The Impact Of IFRS Adoption On The Performance Of Private Sector Enterprises In Nigeria

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The Impact Of IFRS Adoption On The Performance Of Private Sector Enterprises In Nigeria


Abstract


The impact of IFRS adoption on firm performance has generated mixed and inconclusive findings in literature. The study examined the impact of IFRS adoption on the performance of private enterprises in Nigeria. The study precisely investigated the influence of IFRS adoption on the profitability, liquidity and financial leverage of private enterprises in Nigeria. IFRS adoption was adopted as a dummy variable, while audit quality and firm size were deployed as control variables. Return on asset, current ratio and debt ratio was used to measure profitability, liquidity and financial leverage respectively. The sample of the study consisted 54 quoted private companies in Nigeria. Data was obtained from the published annual reports of selected firms between 2013 and 2017. The pooled least square technique, precisely the random-effect model was employed to estimate the models specified. The findings of the study revealed that IFRS adoption had no significant impact on the profitability, liquidity and financial leverage of private enterprises in Nigeria. The study concluded that adopting IFRS does not automatically translate to improved firm performance. To this end, the study suggests amongst others that, workshops, training programmes and seminars should be organized for professional accountants and auditors in the private sector to make them knowledgeable about the practical aspects of IFRS. Capacity building of various stakeholders in the accounting profession is also a necessity.


Chapter One


Introduction

1.1 Background to the Study

The Nigerian Accounting Standards Board (NASB) was established on September 9, 1982. NASB is the only recognized independent body in Nigeria responsible for the development and issuance of Statements of Accounting Standards (SAS) for users and preparers of financial statements, investors, commercial enterprises and regulatory agencies of government. The responsibility of NASB is identical to other National Accounting Standard Setting bodies like the Financial Accounting Standards Board, USA; Accounting Standards Board, United Kingdom; Australian Accounting Research Foundation, Australia. Section 335(1) of the Companies and Allied Matters Decree 1990 gave legal backing to the activities of the Board by requiring that the financial statements prepared under the decree shall comply “….with the accounting standards laid down in the Statements of Accounting Standards issued from time to time by the Financial Reporting Council”. The Board was directed by a Governing Council selected from organizations having interest in financial reporting. The organizations that made up the Board were expected to use their endeavor to persuade their members and organizations they deal with, to comply with all relevant accounting standards and were also allowed to devise their own punitive measures for non-compliance (Abata, 2012). The fact that relevant enabling laws that constitute the organizations that made up the governing council only required them to exercise authority over varying aspects of monitoring of compliance to SAS without clearly vesting the power on any one entity made the situation very confusing.

The International Accounting Standards Committee (IASC) was established in 1973 through an agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, Netherlands, United Kingdom, Ireland and United States of America (Houque & Karim, 2012). Additional sponsoring members were added in subsequent years, and in 1982 the sponsoring members of the IASC comprised of all the professional accountancy bodies that were members of the International Federation of Accountants (IFAC). The standard-setting board of the IASC was known as the IASC board. The IASC Board enacted a large number of standards, interpretations, conceptual framework and other guidance that was adopted directly by many companies and that was looked into by many national accounting standard-setters in developing national accounting standards.

The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the International Financial Reporting Standards (Houque & Karim, 2012). The IASB is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRS). The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). The IASB is responsible for developing International Financial Reporting Standards (IFRS), formerly known as International Accounting Standards (IAS) and promoting the use and application of these standards. In addition, the IASB is also responsible for the endorsement and issuance of interpretations developed by the IFRS Interpretation Committee.

Studies in accounting and finance have gained greater recognition since the universal declaration of IFRS. According to International Accounting Standards Board (2012), publicly owned companies in about 120 countries have been required to make use of IFRS. IFRS is a globally-accepted set of accounting standards established by the International Accounting Standards Board (IASB) and International Financial Reporting Interpretation Committee (IFRIC). IFRS was established to serve as a uniform global language for all accountants across the globe. IFRS is equally expected to become the main financial reporting standards for all business entities across the globe (Adeyemi, 2016). The essence of IFRS is to develop a single set of high quality and globally accepted financial accounting standards premised on clear articulated principles (IASB, 2012). Before the emergence of IFRS in Nigeria, all organizations have been complying with the Nigerian Accounting Standards Board (NASB) which has now evolved to Financial Reporting Council of Nigeria (FRCN). The NASB declared its roadmap to convergence with IFRS in September, 2010 (Tanko, 2012). The roadmap requires publicly listed companies and key public interest entities to comply with IFRS starting from 1st January, 2012. Other public interest entities are mandated to comply with IFRS from 1st January, 2013 while small and medium scale enterprises are required to comply with IFRS starting from 1st January, 2014.

The implementation of IFRS in Nigeria was fuelled by the need to develop high quality financial reporting in order to propel sound financial healthy economy. The adoption of IFRS in Nigeria is expected to promote the collation of relevant data of reporting entities’ performance for comparability, reliability, fast decision-making, and accessibility to external financing and obtain inflow of foreign investment (Madawaki, 2014). The decision to adopt IFRS in a big economy like Nigeria cannot be undermined. Before the adoption of IFRS, it is pertinent for government, especially in developing countries, to consider several factors affecting the relevance of IFRS. According to Budrina (2014), IFRS is a principle-based system established to have a high degree of transparency of financial statement and to promote the usefulness of financial reporting. The central focus is to meet the needs of diverse users in economic decisions and to contribute positively to a healthy financial market. The major concern about the convergence to IFRS is that it is more of a principle-based system and there is fear that companies might apply same rules differently thereby producing varying results.

