ABSTRACT
This study examines the Relevance of International Financial Reporting Standard Adoption on the Financial Performance of Listed Deposits Money Banks in Nigeria. The specific objectives of the study are to assess the relevance of the adopting of IFRS on the reported return on equity of Deposit Money Banks Nigerian, to ascertain the influence of the adoption of IFRS on the liquidity of Nigeria Deposit Money Banks and to ascertain the influence of the adoption of IFRS on the reported Net Profit Margin and operating profit margin of Deposit Money Banks in Nigeria. An expo-facto research design is considered appropriate and suitable for this study. A purposive sampling technique was adopted in selecting the sampled banks. The study reveal that the first hypothesis shows the regression result of model 1 indicating that the adoption of International Financial Reporting Standard (IFRS) has a positive effect on the profitability of Nigerian Deposit Money Banks measured by Return on Equity (ROE). Based on the findings, the study therefore recommended that financial statement users should exercise caution when comparing ratios based on Nigerian GAAP and it was also recommended that top management, external auditors and regulators, being the key players in standards, need to work together and tighten compliance so that the impact of IFRS could be properly felt. Efforts should be directed towards the production of high quality accounting information that is free from systematic or deliberate bias, material or significant error, in the banking sector. These findings led us to the conclusion that IFRS adoption has a significant effect on the financial ratios of Nigerian Banks.
Keywords: IFRS Adoption, Financial Performance, Deposits Money Banks, Accounting Standards, Nigerian Banking Sector, Financial Reporting
TABLE OF CONTENTS
TITLE PAGES
Title Page i
Certification ii
Declaration iii
Dedication v
Acknowledgement v
Abstract vi
Table of content vii
CHAPTER ONE: INTRODUCTION
1.1 Background to the study 1
1.2 Statement of the problem 6
1.3 Objective of the study 6
1.4 Research Questions 7
1.4 Research Hypothesis 7
1.6 Significance of the Study 7
1.7 Scope of the Study 8
1.8 Limitations of the study 8
CHAPTER TWO: LITERATURE REVIEW
2.1 CONCEPTUAL FRAMEWORK 9
2.1.1 IFRS: Nature and Meaning 9
2.2 IFRS Adoption 10
2.2.1 Main Characteristics of IFRS 12
2.2.2 Issues and Challenges in International Financial Reporting Standards 14
2.2.3 Composition of IFRS 16
2.2.4 Major Changes in Financial Reporting and Stages of Effective adoption 16
2.3 Adoption of IFRS in Nigeria 18
2.3.1 Challenges of IFRS Adoption in Nigeria 19
2.3.2 Benefits of Adopting IFRS in Nigeria 20
2.3.3 Objective of Financial Reporting by Business Enterprises 21
2.4 Regulatory Framework and Accounting Standards in the Nigerian
Banking Sector 25
2.4.1 First Time Application of IFRS and Nigerian Banking Sector 26
2.4.2 The Overview and Structure of the Nigerian banking Industry 29
2.5.1 IFRS adoption and banks reported return on equity 33
2.5 The Concept Value Relevance 36
2.5.1 Attributes of Value Relevance 37
2.6 Theoretical Review
2.7 Theory of Change and Culture 38
2.7.1 Diffusion of Innovation Theory 42
2.7.2 Social Comparison Theory 43
2.7.3 Shareholders’ Theory 44
2.7.4 Stakeholders’ Theory 45
2.8 Empirical Framework 49
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction 50
3.2 Research Design 50
3.3 Population 51
3.4 Sample size and sampling Technique 51
3.5 Sources of Data 52
3.6 Validity and Reliability of Research Instruments 52
3.7 Method of Data Analysis 54
3.8 Model Specifications 54
3.9 Model Evaluation Technique 55
3.10 Justification for Data Analysis Methods 56
3.11 Apriori Expectation 57
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION OF FINDINGS
4.0 Introduction 58
4.1 Descriptive Analysis 58
4.2 Empirical Analysis 60
1.2.1. Test for Equality of means 61
4.2.2. Correlation Analysis 61
4.2.3.1.Test of Hypothesis One (H01 ) 62
4.2.3.2.Test of Hypothesis Two (H 02 ) 64
4.2.3.3.Test of Hypothesis Three (H 03 ) 68
4.2.3.3. Test of Hypothesis Three (H03) 67
4.3 Discussion of Findings 68
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary 72
5.1.1 Summary of Findings 73
5.1.2 Implications of the Findings 74
5.2 Conclusion 75
5.3 Recommendations 76
5.4 Suggestions for Further Studies 76
References
CHAPTER ONE
INTRODUCTION
1.1 Background to the study
The move towards globalization is a concern for many countries particularly developing countries as it has the potential of having a deep impact on the economy at large. The adoption of IFRS as a global and uniform standard is gaining ground as more countries are adopting IFRS or have intentions of adopting the standard. The European Union commenced the adoption in 2005 by ensuring that all listed companies in the European Union implement IFRS in their financial report (Odia and Ogiedu, 2013). The development of a globally acceptable standard originally commenced in 1973 as a result of the coming together of a group of qualified accounting professionals of major countries to form IASC (International accounting standard committee). These countries are UK, Ireland, United States, Australia, Canada, France, Germany, Japan, Mexico and Netherlands. They focused on developing a global accounting standard which will replace local standards, harmonize the differences in financial report due to diversities in legal systems, business structures and tax systems around the world. Hence, the users of financial information can adequately compare the financial statements of different companies to evaluate their financial performance and position there has also been some opposition to the adoption of IFRS particularly for developing countries like Nigeria. It has been argued that Nigeria and many developing countries have weak institutions, unpredictable economic and political environments which may undermine the successful implementation of IFRS (Tanko, 2012).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 1stJanuary, 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 1stJanuary, 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
i. no Board members are foreigners
