ABSTRACT
This examineed how disclosure of International Financial Reporting
Standard (IFRS) 7, namely Compliance Index (CI), Disclosure Quality Index (DQI)
and Risk Disclosure Index (RDI), affects the financial performance of listed
financial services firms in Nigeria. The study is driven by the unending issues
about transparency, risk management, and reporting reliability in the Nigerian
financial system to assess the impact on variations in the depth, quality, and
completeness of IFRS 7 disclosures on the return on assets (ROA). The research
design is ex-post facto research design based on the usage of a panel data
consisting of ten years (2015-2024) of annual reports of 10 sampled financial
institutions. The key pre-estimation diagnostics were completed using the
descriptive statistics, correlation, unit root tests, and Multicollinearity
analysis, which was followed by the implementation of the OLS regression. The
robustness of the model was ensured by running post-estimation tests, including
heteroscedasticity test and Durbin-Watson autocorrelation test. The results of
the empirical studies demonstrate a significant and positive significant impact
of IFRS 7 Compliance Index (CI) on financial performance, meaning that the
higher the compliance levels, the greater the profitability of the firm because
of the increased transparency and the decreased information asymmetry. On the
other hand, IFRS 7 Disclosure Quality Index (DQI) and Risk Disclosure Index
(RDI) were identified to have substantial yet negative effects on ROA. These findings
indicate that transparency and regulatory credibility are promoted through
higher-quality disclosures, but the cost of compliance, the administrative
burden, and the unveiling of underlying risks are liable to decrease short-term
profitability. Firm size (FSZ) always had insignificant impact on models,
leverage (LR) and liquidity ratio had strong positive impact, which implies the
significance of financial structure and liquidity adequacy in driving the
performance. The research finds that IFRS 7 disclosures have a strong impact on
the financial performance, but their effects are different among compliance,
quality, and risk disclosure dimensions. Although compliance yields
performance, quality and comprehensive risk disclosures could have financial burdens
on profitability in the short term. The paper suggests better automation of
risk-reporting procedures, developing capacity in financial professionals and
regulatory assistance focused on the lessening of disclosure load and
preserving transparency. The results can be added to the current literature on
the quality of financial reporting in the emerging markets and have some
important implications to the regulatory community, policymakers, investors,
and managers of the Nigerian financial services industry.
Keywords: IFRS 7, Risk Disclosure, Financial Performance, Disclosure
Quality, Compliance Index
TABLE OF CONTENTS
CHAPTER ONE
INTRODUCTION
1.1 Background
to the Study 1
1.2 Statement
of the Problem 5
1.3 Objectives
of the Study 6
1.4 Research
Questions 7
1.5 Research
Hypotheses 7
1.6 Significance of the study 6
1.7. Scope of the Study 8
1.8 Definitions of Key Terms 9
CHAPTER
TWO
LITERATURE
REVIEW
2.0
Introduction 11
2.1 Conceptual Review 11
2.1.1 Financial Performance 11
2.1.2 Financial Performance
Measurement 12
2.1.3
IFRS 7 Financial Instrument Disclosure 13
2.1.4
IFRS 7 Financial Instrument Disclosure
Index 14
2.1.4.1
Compliance Index of IFRS 7 Disclosure Requirement 14
2.1.4.2 Quality Index of IFRS 7 Disclosure Requirement 17
2.1.4.3 Risk Disclosure Index of IFRS 7 Disclosure
Requirement 20
2.1.5 Control Variables. 23
2.1.5
Conceptual Framework 26
2.2 Empirical
Review 27
2.2.1 Compliance
Index of IFRS and Financial Performance 28
2.2.2 IFRS 7 Disclosure
Quality Index of and Financial Performance 34
2.2.3 Risk Disclosure
Index of IFRS and Financial Performance 39
2.2.5
Literature Mapping 46
2.2.6 Gap in Literature 50
2.3 Theoretical
Framework 51
CHAPTER
THREE
RESEARCH
METHODOLOGY
3.0
Introduction 54
3.1 Research Design 54
3.2. Population of the Study 54
3.3 Sample and Sampling Technique 54
3.4 Source of Data and Data Collection Method 55
