ABSTRACT
The study examines the effect of IFRS adoption on the financial performance of manufacturing firms in Nigeria. Data were collected from the financial reports of ten manufacturing firms in Nigeria from 2007 – 2016. The research design adopted was ex post facto. Data were analyzed using descriptive analysis to ascertain the mean, standard deviation and skewness of the variables. Independent samples T- test statistics was used to analyze significant difference between the variables in the pre and post IFRS adoption. The findings revealed that IFRS adoption has no significant effect on some profitability ratios, while some indicated significant effect. No significant difference was observed in the profit margin, liquidity and leverage when compared over the period while Efficiency and Dividend payout indicated a significant difference. The findings showed that the t-test statistic for profit margin, liquidity and leverage are -0.789, .262, and .133 respectively which is not statistically significant at an acceptable bound of 5%. Also IFRS adoption significantly affects the firm’s efficiency and dividend payout ratios with a t- test value of .042 and .023 respectively which is within the bound of 5% level of statistical significance. The study therefore recommends that manufacturing firms should support the Nigeria’s adoption of IFRS, to comply strictly and follow the rudiments of IFRS to enable them benefit from IFRS adoption just as the developed countries are benefitting. It also point out that, manufacturing firms should embark on re- training programs for accountants.
TABLE OF CONTENTS
Title Page ii
Declaration iii
Certification iv
Dedication v
Acknowledgements vi
List of Tables xi
Abstract xii
CHAPTER 1: INTRODUCTION
1.1
Background of the Study 1
1.2
Statement of the Problem 4
1.3
Research Questions 7
1.4
Objectives of the Study 8
1.5
Statement of Hypotheses 8
1.6
Scope of Study 9
1.7
Significance of the Study 9
1.8
Operational Definition of
Terms 10
CHAPTER 2: REVIEW OF
RELATED LITERATURE
2.1
Conceptual Framework 12
2.1.2 IFRS
adoption 14
2.1.3 Arguments for/ against IFRS adoption 16
2.1.4 IFRS vs Nigerian GAAP 20
2.1.5 Major
differences between NGAAP and IFRS 24
2.1.6
Financial performance 26
2.1.7
Effects of IFRS on financial ratios 28
2.1.8 IFRS
implementations and financial statement disclosures 29
2.2 Theoretical
Framework 30
2.2.1 Stakeholder’s
theory 31
2.2.2 The Theory of the firm 32
2.3 Review
of Empirical Studies 32
2.5 Gap in Literature 42
CHAPTER 3: METHODOLOGY
3.1
Design of the Study 43
3.2
Population of the Study 43
3.3
Sample Technique 43
3.4
Method of Data collection 44
3.5
Method of Data Analysis 44
3.6
Model specification 44
CHAPTER 4: DATA
PRESENTATION, ANALYSIS OF RESULTS AND DISCUSSION
4.1
Data Presentation 48
4.2 Test of Hypotheses 51
4.2.1 Hypothesis 1 51
4.2.2 Hypothesis 11 53
4.2.3 Hypothesis 111 54
4.2.4 Hypothesis 1v 56
4.2.5 Hypothesis 111 58
CHAPTETR 5: SUMMARY,
CONCLUSION AND RECOMMENDATIONS
5.1
Summary 60
5.2
Conclusion 62
5.3
Recommendation 63
References 66
Appendices 71
LIST OF TABLES
4.1 Variance analyses of IFRS Profitability
margin 35
4.2
Difference in the IFRS liquidity 37
4.3
Firm’s leverage in the pre and post
IFRS 38
4.4
Firm’s efficiency in the pre and post
IFRS 40
4.5
Firm’s dividend payout in the pre and
post IFRS 42
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
Prior
to International Financial Reporting Standard adoption era, most countries had
their own standards with local bodies responsible for development and issuance
of standards (Tanko, 2012). During this era the financial reporting methods
vary in the different countries and regions; this variation could not allow proper
accountability and sound comparability of financial reporting among different
countries. The necessity, therefore, of standardization was felt worldwide. As
a result of discrepancies in international accounting principles and reporting
practices coupled with incompleteness of the local accounting standards,
fraudulent practices such as manipulation
of financial statements, companies window dress figures and tax avoidance, were
observed. These resulted to the collapse of many viable institutions in some
countries, and with the increasing internationalization of trading activities
amongst countries of the world, necessitated by globalization, to avert the
situation. IASB came up with a globally accepted, high quality accounting
standards that will enable all countries to use one accounting language and
standards world-wide known as International Financial Reporting standards
(IFRS) (IASB,2010; Abata, 2015; Tanko, 2012).
