ABSTRACT
The
main objective of the study involved the assessment of the impact of the
adoption of International Financial Reporting Standards on the performance
reporting of Nigerian Deposit Money Banks using financial ratios, while the
specific objectives involved the examination of the effects of the adoption of
IFRS on the reported profitability measured by return on equity (ROE), on the
reported liquidity, measured by current ratio (CR), on the reported gearing
ratio measured by Total Deposit to Equity (TDE), and on the reported interest
cover measured by (FCC) of the Nigerian Deposit Money Banks. The globalization
of business had necessitated the introduction of International Financial
Reporting Standards (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.However, accounting under IFRS and pre-changeover Nigerian accounting
standards hampers the consistency of information in the financial statements
due to the application of fair value accounting and thus affects the
performance of Nigerian Banks. This study examined the effects of IFRS adoption
on the reporting performance of Nigerian listed banks using four (4) key
financial ratios (ROE, CR, TDE and FCC). The study covered a period of four (4)
years pre-adoption of IFRS and four (4) years post –adoption of IFRS.
The
study employed an ex-post facto research design. The population of the study
constitutes all the 15 Deposit Money Banks Listed on Nigerian Stock Exchange
(NSE) as at 31st December, 2015, while eight (8) banks were selected using a
purposive sampling technique.
Pearson’s
Correlation Analysis, Analysis of Variance (ANOVA) and Regression Analysis were
used to find the effects of IFRS adoption on financial ratios while paired sample
t –test and F-test were used to test the significance of the difference in
means and variances between ratios under IFRS and Nigerian Generally Accepted
Accounting Principles (NGAAP) respectively.
The
result of the findings revealed that there is statistical significant
difference in ROE, CR, TDE and FCC prior and after the IFRS adoption.
Transition in standards has therefore drastically enhanced the reported
accounting figures and estimates of Deposit Money Banks listed on the Nigerian
Stock Exchange (NSE). Also, IFRS positively influenced the banks’ ROE and TDE,
but has significant negative effect on CR and FCC.Thestudy concluded that IFRS
adoption has a significant effect on the financial ratios of Nigerian banks and
consequently on their reporting performance.
TABLE OF CONTENTS
Title
Page
Abstract
Table of
Contents
List of Tables
List of Figures
List of
Abbreviations
Appendices
CHAPTER ONE:
INTRODUCTION
1.1
Background to the Study
1.2
Statement of the Problem
1.3
Objective of the Study
1.4
Level of adoption of IFRS by the
Nigerian Deposit Money Banks
1.5
Challenges of the adoption of IFRS
1.6
Research Questions
1.7
Hypotheses
1.8
Rationale for Hypotheses
1.9
Significance of the Study
1.9.1 Significant Implication for investors
1.9.2 Significant Implication for Companies’
Management
1.9.3 Significant Implication for Academics
1.9.4 Significant Implication for Consultants in
Practice
1.9.5 Significant Implication for Policy Makers
1.10
Scope of the Study
1.11
Operationalization of Variables
1.12
Operational Definition of Terms
CHAPTER TWO: REVIEW OF
LITERATURE
2.1 Conceptual Review
2.1.1 Concept
of Financial Performance (Profitability)
2.1.2 Concept
of Leverage
2.1.3 Concept
of Liquidity
2.1.4 Concept
of Fixed Interest Cover
2.1.5 Empirical
Review
2.1.6 The IASC/IASB Conceptual Model
2.1.7 IASC/\IASB Regulatory Framework
2.1.8 Main Characteristics of IFRS
2.1.9 Differences in Accounting Standards
2.1.10 History of National Differences
2.1.11 Differences in Accounting System
2.1.12 IFRS Adoption and Developing Countries
2.1.13 Objectives of Financial Reporting by Business
Enterprises
2.1.14 Qualitative Characteristics of Accounting
Information