3.6 Model Specification 55
3.7 Measurement of Variables 56
3.8 Techniques for Data Analysis 57
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 Data
Presentation 60
4.2 Pre-Estimation
Tests 60
4.2.1 Descriptive Statistics 60
4.2.2 Correlation Matrix 63
4.2.3 Unit Root Test 65
4.2.4 Multicollinearity Test 67
4.3 Test
of Hypotheses 68
4.3.1 Test of Hypothesis One 68
4.3.2 Test of Hypothesis Two 70
4.3.3 Test of Hypothesis Three 72
4.4 Post
Estimation Diagnostic Tests 74
4.4.1 Heteroscedasticity Test 74
4.4.2 AUTOCORRELATION TEST (Durbin-Watson ) 75
4.5 Discussion
of findings 76
CHAPTER FIVE
SUMMARY, CONLUSION AND
RECOMMENDATIONS
5.1
Summary 80
5.2 Conclusion
82
5.3 Recommendations 83
5.4 Contribution
to Knowledge 85
5.5 Suggestions
for Further Studies 86
References 89
APPENDIX
1: IFRS 7: Financial Instruments Disclosures Items Checklist 10
APPENDIX II: Listed Financial Services Firms on the Nigeria Exchange Group 102
APPENDIX
III: Data Presentation 104
APPENDIX
IV: Eviews Outputs 107
CHAPTER ONE
INTRODUCTION
1.1 Background to the
Study
Financial
performance remains a critical metric for assessing the viability, efficiency,
and sustainability of any business enterprise, especially for listed companies
that are accountable to a diverse range of stakeholders. It reflects the
ability of a firm to generate profits, optimize resources, maintain liquidity,
and sustain operations over time. Financial performance is commonly measured
using indicators such as Return on Assets (ROA), Return on Equity (ROE),
Earnings Per Share (EPS), and Net Profit Margin (Ebaid, 2023). These measures
are of particular interest to investors, financial analysts, regulatory
agencies, and managers because they serve as a basis for evaluating the
profitability and financial health of an organization.
Over
the past few decades, the evaluation of financial performance has gained
greater complexity due to globalization, increasing investor demand for
transparency, and evolving regulatory frameworks. This has made high-quality
financial reporting and disclosure an essential requirement for firms,
particularly those listed on stock exchanges. Reliable financial performance
data helps reduce information asymmetry between management and investors,
allowing for more informed decision-making (Sandberg, Alnoor & Tiberius,
2023). However, this level of transparency is only possible if firms adhere to
rigorous reporting standards that are universally accepted, comparable, and
relevant. This necessity for harmonization of financial reporting gave rise to
the adoption of the International Financial Reporting Standards (IFRS).
The
IFRS, developed by the International Accounting Standards Board (IASB), were
introduced to provide a common accounting language that improves the quality,
comparability, and transparency of financial statements across international
borders. These standards are particularly significant for emerging economies
like Nigeria, where the integration of domestic firms into the global financial
ecosystem is a developmental priority. Prior to IFRS adoption, Nigerian firms
operated under the Nigerian Generally Accepted Accounting Principles (NGAAP),
which lacked limited international recognition and capacity to reflect economic
realities in financial disclosures (Okoye, Nwoye & Okoro, 2019). The transition
to IFRS in 2012 marked a substantial shift in the regulatory landscape,
especially for firms listed on the Nigerian Exchange Group (NGX).
Among
the standards introduced, IFRS 7: (Financial Instruments Disclosures) is one of
the most pertinent to corporate financial performance. IFRS 7 specifically
addresses the disclosure requirements for financial instruments and the risks
associated with them. According to the IASB (2023), IFRS 7 requires entities to
provide both qualitative and quantitative disclosures that enable users of
financial statements to evaluate the significance of financial instruments in
the entity’s financial position and performance, as well as the nature and
extent of risks arising from those instruments. The standard mandates reporting
on credit risk, liquidity risk, and market risk, as well as a detailed
explanation of how these risks are managed.