ii. 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 need for risk management in banks stems from the core nature of the banking business which revolves more around lending. Poor assets quality and low liquidity have been seen as the two key challenges of banks (Oino, 2015). Deteriorating assets quality in the banking sector has been of global concern particularly after the 2007-2009 global financial crisis. In Sub Saharan Africa including Nigeria, non-performing loans have been on the rise (EIB, 2016). In the view of Nwaubani and Ezeudu (2015) the banking system still remains the engine of growth in any economy in view of its crucial functions in the economy. Therefore the need for a sound banking system in any economy is obvious. The directive for banks to adopt International Financial Reporting Standards (IFRS) in their financial reporting has been of interest to various local and international stakeholders. The primary objective of accounting is to provide useful financial information to stakeholders such as current investors, potential investors and lenders/creditors (Garcia,2015). According o the author, the quality of information provided in financial reports determines the usefulness and reliability of such reports to users. According to IFRS Foundation (2017) accounting standards are a set of principles and rules companies follow when they prepare and publish their financial statements. The principles provide uniform and consistent yardstick for assessing and comparing performances of the organizations. They are the authoritative statements of best accounting practices and are issued by recognized expert accountancy bodies providing a guide on how accounting information should be recorded, reported and interpreted (Shil,Das&Pramanik, 2009; Jamal, Shamsher, Taufiq&Zulkarnain, 2011). National standards differ from country to country because the standards reflect unique economic and socio-political realities of each nation and theserealities normally differ among nations. The differences in national standards introduce difficulties to investors and multinational corporations that need to prepare varying sets offinancial statements for the different countries where their subsidiaries operate (Mande, 2014). With fasts pace of globalization and integration of national financial markets the need for a common financial language becomes imperative (Herbert et al., 2013). Besides the imperatives of globalization, in recent years several financial and accounting scandals have risen and the incidents of corporate frauds in the form of false financial reporting, irregular transactions and assets embezzlement have been on the rise globally (Ugbede, Mohd, & Ahmad, 2014). These incidents have negatively affected the confidence and trust of the public and especially investors in financial reporting. To narrow the differences in national standards and to boost confidence and trust of local and international stakeholders in financial reporting; the International Accounting Standards Committee (IASC) later known as International Accounting Standards Board (IASB) commenced issuing International Accounting Standards (IAS). The IAS later became known as IFRS – International Financial Reporting Standards (Mustafa, 2014). National accounting standards setting bodies of different countries are expected to adopt the IFRS. Adoption of IFRS by a country refers to an attempt to replace a country’s standards with international financial reporting standards (IFRS). There is clear appreciation among stakeholders of the need for each country to adopt the IFRS.
1.2 Statement of the problem
Some research’s were conducted in developed countries, especially those from European Union, on the relevance of the adoption of IFRS on banks profitability. However, very little evidence exists in Nigeria to demonstrate how IFRS adoption has impacted on profitability of deposit money banks. This study, therefore, is a response to the need of financial statement users to know the impact of IFRS adoption on profitabilityof Deposit Money Banks in Nigeria.
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 profitability. These variances in the financial ratios will impair the comparability and measurement of banks performance. Basically, profitability, stability and liquidity are essential for the survival of a business. The relevance 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. Mean while, 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.
1.3 Objective of the study
The main objective of the study is to assessing 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. To assess the relevance of the adopting of IFRS on the reported return on equity of Deposit Money Banks Nigerian
2. To ascertain the influence of the adoption of IFRS on the liquidity of Nigeria Deposit Money Banks
3. To ascertain the influence of the adoption of IFRS on the reported Net Profit Margin and operating profit marginof Deposit Money Banks in Nigeria
1.4 Research Questions
1. To what extent does the adoption of IFRS affect the reported return on equity of Nigerian Deposit Money Banks?
2. How does the adoption of IFRS influence the liquidity of Nigeria Deposit Money Banks ?
3. What impact does the adoption of IFRS have on the reported Net Profit Margin and Operating Profit Margin of Deposit Money Banks in Nigeria?
1.5 Research Hypotheses
H01: IFRS does not have any significant effect on return on Equity of Deposit Money Banks in Nigeria.
H02: The Adoption of IFRS does not have any significant influence on the liquidity of Nigeria Deposit Money Banks
H03: The adoption of IFRS does not have any significant effect on Net Profit Margin and Operating Profit Margin of Deposit Money Banks .
1.6 Significance of the Study
The outcome of this study are expected to benefit the banking regulators, managements of banking firms, potential shareholders of banks, creditors, and Researchers of Nigerian Deposit Money Banks to determine whether the adoption of IFRS would change their reported performance in the financial statements, and if so, to incorporate this information on their planning process.
1.7 Scope of the Study
This study covers seven (7) of the fifteen (15) Nigerian Deposit Money Banks listed on the Nigerian Stock Exchange (NSE) as at 31st December 2019 and financial period of sixteen (16) years (2004 –2019) were used covering the period of eight (8) years prior adoption and eight (8) years post adoption periods.
1.8 limitations of the study
This research shall be limited by the following factors: Constraint of security on secondary data, Inadequate of finance, Lack of access to vital information, Time.
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