2.1.15 Accounting Standards and IFRS in Nigeria
2.1.16 Fundamental differences between IFRS and
Nigerian GAAP
2.1.17 Regulatory Framework and Accounting Standards
in the
Nigerian Banking Sector
2.1.18 First Time Application of IFRS and Nigerian
Banking Sector
2.1.19 Financial Statements and Financial Reporting
2.1.20 Tools of Analysis and Interpretation of
Financial Statements
2.2 Theoretical Review
2.2.1 Diffusion of Innovation Theory
2.2.2 Social Comparison Theory
2.2.3 Agency Theory
2.2.4 Shareholders’ Theory
2.2.5 Stakeholders’ Theory
2.2.6 Theoretical Framework
2.2.7 Diffusion of Innovation Theory
2.2.8 Social Comparison Theory
2.3 Empirical
Framework of IFRS’s Adoption on Reporting Performance
of
Nigerian Deposit Money Banks
2.3.1 IFRS
adoption and banks reported return on equity
2.3.2 IFRS
adoption and reported current ratio (Liquidity Ratio)
2.3.3 IFRS
adoption and banks’ reported Leverage Ratio
2.3.4 IFRS
adoption and banks’ Fixed Charge Coverage
2.4 Summary
2.5 Gaps in Literature
CHAPTER THREE:
METHODOLOGY
3.1 Research Design
3.2
Population
3.3 Sample size and sampling Technique
3.4 Sources of Data
3.5 Validity and Reliability of Research
Instruments
3.6 Method of Data Analysis
3.7 Model Specifications
3.8 Model Evaluation Technique
3.9 Justification for Data Analysis
3.10 Apriori Expectation
3.11 Ethical Consideration
CHAPTER
FOUR: DATA ANALYSIS, RESULTS AND
DISCUSSION OF
FINDINGS
4.1 Descriptive Analysis
4.2
Empirical Analysis
4.2.1 Test for Equality of Means
4.2.2 Correlation Analysis
4.2.3 Test of Hypotheses
4.2.3.1 Test of Hypothesis One (Ho1)
4.2.3.2 Test of Hypothesis Two (Ho2)
4.2.3.3 Test of Hypothesis Three (Ho3)
4.2.3.4 Test of Hypothesis Four (Ho4)
4.3 Discussion of Findings
CHAPTER FIVE:SUMMARY,
CONCLUSION AND RECOMMENDATIONS
5.1 Summary
5.1.1 Summary of Findings
5.1.2 Implications of the Findings
5.2 Conclusion
5.3 Recommendations
5.4 Contribution to Knowledge
5.5 Limitation of the Study
5.6 Suggestion for Further Studies
References
Appendix
CHAPTER ONE
INTRODUCTION
1.1
Background
to the Study
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 1st January, 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 1st
January, 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
difference in financial reports across nations was partly responsible for the
financial down turn experienced in the world. For example, in December 2, 2001,
Enron Corporation, an American Company, became bankrupt as a result of willful
corporate fraud and corruption. Arthur Andersen, one of the “Big Five”
accounting firms in the world voluntarily surrendered its licenses to practice
as Certified Public Accountants. In 2002, Worldcom, another US based
telecommunication company collapsed.
Bratton
& Cunningham, 2002, attributed these corporate scandals to failure on the
part of Auditing Firms. Enron
Corporation was an American energy, commodities, and services company based in
Houston, Texas. It was founded in 1985 as the result of a merger between
Houston Natural Gas and Inter North, both relatively small regional companies
in the U.S. Before its bankruptcy on December 2, 2001, Enron employed
approximately 20,000 staff, and was one of the world’s major electricity,
natural gas, communications and pulp and paper companies, with claimed revenues
of nearly $111 billion during 2000. At the end of 2001, it was revealed that
its reported financial condition was sustained by institutionalized,
systematic, and creatively planned accounting fraud, known since as Enron
scandal. Enron has since become a well known example of willful corporate fraud
and corruption. The scandal also brought into question the accounting practices
and activities of many corporations in the United States and was a factor in
the enactment of the Sarbanes –Oxley Act of 2002. The scandal also affected the
greater business world by causing the dissolution of the Arthur Andersen
accounting firm.