Understanding
IFRS 7 is crucial to linking financial performance with financial instrument
disclosures. Financial instruments such as loans, receivables, derivatives, and
equity investments form an integral part of corporate statement of finance
position. Poor management or inadequate disclosure of these instruments can
distort a firm’s financial position, mislead stakeholders, and adversely impact
financial performance. Hence, IFRS 7 aims to bridge the information gap by
compelling firms to disclose not only the carrying amounts of financial
instruments but also the associated risk exposures and strategies for risk
mitigation.
From
a theoretical standpoint, compliance with IFRS 7 can significantly affect
financial performance through several pathways. First, improved transparency
resulting from detailed disclosures may enhance investor confidence, reduce perceived
risk, and lower the cost of capital (Iyoha & Faboyede, 2019). Investors are
more likely to commit capital to firms that clearly communicate their risk
exposures and financial health. Secondly, IFRS 7 encourages internal discipline
among management by requiring systematic identification and disclosure of
financial risks. This can improve managerial decision-making, enhance corporate
governance, and ultimately improve firm performance (Ahmed & Hla, 2019).
However,
the adoption and implementation of IFRS 7 are not without challenges. Compliance
with its detailed disclosure requirements often entails considerable financial
and operational costs. Firms may need to invest in new accounting systems,
train personnel, and undergo more extensive audits (Ozili, 2021). These costs
can be particularly burdensome for small and medium-sized enterprises (SMEs)
and may negatively impact short-term profitability. Moreover, in some cases,
full disclosure of financial risks may reveal vulnerabilities that were previously
obscured, potentially leading to reputational damage or reduced investor
confidence (Akinleye, Azeez & Adepoju, 2020).
In
the Nigerian context, the implementation of IFRS 7 has taken place amidst
significant macroeconomic and institutional challenges. The Nigerian business
environment is characterized by regulatory uncertainty, inflationary pressures,
foreign exchange volatility, and inconsistent enforcement of financial
regulations (Uwuigbe et al., 2019). These factors complicate the process of
financial risk assessment and disclosure. Despite the official adoption of
IFRS, studies show that compliance levels vary widely across firms, with many
struggling to fully align their reporting systems with the required standards
(Oyeka, Uwuigbe & Falana, 2021).
Nevertheless,
the potential benefits of IFRS 7 remain substantial. By enhancing the
transparency and quality of financial statements, IFRS 7 could contribute to
more accurate assessment of financial performance, improved corporate
governance, and stronger investor relations. Moreover, the credibility gained
through IFRS compliance may facilitate access to international capital markets,
thereby supporting the growth and sustainability of Nigerian companies (Eluyela
et al., 2020). In addition, better risk disclosure under IFRS 7 may foster a
culture of proactive risk management, enabling firms to mitigate financial
shocks and maintain stable performance over time.
Several
empirical studies have explored the relationship between IFRS 7 compliance and
financial performance. For example, Onah (2025) found that compliance with IFRS
7 positively affected Return on Equity (ROE) and Earnings Per Share (EPS) among
construction firms listed on the Nigerian Exchange. The study suggested that
enhanced transparency and risk disclosure boosted investor confidence and
contributed to improved financial outcomes. Similarly, Mardonova (2025)
emphasized the link between IFRS compliance and credit ratings, asserting that
firms with better disclosure standards were more likely to receive favorable
credit assessments. In Kenya, Daniel, Warui, and Musau (2025) studied the
impact of IFRS 9 (a closely related standard focusing on accuracy for expected
credit losses) and found that improved financial instrument reporting was
positively correlated with financial performance metrics in commercial banks.
These studies collectively highlight the potential of disclosure-based
standards like IFRS 7 to influence firm-level performance.
While
the benefits of IFRS 7 are theoretically appealing and empirically supported,
the realization of these benefits depends significantly on firm-level
commitment to genuine compliance. Merely ticking regulatory checkboxes is
insufficient; companies must internalize the principles of transparency,
accuracy, and risk awareness that underpin the standard. In many Nigerian
firms, especially those in the financial services and manufacturing sectors,
institutional weaknesses such as poor internal controls, lack of technical
expertise, and weak enforcement mechanisms remain significant barriers to full
compliance (Abata, 2022).
