of this nature that are country specific. Blanchett Franchois & Girard (2011)
assert that while the means and medians of IFRS ratios differ from the mean and
medians of the same ratios under the prechange-changeover Canadian GAAP, the
difference are not statistically significant at all. Also Asian (2015) opiums that despite a
considerable interest in the effectiveness of accounting standards on the
quality of financial reporting, empirical literature emerged that offers
contradictory findings about the question to what extent accounting standards
contribute to the decision usefulness of financial reporting information. Saidu
&Umar (2014) highlight that the financial crises in the late 1990s, caused
the international community emphasized on the major role that the observance of
international standards and codes of best practices can play in strengthening
national and international financial systems.
Mayer (1990) states
that, the financial report of one organization if honestly and sincerely
prepared, could serve as the basis in making a comprehensive and comparative
assessment of its operations with like company. However, Chiha & Hamza
(2013) assert that empirical accounting studies have been conducted to examine
the extent to which IFRS provides additional relevant information and improve
the information content of financial statements prepared in accordance with
these standards. These studies have mixed results. Thus Soderstrom & Sun
(2007) emphasize that the mixed findings can be partly explained by the
influence of country specific factors. Hence the adoption of a common set of
accounting standards across the globe may not improve quality of financial
reporting homogeneously in each company and country because of other factors
such as financial reporting incentives, legal systems and political systems
that may affect accounting quality. The relevance of financial reporting is in
its ability to ascertain and present the result of the economic activities of
an entity in monetary terms in an objective and justifiable manner. Prior
researches have produced inconsistent and mixed findings and consequent upon
the gap in literature arising from the conflicting views on the impact of IFRS
adoption on financial reports in Europe, Asia and other regions, this study
thus provides evidence from the Nigeria perspective by studying the effect of
such mandatory adoption on the performance of listed oil and gas in Nigeria.
ICAEW (2014) find increased liquidity following mandatory IFRS adoption for
firms in France and Germany, but report mixed findings for UK and Swedish
firms. IFRS annually changes, therefore the effects found by one research will
not always continue to apply indefinitely. Effects of IFRS varies from firm to
firm and country to country. Previous
findings are mixed hence the impetus for this study on listed oil and gas in
Nigeria.
Ball (2001) premises
that country specific factors such as the presence of an independent legal
system, a strong accounting profession, the separation of financial reporting
for public interests and taxation, and corporate ownership and governance
structures all play role in creating an efficient public accounting disclosure
environment. Nobes (2011) surmises that there are many opportunities for IFRS
practices to differ from company to company and from country to country. For
example, different versions of IFRS arise because most countries introduce
delays or changes when implementing IFRS: in addition, there are options within
IFRS. For several reasons, it can be expected that a company will continue with
many of its previous accounting policy choices when it first adopts IFRS. Thus
the country and industry specific nature of IFRS made this research imperative
for Nigerian oil and gas. Therefore this study ascertained the effect of IFRS
adoption on performance of listed deposit money oil and gas in Nigeria.
1.3 Objectives of the Study
The main objective
of this study is to empirically ascertain the effect of IFRS adoption on the
performance of listed oil and gas on Nigerian Stock Exchange (NSE).
Other specific objectives are;
i. To
ascertain the effect of IFRS adoption on return on equity of listed deposit
money oil and gas in Nigeria. ii. To evaluate the effect of IFRS adoption
on earnings per share of listed deposit money oil and gas in Nigeria.
iii.
To assess the effect of IFRS adoption on net
profit margin of listed deposit money oil and gas in Nigeria.
iv.
To determine the effect of IFRS adoption on
gross earnings of listed deposit money
oil and gas in Nigeria.
1.4 Research Questions
Based on the objective of the study, the following research
questions are pertinent;
i.
What is the effect of IFRS adoption on return on
equity of listed deposit money oil and gas in
Nigeria?
ii. To
what extent does IFRS adoption affect earnings per share of listed deposit
money oil and gas in Nigeria?
iii. How
does IFRS adoption affect net profit margin of listed deposit money oil and gas
in
Nigeria?
iv. What
is the effect of IFRS adoption on gross earnings of listed deposit money oil
and gas in Nigeria?
1.5 Research Hypotheses
To lend empirical credence to this study, the following
research hypotheses are formulated;
Ho1: IFRS adoption has no significant effect on
return on equity of listed deposit money oil and gas in Nigeria.
Ho2: IFRS adoption has no
significant effect on earnings per share of listed deposit money oil and gas in
Nigeria.
Ho3: IFRS adoption has no significant effect on
net profit margin of listed deposit money oil and gas in Nigeria.
Ho4: IFRS adoption has no significant effect on
gross earnings of listed deposit money oil and gas in Nigeria.
1.6 Significance of the Study
Following the harmonization and
convergence of accounting standards globally and the adoption of IFRS in Nigeria
especially by the banking sector in the year 2012, the benefits accruing from
this study are enormous and significant as it used more robust performance
indicators to empirically investigate the aggregate effect of such mandatory
adoption on the performance of the banking sector in Nigeria. Hence, this study will be significant in the
following ways;
i.
It will help capital market participants to
understand the relevance of IFRS in improving financial reporting quality
through profitability.
ii.
It will provide a framework for Financial
Reporting Council of Nigeria and Central Bank of Nigeria to effectively
understand how IFRS adoption has affected the activities of the banking sector
through the findings and recommendation.
iii.
The study will also serve as a reference point
for future scholars who want to carry out a study on International Financial
Reporting Standards through empirical review and findings.
1.7 Scope of the Study
The scope of this study is limited to the
banking sector especially the commercial oil and gas listed on the Nigerian
Stock Exchange. It is limited only to the effect of IFRS on listed commercial Oil
and gas performance using two variables to measure such effect. The period of
coverage is ten (10) years (2007 -2016), thus cutting across the 5 years before
adoption (2007 - 2011) and 5 years post IFRS adoption era (2012 – 2016).
1.8 Limitations of the Study
In the course of this research, the following limitations
were identified and resolved:
a. Dynamism
in environment: Changes in events, institutions and anticipated markets after
the adoption of IFRS may likely compound the effect of IFRS on the variables under study. This was
controlled by selecting population and sample of the same
characteristics.
b. Reliability
of secondary data: The secondary data
used were obtained from financial statements prepared by the oil and gas as
required by Companies and Allied Matter Act
(CAMA), Oil and gas
and other Financial Institutions Act (BOFIA), International Financial Reporting
Standard (IFRS), Nigeria Deposit Insurance Corporation (NDIC) and other
regulatory bodies. Thus the degree of reliability and credibility of the
financial statements is anchored on the Auditors report.
In spite of these limitations, statistical tests were used to
accommodate the effects of these limitations thereby making the research
reliable.
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