Arthur Andersen LLP, based in
Chicago, is an American holding company and formerly one of the “Big Five”
accounting firms among Price-water-house Coopers, Deloitte Touche Tohmatsu,
Ernst & Young and KPMG providing auditing, tax and consulting services to
large corporations. In 2002, the firm voluntarily surrendered its licenses to
practice as Certified Public Accountants in the United States after being found
guilty of criminal charges relating to the firm’s handling of the auditing of
Enron, an energy corporation based in Texas, which had filed for bankruptcy in
2001.
WorldCom was
a US based telecommunications company and the second largest long-distance
phone company in the country until a massive accounting scandal that led to the
company filing for bankruptcy protection in 2002. Most notably, company founder
and former CEO Bernard Ebbers was sentenced to 25 years in prison, and former
CFO Scott Sulivan received a five-year jail sentence, which would have been
longer had he not pleaded guilty and testified against Ebbers. Under the
bankruptcy reorganization agreement, the company paid $750 million to the
Securities and Exchange Commission (SEC) in cash and stock in the new MCI which
was intended to be paid to former investors.
In July
2002, WorldCom filed for Chapter 11 bankruptcy protection in the Southern
District of New York. Approximately one month prior, an internal audit showed
the company improperly accounted for $3.8 billion in operating expenses over
five quarters. After filing for bankruptcy, Sullivan was fired, senior vice
president and controller David Meyers resigned, and 17,000 workers were laid
off. WorldCom’s filing for bankruptcy, which did not include its foreign units,
is as of 2016, the biggest in U.S. History. (Bratton & Cunningham 2002).
In 1997, the
Nigerian banking sector collapsed with 26 banks liquidated. In October 2006,
there was falsification of the company financial statement in Cadbury Nigeria
Plc. (Olusola, Adeniran & Obiamaka, 2013). In 2009 in Nigeria, 10 banks
were declared insolvent while 8 executive management teams of the banks were
removed by the Central Bank of Nigeria.
In October
2006, the Board of Directors of Cadbury, Nigeria Plc. (Public Limited Company)
informed the world of the discovery of overstatement in its accounts spanning a
period of years. This overstatement was to the tune of between 85 and 100
million naira. The quality of financial reporting is essential to the needs of
users who require useful accounting information for investment and other
decision making purposes. Information emanating from financial reporting is
regarded as useful when it faithfully represents the “economic substance” of an
organization in terms of relevance, reliability and comparability (Spicel, Sepe
& Tomassini, 2001). As observed by Chambers, Penman (1984) and Ahmed
(2003), useful accounting information which derives from qualitative financial
reports, assists in efficient allocation of resources by reducing dissemination
of asymmetric information and improving pricing of securities.
Financial
reporting is intended to provide reasonably accurate information that enables
users of financial statement to take economic and investment decisions.
Therefore financial report is prepared to meet information needs of various
users of financial information. Hence, high-quality financial reports should
produce financial information that reports events timely and faithfully in the
period in which they occur. This becomes imperative as individuals and
organizations are concerned about the future of their investments and of the
organizations in which such investment decisions are made (Okwoli, 2001).
In 2001, the
International Accounting Standard Board, (IASB), an independent, private sector
body was formed to replace International Accounting Standards Committee (IASC),
with the main objectives of developing and approving International Financial
Reporting Standards (IFRS). The need for the reorganization is that, if
accounting is the language of business, then, business enterprises all over the
world cannot continue to be speaking in different languages to each other while
exchanging financial numbers from their international business activities.
Thus, a single set of global accounting standards would simplify accounting
procedures by allowing the use of a common reporting language across the globe
(Azobi, 2010).