Moreover,
the role of auditors, regulators, and other stakeholders cannot be ignored.
Auditors play a vital role in ensuring that firms do not merely comply in form
but in substance. Regulatory agencies such as the Financial Reporting Council
of Nigeria (FRCN) and the Securities and Exchange Commission (SEC) are
instrumental in setting the tone for enforcement and monitoring compliance with
IFRS standards.
Financial
performance continues to be the bedrock upon which investor decisions,
strategic management, and corporate sustainability rest. The demand for
accurate and comprehensive financial reporting has necessitated the adoption of
international standards such as IFRS. Among these, IFRS 7 stands out as a
crucial tool for enhancing the transparency and reliability of financial
information, particularly regarding financial instruments. By mandating robust
disclosures, IFRS 7 not only helps stakeholders understand the financial risks
a firm faces but also enables firms to better manage those risks, thereby
potentially enhancing financial performance. In the Nigerian context, the
successful implementation of IFRS 7 offers a pathway to greater financial
integration, improved investor confidence, and more resilient corporate
performance.
IFRS 7
disclosure is imperative in financial services companies in Nigeria as it
exposes the sector to diverse financial instruments, risks, and market
uncertainties. IFRS 7 mandates transparent reporting on the nature, extent, and
management of credit, liquidity, and market risks, thereby enhancing investor
confidence and regulatory compliance. For Nigerian financial institutions, full
adherence to IFRS 7 ensures comparability of financial statements across
borders, improves the quality of risk disclosures, and strengthens stakeholder
trust. Moreover, it aids regulatory bodies such as the Central Bank of Nigeria
(CBN) and the Financial Reporting Council (FRC) in assessing systemic stability
and enforcing accountability. Thus, IFRS 7 disclosure is vital for credibility,
financial soundness, and sustainable market confidence. Hence,
exploring the effect of IFRS 7 compliance on the financial performance of
listed financial services companies in Nigeria is both timely and significant
for academic research, policy formulation, and corporate governance.
1.2 Statement of the
Problem
The
financial performance of listed companies in Nigeria has been a persistent
concern among investors, regulators, and stakeholders. Despite regulatory
reforms and financial market expansion, several firms continue to report
suboptimal returns, unstable earnings, and declining profitability indicators
such as Return on Assets (ROA), Return on Equity (ROE), and Profit After Tax
(PAT). These concerns raise critical questions about the underlying financial
reporting practices and transparency mechanisms employed by these firms. The
persistent underperformance suggests that traditional financial reporting may
not be providing adequate insights into the firms' financial health, risk
exposure, and long-term sustainability.
Given
the dynamic and risk-laden nature of the modern financial environment, one key
area of inquiry is whether the quality and depth of financial disclosures
influence a firm's financial performance. Financial performance is not only a
reflection of operational efficiency but also of how transparently and
comprehensively firms disclose risks and financial instruments in their
reports. In this regard, the quality of financial reporting becomes
instrumental in building investor confidence and enhancing financial
decision-making. However, the limited performance improvements in the post-IFRS
era suggest that enhanced reporting frameworks may not have translated into
improved financial outcomes for Nigerian companies, or that compliance may have
been superficial or inconsistent.
In
response to global demands for more transparent and risk-sensitive financial
reporting, International Financial Reporting Standard 7 (IFRS 7) was
introduced. It mandates detailed disclosures concerning financial instruments,
including credit, liquidity, and market risks. Nigeria adopted IFRS in 2012,
and IFRS 7 has since played a central role in shaping the risk disclosure
landscape. However, despite the presumed benefits of compliance—such as reduced
information asymmetry, increased transparency, and improved
decision-making—there remains insufficient empirical evidence on the extent to
which IFRS 7 disclosures have enhanced financial performance in the Nigerian context,
especially financial services companies.
A
key issue concerns the degree of compliance with IFRS 7 by listed Nigerian
firms. While the standard calls for broad and robust disclosures, various
studies have documented only partial or selective compliance. This partial
implementation raises doubts about whether firms are truly leveraging the
standard’s transparency potential to improve financial outcomes. Furthermore,
firm-level differences such as size, liquidity, and industry-specific factors
may control the relationship between compliance and financial performance, but
these dynamics are not yet well understood.
