Impact Of The Adoption Of IFRS On Value Relevance And Accounting Information In The Insurance Sector

Project and Seminar Material for Accountancy / Accounting

Chapter One

Introduction

1.1 Background to the Study

Accounting provides a vital service to broad and diverse users. Investors use financial accounting information for investment decisions, governments agencies need it particularly for tax purposes while regulatory agencies use it to determine whether existing statutory pronouncement are complied with, among others (Kajola and Adedeji, 1999). According to Mayer (2007:2) “Accounting plays a significant role within the concept of generating and communicating wealth of companies. Nevertheless, in the wake of the recent scandals and economic meltdown where billions of naira of investments and retirement wealth have disappeared, the very integrity and survivability of the value relevance of this has been called to question.

Valuation model based on accounting information show that equity value related to accounting earnings (e.g Ball and Brown, 1968; and Collins Kothari, and Rayburn, 1989) and balance sheet measurement or both book values and earnings (e.gHandsman, 1986, Barth 1991, and Shevlin, 1991). Ohlson model (1995) led to an expansion of research studies on value relevance of accounting information to include both balance sheet measures of assets and liabilities and income statement measurement.

Adoption of IFRS inevitably changes related system of a country because an accounting system of a country is closely related to the numerous laws and regulations of that country. Thus, it affects the value relevance of accounting information. Recently, there have been transitions from local GAAP to IFRS issued by IASB to provide for harmonization of accounting standards and practices all over the world. Until now, disclosure issues receive little attention in literatures even though IFRS significantly increases financial disclosure requirements (Nobes, 2001).

1.2 Statement of the Research Problem

The measure for regulating the performance of accounting practices all over the world has been the accounting standards. In Nigeria, GAAP was used to regulate the presentation and disclosure of accounting activities of companies. This helped to presents quality financial reporting and improved value relevance of accounting information. In 2010, Nigeria set in motion the adoption of IFRS with the rest of the world which was geared at harmonizing the accounting standards globally. In January 2012, IFRS was finally adopted, making extinct the Nigerian GAAP.

The value relevance of accounting information has been of great concern by researchers (Hellstron, 2005). Research studies made on value relevance in the past include the value relevance of book value, earnings and cash flow (Kwon, 2009) Relative value relevance of historical cost fair value (Khurana, Kimums, 2003).The effect of growth on value relevance of accounting information and shareholding in emerging capital market.(Che, 2009). All of these studies were however carried out under the aegis of the GAAP. Since the adoption of IFRS, issues on value relevance of accounting information have been raised. As a result, efforts were made to answer the following questions:

Does the adoption of IFRS have significant effects on the relationship between marker price and earnings per share in the insurance sector?
Is there a significant effect of IFRS adoption on the relationship between book value and market price in the insurance sector?
Does the adoption of IFRS have an effect on the relationship between dividends and market price in the insurance sector?
Does the adoption of IFRS have an impact on the relationship between cash flow and market price in the insurance sector?

1.3 Objectives of the Study

The broad objective of this study was to emphatically examine the adoption of international financial reporting standards on value relevance and accounting information in the insurance sector. On a specific note however, the objectives of this study are:

To determine if the adoption of IFRS has significant effects on the relationship between market price per share and earnings per share in the insurance sector.
To know whether there are significant relationship between book value and market price per share in the insurance sector.
To state if there are connections between dividends and market price in the insurance sector.
To determine if IFRS adoption have effect upon the relationship between cash flow and market price in the insurance sector.

1.4 Research Hypotheses

The following hypothesis would be statistically tested during the course of this study. They include:

Hypothesis I

HO: Earnings per share have no significant relationship with market price per share after IFRS adoption in insurance sector.
HI: Earnings per share have significant relationship with market price per share after IFRS adoption in insurance sector.

Hypothesis II

HO: Dividend has no significant relationship with market price per share after IFRS adoption in insurance sector.
HI: Dividend per share has significant relationship with market price per share after IFRS adoption in insurance sector.