A major
breakthrough came in 2002 when the European Union (EU) adopted legislation that
requires listed companies in Europe to apply IFRS in their consolidated
financial statements. The legislation came into effect in 2005 and applied to
more than 8,000 companies in 30 countries including countries such as France,
Germany, Italy, Spain and United Kingdom. The adoption of IFRS in Europe means
that IFRS has replaced national accounting standards and requirements as the
basis of preparing and presenting group financial statements of listed
companies in Europe. Outside Europe, many other countries also have been moving
to IFRS. By 2005, IFRS had become mandatory in many countries in Africa, Asia
and Latin America. In addition, countries such as Australia, Hong Kong, New
Zealand, Philippines and Singapore have adopted national accounting standards
that mirror IFRS. According to one estimate about 80 countries required their
listed companies to apply IFRS in preparing and presenting financial statements
by 2008. Many other countries permit companies to apply IFRS (Abbas, Magnus
& Graham, 2008).
The Nigerian
Accounting Standards Board (NASB) (2010) asserted that emergencies of the
globalization of accounting standard, among others, have been reported to
reduce the cost of producing supplementary information as well as enhancing
comparability, understandability, evaluation and analysis of the financial
statement. These have necessitated many developing countries that do not want
to be left behind to take a cue from the world major economies to adapt, adopt
or converge to the IFRS. Nigeria has equally taken steps to converge to IFRS;
in 2011, Government signed into law, the Financial Reporting Council of Nigeria
(FRCN) Act, 2011 with emphasis that the countries road map to stage adoption of
IFRS was scheduled to begin by 1 January, 2012 with publicly quoted companies.
Other Public Interest Entities (PIEs) were to converge to IFRS by 1 January,
2013 and small and medium size entities by 1 January, 2014 (NASB 2011). The
Central Bank of Nigeria (CBN) had however directed banks to comply with IFRS
since 2010.
The
legislation (Financial Reporting Council of Nigeria Act of 2011) is to create
an enabling environment for the implementation of IFRS and to guarantee
credible financial reporting regime in both private and public sector entities.
In Nigeria, Government has equally empowered the Financial Reporting Council of
Nigeria to issue and regulate accounting actuarial valuation, and auditing
standards. What this means is that, the Nigerian Accounting Standard Board
(NASB) together with the Statement of Accounting Standards (SAS) issued by it
is now replaced. While this might be regarded as a welcome development, the
questions that beg for answers as to whether the adoption of IFRS would improve
transparency of financial reporting in Nigeria are a legion. IFRS is more
principles based and does not provide issuers with the same degree of detailed
guidance for the preparation of financial statements, as it is for instance,
under Nigeria GAAP. (Azobi, 2010).
In
compliance with IFRS, IFRS1 requires an entity to explain how the transition
from local GAAP to IFRS affects its reported financial statements. It also
requires an entity to prepare and present an opening statement of financial
position at the date of transition to IFRS. This is the starting point of
financial reporting through IFRS and will also result to two comparative
financial statements for the period. However, the fundamental difference in the
application of fair value accounting under IFRS and the Nigerian GAAP hampers
the consistency of items of financial statements (Anna-Maija & Petri,
2007). The fair value accounting causes adjustment in financial statements and
thus makes the financial statement, to differ from what it used to be.
Therefore, problem of comparability and measurement of company performance
might have emerged (Pawel, 2011).
1.2 Statement
of the Problem
Some
researches were conducted in developed countries, especially those from
European Union, on the impact of the adoption of IFRS on financial performance.
However, very little evidence exists in Nigeria to demonstrate how IFRS
adoption has impacted on financial performance of entities. This study,
therefore, is a response to the need of financial statement users to know the
impact of IFRS adoption on financial performance of Deposit Money Banks in
Nigeria using financial ratios.
The main
objective of the study is the assessment of the impact of the adoption of International
Financial Reporting Standards on the performance reporting of Nigerian Deposit
Money Banks using financial ratios, while the specific objectives include the
examination of the impact of the adoption of IFRS on the reported profitability
measured by Return on Equity (ROE), on the reported liquidity, measured by
Current Ratio (CR), on the reported gearing ratio, measured by Total Deposit to
Equity (TDE) and on the reported interest cover measured by (FCC) of the
Nigeria Deposit Money Banks.