Another
critical area is the quality of disclosures made under IFRS 7. Compliance alone
does not ensure that disclosures are comprehensive, truthful, or
decision-useful. There is a dearth of research that empirically examines the
Disclosure Quality Index (DQI) in the context of IFRS 7 and its specific impact
on firm performance. If companies merely comply in form but not in substance,
the potential benefits in terms of investor trust, better risk pricing, and
improved performance may be lost. This raises the question of whether Nigerian
companies are offering high-quality disclosures that can positively influence
their financial standing or simply adhering to minimum regulatory requirements.
Additionally,
the relationship between IFRS 7 risk disclosure and accounting quality remains
underexplored. Accounting quality is critical to financial performance as it
assures users of the reliability, comparability, and accuracy of reported
information. Poor risk disclosure impairs financial reporting quality, which
can erode stakeholder confidence and result in suboptimal financial decisions.
Although some literature addresses the broad implications of financial
disclosure, very few studies have examined the specific linkage between IFRS 7
risk disclosure indices and the accounting quality of Nigerian firms, and how
this ultimately affects financial performance.
There
exists a significant gap in literature and practice regarding how compliance
with IFRS 7, both in terms of extent and quality, influences the financial
performance of listed companies in Nigeria. This study addresses this gap by
empirically examining how levels of compliance, disclosure quality, and the
relationship between risk disclosure and accounting quality under IFRS 7
jointly influence key financial performance indicators in financial services
companies. The findings are expected to provide relevant insights to
regulators, financial analysts, auditors, and corporate managers on how
financial disclosure practices can be strategically improved to enhance firm
performance and market confidence.
1.3 Objectives of the Study
The
general objective of the study is to determine the effect of IFRS 7 adoption on
the financial performance of listed financial services companies in Nigeria.
The specific objectives of the study are to:
i.
To examine the
extent to which compliance with IFRS 7 disclosure requirements influences the financial
performance of listed financial services companies in Nigeria.
ii.
To assess the
effect of IFRS 7 disclosure quality on the financial performnce of listed financial
services companies in Nigeria.
iii.
To investigate the
impact of IFRS 7 risk disclosure on financial performance of listed financial
services companies in Nigeria.
1.4 Research Questions
In
order to achieve the set objectives, the following research questions guided
the study:
i.
To what extent
does compliance with IFRS 7 disclosure requirement influence the financial
performance of listed financial services companies in Nigeria?
ii.
What is the effect
of IFRS 7 disclosure quality on the financial performance of listed financial
services companies in Nigeria?
iii.
How does IFRS 7
risk disclosure influence financial performance of listed financial services companies
in Nigeria?
1.5 Research Hypotheses
For
the purpose of achieving the objectives of the study, the following null
hypotheses were formulated to guide the study
i.
H₀₁:
There is no significant relationship between compliance with IFRS 7 disclosure
requirements and financial performance of listed financial services companies
in Nigeria.
ii.
H₀₂:
IFRS 7 disclosure quality has no significant effect on the financial
performance of listed financial services companies in Nigeria.
iii.
H₀₃:
IFRS 7 risk disclosure does not significantly influence financial performance
of listed financial services companies in Nigeria.
1.6 Significance of the study
The usefulness of the research will be derived
from the findings in making financial reporting policies and investment
decisions by stakeholders of quoted companies in Nigeria. To this effect, the benefits
to be derived by various stakeholders from this research specifically,
More informative financial reports
automatically build up investor confidence and hence are more likely to attract
increased investment. This study tries to help investors to conclude whether
IFRS adoption by Nigeria leads to the improvement of the financial performance
and accounting quality of the listed companies, which will assist the investor
in making their investment decisions.