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. This body was properly recognized
in 2001and later in 2002 the Norwalk Agreement brought together the Financial
Accounting Standard Board (FASB) and the IASB to agree to develop a set of high
quality accounting standard for local and international transactions. In
the new dispensation, the Nigerian Accounting Standards Board was restructured to
Financial Reporting Council (FRC) of Nigeria as the regulatory body overseeing
the adoption and implementation of IFRS. The IASB published its standard in a
series of pronouncements called the International Financial Reporting Standards
(IFRS), a body of prescriptive rules and guidelines
with global reach and appeal which provide direction and guidance on how
business enterprises in a globalized world could achieve the goal of proper
record keeping, transparency, uniformity, comparability and enhancing public
confidence in financial reporting (Tendeloo and Vanstraelen, 2005). Nigeria
officially adopted IFRS in 2012. IFRS is a global generally accepted accounting
principle and a principle - based set of accounting standard designed to
improve the comparability of financial statements internationally: the main
features of IFRS include principle based- approach, fair value orientation, the
concept of comprehensive income, the entity theory underlying consolidation and
improved transparency. (Blanchette, et al 2011). It is a high quality globally accepted sets
of accounting standards. According
to Tanko (2012) the essence of IFRS is to enhance cross border comparison of
financial statements by ensuring uniformity in financial reporting, it is
equally expected to enhance cross-border financial markets stabilization and
promotion of cross- border investments. Kunle, Omoruyi and Hamed (2011),
observe that just like every other system, IFRS is a systematic approach that promotes
understandability, reliability, relevance and comparability and that the adoption
of IFRS is intended to improve the general accounting quality of Nigerian
companies, improve the comparability and transparency of their financial
statement dissimilarity. Benzacar (2008) described IFRS as the official
reporting standard with which a business can present its financial statement on
the same basis as its foreign competitors, making comparisons easier. Beke
(2011) also stressed the fact that a global accounting standard will result to
a rise in market liquidity, fall in transaction costs for investors and cost of
capital reduction.
IFRS has benefited some countries in terms of
attracting Foreign Direct investment. It will help to position companies in the
global market place as well as ensure transparency, accountability and
integrity in its financial reporting. It helps international investors to make
well- informed, useful and meaningful comparison of investment portfolio. IFRS
helps for easy consolidation of financial statement of multinational companies.
It promotes better management control system and makes cross border
transactions and trading easer through common accounting practice especially in
under developed regions of the world. IFRS also leads to increase in government
revenue as a result of transparency and integrity in reporting. IFRS
facilitates easy access to capital. Despite the above mentioned benefits, there
are still costs and challenges attached to IFRS adoption both in developed and
developing countries. Key professional accountant that are competent to
implement IFRS within the given time frame are needed. There is also urgent
need to improve the level of public awareness especially among investors and
regulatory bodies in the developing countries.
A good number of studies carried out in different
countries have highlighted the benefits of having single set of financial
reporting standard across the globe in supporting the adoption of IFRS
globally. Few of the studies had given contradictory views questioning the
relevance of IFRS adoption in developing and emerging countries. Some
researchers have studied the effect of IFRS adoption on financial performance
of firms looking at various profitability indicators but few or none have use
dividend pay-out and efficiency and there has been less research work on
manufacturing firms in Nigeria, also manufacturing firms contributes so much to
the Gross Domestic product of its country. In this study the researcher used
the following as profitability indicators: profitability- to measure the
success of a firm in earning a net return on investment-(net profit margin),
liquidity- to measure the firm’s ability to meet maturing short term obligations,
efficiency-receivables turnover ratio was used which is the ratio of credit
sales to accounts receivables, which tracks outstanding credit sales, leverage-
debt to equity ratio was used to measure the ratio of total debt to shareholders
equity and dividend pay-out- is the amount of dividend paid to stockholders
relative to the amount of total net income of a company. This
research will focus on the effect of IFRS adoption on the financial performance of
quoted manufacturing companies in Nigeria.