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 financial performance. These variances in the financial ratios
will impair the comparability and measurement of banks performance. Basically,
performance, stability and liquidity are essential for the survival of a
business. The impact 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. Meanwhile, 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. Therefore, the overall effect of these changes
will affect the financial and economic decisions of various users of financial
information.
1.3 Objective of the Study
The main
objective of the study is to assess 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.
assess the impact of the adoption of IFRS on the
reported return on equity of Nigerian Deposit Money Banks;
2.
ascertain the influence of the adoption of IFRS on the
reported current ratio of Nigerian Deposit Money Banks;
3.
ascertain the influence of the adoption of IFRS on the
reported gearing ratio of Nigerian Deposit Money Banks and
4.
assess the effect of the adoption of IFRS on the
reported fixed interest cover of Nigerian Deposit Money Banks
1.4 Level
of adoption of IFRS by the Nigerian Deposit Money Banks
Between 2010
and 2011 only nine (9) i.e. 60% of the fifteen (15) Deposit Money Banks listed
on the Stock Exchange had adopted IFRS, but from 2012, all the fifteen (15)
Deposit Money Banks listed on the Stock Exchange had adopted IFRS.
1.5 Challenges
of the adoption of IFRS
There are
various issues and challenges that come with the mandatory adoption of IFRS.
The numerous technical challenges on adoption of IFRS include need to engage
specialist due to difficulty of standards, shortage of technical competent
staff in application of standards, financial instrument considered to be the
most difficult standard and change or enhancement of present IT system to be
IFRS compliant. The logistic challenges include huge cost of staff training on
IFRS matters, high cost of IFRS implementation, resistance to change to a new
system of financial reporting that is in conformity with IFRS and timing too
short to fully equip the required staff on IFRS Implementation. (Shiyanbola,
Adeyemi & Adelekun 2015).
1.6 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 current ratio of Nigerian Deposit Money Banks?
3. What impact does the
adoption of IFRS have on the reported gearing ratio of Nigerian Deposit Money
Banks?
4. What is the effect of
the adoption of IFRS on the reported fixed interest cover of Nigerian Deposit
Money Banks?
1.7 Hypotheses
The
following hypotheses were tested at 0.05 level of significance:
H01:
Adoption
of IFRS has no significant impact on the reported return on equity of Nigerian
Deposit Money Banks
H02: Adoption of IFRS has no
significant influence on the current ratio of Nigerian Deposit Money Banks
H03:
Adoption
of IFRS has no significant impact on the reported gearing ratio of Nigerian
Deposit Money Banks
H04: The adoption of IFRS has no significant
effect on the reported fixed interest cover of Nigerian Deposit Money Banks
1.8 Rationale
for Hypotheses
Hypothesis One
H01: relates to the measurement of operating
efficiency of the banks. The profitability ratio measures efficiency of the
business in using its assets to generate net income as well as return on equity
which focuses on return to the shareholders of a company. The conclusion of Ibiamke
& Ateboh-Briggs (2014) and Moore (2012) is that there are no significant
differences between the profitability ratios under the two standards. This
hypothesis is justified on the ground that if banks are able to report better
profits under IFRS, this is an indication that Nigerian GAAP may have been
underestimating banks performance.
Hypothesis Two
H02: relates to the measurement of the
ability of the firm to meet its current obligations. The justification for this
hypothesis is that if there are significant differences found between the
liquidity ratios reported under the two standards, creditors’ decision to
advance further credits to the company will be affected.
Hypothesis Three
H03: relates to the measurement of how the
business is being financed, owned or controlled. It relates to the use of fixed
charges funds such as debts, bond and debenture capital together with the
owners’ equity in the capital structure. Financial leverage provides a good
mechanism for assessing and measuring the financial risk of an enterprise. It
can be seen as alternative for the residual claim of equity holder. As a broad
generalization, where the value of fixed interest capital is less than the
value of equity, a company is said to be low geared. Ibianike &Afeboh-Briggs
(2014) found that leverage.
ratios have
increased by the transition from NGAAP to IFRS by Nigerian listed firms.