This research will be useful to the following
agencies for further research: Central Bank of Nigeria, Nigerian Deposit Insurance
Corporation, Nigerian Exchange Group, Financial Reporting Council of Nigeria,
the Institute of Chartered Accountants of Nigeria, and Association of National
Accountants of Nigeria. This will give a basis for reviewing existing standards
and assessing the effect of global standards on financial reporting. Moreso,
the results from this study will help management identify whether the adoption
of IFRS affects their reported performance and the quality of financial
statements, thereby helping them in their planning processes. Consultants will
also be better positioned to advise their clients through an understanding of
how IFRS influences financial performance. Such research would, therefore,
enable them to provide better services and guidance on how best to improve
their performance and quality.
The findings will therefore be useful to
policy makers in understanding the realities of transition from NGAAP to IFRS
and inform future development of standards. The study shall also add to the
body of literature at both national and international levels on IFRS adoption
and implementation. It shall form a source for any interested future researcher
and thus facilitate continued academic research into the impact of IFRS on
financial performance and organizational value in various sectors in Nigeria.
1.7. Scope of the Study
This study focuses on evaluating the effect
of IFRS 7 disclosure requirements on the financial performance of listed
financial services firms on the Nigerian Exchange Group. The research
specifically examines the extent to which the Compliance Index, Disclosure
Quality Index, and Risk Disclosure Index which are key elements of IFRS 7
affect the financial performance of these firms.
The study covers a period of ten (10) years,
from 2015 to 2024. This timeframe allows for a comprehensive analysis of the
long-term effects of IFRS 7 adoption, including the initial post-adoption
period and subsequent years where firms have had more time to fully integrate
IFRS 7 standards into their reporting practices.
The research will focus on financial services
firms listed on the Nigerian Exchange Group, which includes banks, insurance
companies, and other financial institutions. These firms are selected due to
the critical role that financial instruments play in their operations, making
them particularly relevant for examining the effect of IFRS 7 disclosures.
By concentrating on this specific sector and
timeframe, the study aims to provide valuable insights into the effectiveness
of IFRS 7 in improving financial transparency and performance in the Nigerian
financial industry. The findings are expected to contribute to the ongoing
discourse on the benefits and challenges of IFRS adoption in emerging markets like
Nigeria.
1.8 Definitions of Key
Terms
These terms have been
defined to present clarity and standardization of the terminology used
throughout the study for consistency and understanding among the researchers,
participants, and readers.
International
Financial Reporting Standards (IFRS): IFRS are
a globally accepted set of accounting standards issued by the International
Accounting Standards Board (IASB) for the preparation and presentation of
financial statements to enhance comparability and transparency in global
financial reporting. IFRS Foundation (2021)
Financial
Performance: This refers to the measure of a
firm’s financial health and operational efficiency over a period, commonly
assessed through accounting indicators such as Return on Assets (ROA), Return
on Equity (ROE), and Net Profit Margin.. Pandey, (2021).
Return on Assets
(ROA): ROA is a financial ratio that shows the
percentage of profit a company earns in relation to its overall total assets.
It indicates how efficiently management is using the firm’s assets to generate
earnings. Brigham & Daves, (2021).
Value Relevance: This is the degree to which financial statement information
explains stock market variations, thereby reflecting its usefulness to investors
in valuing a firm’s equity. Barth, Beaver & Landsman, (2021).
Listed Companies: Listed companies are those whose shares are publicly traded on a
recognized stock exchange, such as the Nigerian Exchange Group (NGX), and are
therefore subject to regulatory oversight and disclosure requirements. Nigerian
Exchange Group (NGX), Listing Rules (2023)
Sector Analysis: Sector analysis involves the examination of specific sectors within
an economy to evaluate financial trends, performance outcomes, and the
potential impact of economic policies or accounting standards like IFRS
adoption. Reilly & Brown, (2022).
Firm Size: Firm size refers to the scale of a business entity and is commonly
quantified by metrics such as total assets, total revenue, or market
capitalization. It is often used as a control variable in financial performance
studies. Chen, Ding, & Xu, (2020).
Firm Age: Firm age denotes the number of years since a firm’s incorporation or
founding. It is used as a moderating factor in performance analysis,
particularly when evaluating maturity effects in financial reporting or
compliance studies. Huergo & Jaumandreu, (2024).
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