1.2 STATEMENT OF THE PROBLEM
Cross border comparison of the financial
performance of companies cannot be properly done if there is no common
accounting standard for preparing and presenting of financial statements. Lack
of proper use of internal accounting standard in some developing countries hinders
transparency and comparison in the financial statements of firms. As a result
of this financial statements fail to provide useful and accurate information
for good investment decision to investors and stakeholders. Owing to the deficiencies and short- comings
encountered by local Generally Accepted Accounting Principles (GAAPs) – when
most countries had their own standard, companies’ falsified figures and
manipulate financial statement, tax avoidance was the norm of the day. Most of
the Nigerian Statement of Accounting Standards (SASs) or GAAP-NG issued by the
NASB are outdated and considered insufficient to provide the necessary guidance
in the preparation of quality financial statements. According toBala (2013) the information disclosed under Nigeria GAAP were
insufficient to effectively reduce the information imbalance between companies
and users of financial statements. Hence, the adoption of IFRS would enable
companies disclose more financial information. SASs seems to be incomplete because there are many accounting issues not
yet covered but had been addressed by IFRS.
Furthermore, globalization
of capital markets requires a unified global accounting, reporting and
disclosure set of standards, due to increasing volume of cross border capital
flows and the growing number of foreign direct investments via mergers and
acquisitions in the globalization era, the need for the harmonization of
different practices in accounting and the acceptance of worldwide standards become
paramount, (Abata, 2015). Also, as a
result of weak and ineffective regulations, coupled with non-comparability,
dissimilarity and non-uniformity of financial statements caused by the use of
GAAPS by different countries necessitated the adoption and implementation of
IFRS (IASB, 2010). Some listed companies especially in the developing
countries do not fully comply with the disclosure requirement stipulated by the
regulatory bodies.Owing to the above problems caused by GAAPs and the quest for
uniformity, reliability comparability, and enhancing public confidence on
financial statements of companies worldwide, a lot of standard have been
issued. Between 1973 and 2000, international standards were issued by the
IASB’s predecessor organization, the international accounting standard
committee (IASC). During that period, the IASC’s pronouncements were described
as International Accounting standards (IAS). Since April 2001, this rule making
function has been taken over by a newly constituted IASB. The IASB describes
its pronouncements under the label “International Financial Reporting Standards”.
A
lot of studies have been carried out in
different countries some highlighted the benefits of having single set of
financial reporting standards across the globe in supporting the adoption of
IFRS globally. Few of the studies had given contradictory views questioning the
relevance of IFRS adoption in developing and emerging economies. The effect of IFRS
adoption on the financial performance of firms like Banks, Oil and Gas and
financial industries has also been examined but the effect of IFRS adoption on the
financial performance of manufacturing firms has been empirically investigated by
only few researchers. Also there has been different result of finding as to the
effect of IFRS adoption on financial performance many researchers said that
there is a positive effect, others negative effect while someresearchers there
is no significant effect.According to Asian (2015) on his work the impact of IFRS on
market performance of food and beverages manufacturing firms in Nigeria between
2009-2013. Earnings per Share, Price
Earnings Ratio and Dividend Yield to measure performance, Comparative analysis
and T test was done to ascertain influence of pre and post IFRS adoption on
market performance of the firms. His findings indicate that differences on
market performance between Pre and Post IFRS periods are not significant,
suggesting a weak correlation between adoption of IFRS and market performance
of quoted food and beverage manufacturing firms in Nigeria. Their conclusion
was that the adoption of IFRS does not automatically translate to higher market
performance which is in contrast with the work conducted by Barth et at (2008)
which finds that firms performance is enhanced by adoption ofIFRS.
Some researchers used only two or three
financial ratios, one or two year’s period to represent the pre and post IFRS
and considered only one company or firm, thereby making their work to be too narrow. For
example Donwaet’al (2015) on his work the effect of IFRS on Accounting Ratios
in Nigeria Oil and Gas Companies used only three accounting ratios and two
years period for each regime. Their finding showed that there is no significant
difference between the two regimes. Also most literature review did not include
recent financial years like 2015 and 2016 to reflect recent data, thereby
creating a research gap in this area which this paper intends to fill. As a
result of the afore mentioned problems it is therefore paramount to carry out
this research the effect of IFRS adoption on the financial performance of
listed manufacturing companies in Nigeria.
The researcher considered ten listed
manufacturing companies in Nigeria comprising top, middle and low size
companies, covering ten years period- five years pre and five years post. From
2012 to 2016 post IFRS this is because 2012 is the IFRS official reporting date
and the researcher started the work in 2017, these period was the only relevant
period and the equivalent five years for pre 2007- 2011. Five performance
indicators were used to make the work more robust which no researcher has used
up to five performance indicators and ten year’s period for their studies.
1.3 RESEARCH QUESTIONS
The
research work would seek answer and clarification to some of the research
questions raised from the objectives of the study as stated below:
1. What is the effect of IFRS adoption on the
profitability of quoted manufacturing companies in Nigeria?