Hypothesis III

HO: Book value has no significant relationship with market price per share after IFRS adoption in insurance sector.
Hi: Book value has significant relationship with market price per share after IFRS adoption in insurance sector.

Hypothesis IV

Ho: Cash flow has no significant relationship with market price after IFRS adoption in insurance sector
Hi: Cash flow has significant relationship with market price after IFRS adoption in insurance sector

1.5 The Scope of the Study

The study provides insight into the impact of the adoption of IFRS in value relevance and accounting information. The period under review is pre and post IFRS (2011-2012). This research was streamlined to seventeen (17) companies in the insurance sector listed on the Nigerian Stock Exchange.

1.6 Significance of the Study

Thus far, there is little known about the role of accounting information in terms of its ability to explain the security prices listed companies on the Nigerian stock exchange. The quality of financial reporting led by management is dependent on the extent to which accounting principles are observed. These standards are aimed at ensuring transparency; reliability and uniformity to enable investors make informed decision based on the information available. The study further review the impact of IFRS adoption in value relevance and accounting information to the parties interested.

1.7 Limitations of Study

1. The Smallness of Sample Size:

Some companies are yet to comply fully with IFRS.

2. Sample size restriction:

Since this research was carried out on the examination of the research was done, therefore; the conclusion arrived at here cannot be extended to other companies not used in the sample due to differences in features of sample of companies and companies not in sample.

3. Lack of reliable data:

Since this research will be based on reports generated in the financial statements, there are tendencies for some of these variables not to be as accurate as reported.

Chapter Five

Summary of Findings, Conclusion and Recommendations

5.1 Introduction

Entities need to have a record of their activities periodically in accordance with the regulatory frameworks. The most important reason is that it has to be able to account for the quantum of resources allotted to it and what has been generated from the use of these resources. The difference being the wealth generated from the enterprise. Accounting plays a major role within the concept of generating and communicating wealth.This role is separated from any economic entity especially the ones where management is differ from ownership by the financial statement prepared by the entity.

5.2 Summary of Findings

This study measured the impact of the adoption of IFRS on value relevance and accounting information in the insurance sector. This study examined the impact of earnings per share (EPS) and book value per share(BVS) on the prices in the Nigerian capital market using the insurance sector as case study.

The following findings were obtained from the study:

Earnings have no significant relationship with market price after IFRS adoption in the insurance sector.
Dividend has no significant relationship with market price after IFRS adoption in the insurance sector
Book Value has no significant relationship with market price after IFRS adoption in the insurance sector
Cash flow has no significant relationship with market price after IFRS adoption in the insurance sector.

5.4 Conclusion

This study investigates the value relevance of accounting information in pre- and post-financial periods of International Financial Reporting Standards’ (IFRS) application in the insurance sector. We introduced cashflow per share (CFPS) and dividend per share (DPS) to the Ohlson (1995) model. Findings revealed that accounting information in the insurance sector is value relevant and EPS is the most relevant variable in the pre-IFRS and post-IFRS adoption in the insurance sector. The coefficient of DPS, ASSETS and CASHFLOWS were positive but insignificant in pre-IFRS while the coefficient of DPS, ASSETS and CASHFLOWS showed an insignificant negative relationship with market price in the after IFRS adoption. This result may be attributed to the one year pre- IFRS adoption and post- IFRS adoption data used, since the period under investigation represents a transition period with greater volatility in the accounting data. Therefore, the results of the changes that were implemented in the post-IFRS period may need some time until they are fully appreciated by investors. The study concluded that IFRS financial statements are more relevant than Nigerian-GAAP in the insurance sector.

5.5 Recommendations

Certainly financial statement information forms the fulcrum of decision making of investors and other varied stockholders. Hence the quality of financial statement information prepared by entities should not be undermined to meet relevance criterion of the financial statements for accounting information to be relevant i.e. Its ability to impact upon the decision making power of a potential investor. We recommend that financial reporting council (FRC) ensure that useful accounting standards are developed and corporate entities support standards that aid transparency in financial statements preparation. Also, that research that tends to explore the area under review should be highly encouraged and such research should not be limited to the insurance sector alone.

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