However, the increase is not statistically significant. This is also in line
with the conclusion of Lantto & Sahlstrom (2009) who discovered that the
leverage ratios increase under IFRS but this increase is as a result of
liabilities arising from Employee Benefit Obligation (IAS 19) and effect of
financial instruments (IAS 32). Any significant differences in leverage ratios
computed under the two standards will significantly affect the decision of
prospective investors who would rely on leverage ratios.
Hypothesis Four
H04: relates to the measurement of a
company’s cash flows generated compared to its interest payments. The ratio is
calculated by dividing Earnings before interest and taxes (EBIT) by interest
payments. The higher the figure, the less chance a company has of failing to
meet its debt repayment obligation. A high figure means that a company is
generating strong earnings compared to its interest obligations. With interest
coverage ratios, it is important to analyze them during good and lean years.
Most companies will show solid interest coverage during strong economic cycles,
but interest coverage may deteriorate quickly during economic downturn. This
hypothesis is justified on the ground that any significant change in coverage
ratios will impact significantly on the decision of long term creditors to
advance more loans to the affected company.
1.9 Significance
of the Study
Researches
were conducted in developed countries, especially those from European Union, on
the impact of the adoption of IFRS on financial performance of entities.
However, very scanty evidence exists in Nigeria to demonstrate how IFRS
adoption has impacted on financial performance of Nigerian entities. This
study, therefore is a response to the need of financial information users to
know the impact of IFRS adoption on financial performance, using financial
ratios. It is in view of this, that this
attempt to inform the users of financial information of what changes should be
expected following IFRS adoption and to allow for more informed decisions. The
outcome of this study would have significant implication for investors,
companies’ management, academic literature, consultants in practice and policy
makers.
1.9.1 Significant
Implication for Investors
The outcome of the research work would assist
investors in the Nigerian Deposit Money Banks to examine whether earnings
reported are still adequate to meet their expectations and to take into
consideration if they should revise their expectations from the organization’s
performance.
1.9.2 Significant
Implication for Companies’ Management
The findings
of this study would be of tremendous assistance to the management 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.
1.9.3 Significant
Implication for Academics
The academic
community has been at the forefront of research on the impact of IFRS adoption
on reported performance of organizations. The outcome of this study would
contribute to both domestic and international literature that relates to the
adoption and implementation of IFRS by focusing on a period of eight (8) years
(2007-2014) rather than the traditional approach of focusing on the “same firm year” found in most of the
empirical studies.
1.9.4 Significant
Implication for Consultants in Practice
The findings
of this study would strategically position consultants to provide better
services to their numerous clients. Through a clear understanding of the nature
and extent to which IFRS influence banks’ financial performance, consultants
will be in a vantage position to advise banks’ management on how to improve
performance using the outcome of this research work.
1.9.5 Significant
Implication for Policy Makers
The findings
of this study would also broaden the expectations of policy makers and assist
them to know the practical implications of converting to IFRS.
1.10 Scope of
the Study
This study
covered eight (8) of the fifteen (15) Nigerian Deposit Money Banks listed on
the Nigerian Stock Exchange (NSE) as at 31st December 2015 and financial
statements for a period of eight (8) years (2007 – 2014) were used covering the
period of four (4) years prior adoption and four (4) years post adoption
periods.
1.11 Operationalization
of Variables
Y = f (X)
Y = Dependent variable (Financial
Ratios)
X = Independent variable (IFRS)
Y = y1, y2, y3,
y4
y1 = Profitability
measured by Return on Equity (ROE)
y2 = Liquidity measured
by Current Ratio (CR)
y3 = Leverage measured by
Total Deposit to Equity (TDE)
y4 = Coverage measured by
Fixed Charges Coverage (FCC)
X= IFRS
ROE =
f(IFRS)………………………………………………………………….……F1
CR =
f(IFRS)…………………………………………………………………………F2
TDE = f(IFRS)……………………………………………………………………….F3
FCC =
f(IFRS)……………………………………………………………………….F4
F1 to F4 above represents the
functional relationship in the study; their respective models are developed in
chapter three.