2. What
is the effect of IFRS adoption on the liquidity of quoted manufacturing
companies in Nigeria?
3. To
what extent does IFRS adoption affect the efficiency of quoted manufacturing
companies in Nigeria?
4. To
what extent does IFRS adoptionaffect theleverage of quoted manufacturing
companies in Nigeria?
5. What
is the effect of IFRS adoption on the dividend payout of quoted manufacturing
companies in Nigeria?
1.4 OBJECTIVES OF THE STUDY
The main objective of the study is to
determine the effect of IFRS implementation on the financial performance of
Nigerian Quoted manufacturing companies. The Specific objectives are to:
1. Determine
the effect of IFRS adoption on the profitability of quoted manufacturing
companies in Nigeria.
2. Investigate
the effect of IFRSadoptionon the liquidity of quoted manufacturing companies in
Nigeria.
3. Examine
the effect of IFRS adoptionon the efficiency of quoted manufacturing companies
in Nigeria.
4. investigate
the effect of IFRS adoptionon theleverage of quoted manufacturing companies in
Nigeria.
5. Determine
the effect of IFRS adoption on the dividend pay out of quoted manufacturing
companies in Nigeria.
1.5 STATEMENT OF HYPOTHESES
The
following hypotheses formulated were empirically tested and appropriate
recommendation advanced based on the findings.
Ho1: IFRS adoption does not have effect on
the Profitability of manufacturing companies in Nigeria.
Ho2: IFRS adoption does not have effect on
the Liquidity of manufacturing companies in Nigeria.
Ho3: IFRS adoption does not have effect on
the efficiency of manufacturing companies in Nigeria.
Ho4: IFRS adoption does not have effect on
the Leverage of manufacturing companies in Nigeria.
Ho5:
IFRS adoption does not have
effect on theDividend pay-outof manufacturing companies in Nigeria.
1.6 SCOPE OF STUDY
This study was conducted in Nigeria to address the
effect of IFRS adoption on the quoted manufacturing companies in Nigeria (2007
to 2016). This research work covers ten
(10) selected quoted manufacturing companies in Nigeria. Data from the financial reports of the firms
was collected to measure profitability, liquidity and growth for the two
different periods. The pre implementation period covered five years from
2007-2011, while the post implementation era covered another five years from
2012-2016 respectively.
1.7 SIGNIFICANCE OF THE STUDY
The need for assessing the effect of
IFRS adoption on the financial performance of quoted companies in Nigeria cannot
be overemphasized. This is because, the financial performance of companies need
to be assess to ascertain whether there is any impart or effect of IFRS adoptioncompared
to the generally accepted accounting
principles adopted by various countries before the introduction of the new
standards.
Management:
this study if adopted will assist management of firmsin comparingthe financial
performance of different branches of the firm especially multinational
companies.
This research work will help to
reveal some of the problems encountered by companies in the preparation and
presentation of financial reports using the new standards.
Investors:
the study would be of immense assistance
to them because the financial crisis has shown how difficult it is to retain
investor’s confidence when investors are uncertain about the information
available to them.
Entrepreneurs:
this work will enable them to easily
understand the one accounting language company and world-wide, and also to know
whether companies are complying with the adoption of IFRS and to know the
extent of the adoption
Research
analysts: This study will act as a guide and
source of reference for researchers in academic area.
1.8
OPERATIONAL DEFIITION OF TERMS
IFRS:
An acronym for International Financial Reporting Standards, a globally accepted
standard for reporting financial transactions by corporate organizations who
have been quoted to trade publicly on the stock market. It is a set of rules and guidelines in which
companies must follow in reporting their financial activities.
Pre-adoption:
A period before the acceptance or adoption of the IFRS which allowed a country
or company to report her financial transactions using local standards. In
Nigeria, the statement of accounting standards was invoke and was regulated by
the Nigerian Accounting Standard Board (NASB). Pre adoption era is a period
before January 2012.
Post-adoption:
A period after January 2012, when firms are expected to have adopted and fully
introduce IFRS in their financial reporting.
FRC:
Financial Reporting Council of Nigeria, a regulatory body that passes pronouncements
and ensures compliance on the full adoption of financial reporting guide lines
in Nigeria.
IASB:
An apex accounting body that legislates on matters relating accounting
standards at the global level. It has been replaced by IFRSC.
DPO:
Dividend pay-out, a portion of company’s earnings which has been declared as
dividend to shareholders.
Leverage:
A firm’s ability to access liquidity or cash due to its debt- equity solvency.
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