1.12 Operational
Definition of Terms
Accounting standard: This is defined as the basic law or
rule upon which the preparation of financial statements are based.
Agency Theory: The separation of ownership from
control makes the relationship between the management and the shareholders a
form of principal-agent relationship where the management who are the agents,
are expected to act in the good interest of shareholders, who are their
principals.
Fair Value: This is the amount for which an
asset could be exchanged, or a liability settled, between knowledgeable,
willing parties in an arm’s length transaction.
Financial Reporting: This is defined as activities which
are intended to serve the informational needs of external users who lack the
authority to prescribe the financial information they want from an enterprise
and therefore must use the information that management communicates to them.
Leverage Ratios: Measure how the business is being
financed, owned or controlled. The ratio measures the riskiness of the
business.
Liquidity Ratios: Liquidity ratios measure the
ability of the firm to meet its current obligations.
Principle-based approach: of IFRS
means that the standards place heavy reliance on principles rather than
detailed rules. This approach enables management to exercise discretion in the
application of accounting methods.
Profitability Ratio: Profitability ratio gives an
indication of the firm’s efficiency of operation.
Stakeholder Theory: The corporation is responsible to a
wider constituency of stakeholders other than shareholders. Other stakeholders
may include contractual partners such as employees, suppliers, customers,
distributors, creditors, and social constituents such as members of the
community in which the firm is located, environmental interests, local and
national governments, and society at large.
Capital Structure: Capital structure represents the
major claims to a company’s assets. This includes the different types of
equities and debt liabilities employed by a firm to finance its business
operations.
Debt Capital: Debt capital is that part of a
firm’s total capital which commonly comprises of loan capital such as debenture
stocks and bonds and short term bank loans such as overdraft.
Debt Ratio: This is the proportion of a firm’s
total assets financed with borrowed funds. It is a measure of a company’s total
debt to its total assets and measures how risky it would be for a debt capital
provider to extend credits/loans to a company. A higher ratio indicates higher
risk and lower ratio indicates lower risk level. It is the proportion of a
firm’s total assets that are being financed with borrowed funds.
Earnings Per Share (EPS): The EPS of a
company for any particular year is calculated by dividing profit after taxes,
PAT, or earnings after interest and taxes (EAIT) also called net income, NI, by
the number of ordinary shares outstanding (Pandey, 2010). The earning after
interest and taxes is the accounting profit after deducting interest on
borrowed funds and income taxation as applicable to a particular jurisdiction.
It measures the relative amount attributable to the shareholders in the form of
either dividend payments and/or retention for business growth and expansion.
Equity Capital: Ownership interests in a
corporation in the form of common stocks or preferred stocks. It can also be
referred to as shares. It is the residual claim of the owners in the firm.
Long Term Debts: These are liabilities of a firm
whose repayment period extends beyond one financial year i.e. the obligation to
pay extends beyond the next twelve months.
Return on Assets (ROA): Return on
assets is the ratio of annual net income to average total assets of business
during a financial year. It measures efficiency of the business in using its
assets to generate net income. It is a profitability ratio. Return on assets
indicates the number of kobo earned on each naira of assets. It is an indicator
of how profitable a company is relative to its total assets. Return on assets
provides an insight as to how efficient management is at using a firm’s assets
to generate earnings. It is commonly referred to as return on investment.
Return on Equity (ROE): Return on
equity (ROE) is a performance metric which focuses on return to the
shareholders of a company. ROE is computed by dividing the profit attributable
to equity holders by the book value.
Corporate Performance Measurement: Corporate
performance measurement entails a critical assessment and review of the overall
business performance. It is also viewed as the process of quantifying the
efficiency and effectiveness of action (Neely, Gregory & Platts, 1995).
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