Presently, many countries have replaced their national accounting standards by IFRS in order to make domestic accounting system more reliable, accurate, transparent, understandable and to enhance the quality of financial reporting. The process of the implementation of IFRS greatly varies from country to country due to political, economic, social, legal and institutional factors (Adeyemi, 2016). Nigeria and other developing countries are bedeviled with weak institutional framework, unstable political environment and economic instability, which are not favorable to the effective implementation of IFRS. Nevertheless, several developed and developing countries have adopted IFRS as their national accounting standards (Umobong, 2015).


1.2 Statement Of Problem

The impact of the adoption of IFRS on performance of firms has been a burning issue in accounting and finance literatures. Studies such as Cai and Rahman (2008); Budrina (2014) and Madawaki (2014) investigated the effect of IFRS adoption and sought the extent to which IFRS supply additional relevant information and elevate the information content of financial statement prepared in line with these standards. Findings of past studies on the subject matter has been inconclusive as scholars such as Tanko (2012); Ronald (2017) and Musa, Nasiru and Muhammad (2017) found a positive impact of IFRS adoption on firm performance while scholars such as Umobong (2015) and Umobong and Ibanichuka(2016) discovered an adverse impact of IFRS adoption on performance of firms. This position has not been totally supported by scholars in the academia and corporate world as their findings failed to support the hypothesis that IFRS retards the performance of firms. For instance, Barth (2007) asserted that IFRS has lesser quality than local GAAP. Mara (2011) maintained that IFRS is only a pure accounting change and is insufficient to deliver expected benefits. It is obviously a fundamental fact that IFRS comes with a lot of adjustment in the manner information is contained in the financial statement of entities and findings on the impact of IFRS adoption is controversial. Adeyemi (2016) commented that IFRS adoption does not translate to automatic improvement in firm performance especially when the firm fails to address the inherent challenges surrounding its adoption and implementation.

It is observed that past studies failed to distinguish the kind of firm, whether manufacturing or non-manufacturing, private or public firms, small, medium, large or multinational. Performance was generalized among firms with different sizes and characteristics. It is therefore necessary to examine the subject area with reference to private sector firms.


1.3 Research Questions

The study attempts to provide answers to the following questions:

  1. What is the impact of IFRS adoption on the profitability of private sector enterprises in Nigeria?
  2. How IFRS adoption does affect the liquidity of private sector enterprises in Nigeria?
  3. To what extent has IFRS adoption influenced the financial leverage of private sector enterprises in Nigeria?

1.4 Objectives Of The Study

The main objective of the study is to examine the implication of the adoption of IFRS on the performance of private sector enterprises in Nigeria.

The specific objectives are:

  1. To examine the effect of IFRS adoption on the profitability of private sector enterprises in Nigeria.
  2. To assess the effect of IFRS adoption on the liquidity of private sector enterprises in Nigeria.
  3. To explore the effect of IFRS adoption on the financial leverage of private sector enterprises in Nigeria.

1.5 Research Hypotheses

Based on the research objectives and questions, the following hypotheses were formulated:

Hypothesis One
  • H0: IFRS adoption has no significant impact on the profitability of private sector enterprises in Nigeria.
  • H1: IFRS adoption has significant impact on the profitability of private sector enterprises in Nigeria.
Hypothesis Two
  • H0: IFRS adoption has no significant impact on the liquidity of private sector enterprises in Nigeria.
  • H1: IFRS adoption has significant impact on the liquidity of private sector enterprises in Nigeria.
Hypothesis Three
  • H0: IFRS adoption has no significant impact on the financial leverage of private sector enterprises in Nigeria.
  • H1: IFRS adoption has significant impact on the financial leverage of private sector enterprises in Nigeria.

1.6 Significance Of The Study

This study contributes to the large debate pertaining to the importance of accounting standards on the quality of financial reporting. The study equally contributes to literature by providing empirical evidence on the effect of IFRS adoption on private sector enterprises’ performance in recent years. Investors, financial analysts, accountants and auditors in private and public parastatals will find this study worthwhile because of the veritable importance of IFRS implementation in documentation of accounting records, financial records preparation, financial reporting and decision-making process of organizations. Policymakers will benefit from the study as it provides them with empirical answers which may support future decisions regarding the reforms of financial statements. Researchers in the academia and corporate environment will find this study intriguing as it encourages more empirical researchers on IFRS adoption and implementation in Nigeria. In addition, this study serves as a body of reserved knowledge to be consulted by students to conduct research on the subject area.


1.7 Scope Of The Study

The study examined the impact of IFRS adoption on the performance of private sector enterprises in Nigeria. The study covered 54 quoted private companies in Nigeria for a 5-year period ranging between 2013 and 2017.


1.8 Definition Of Key Terms

IFRS:

International Financial Reporting Standards are set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.

NASB:

The Nigerian Accounting Standards Board is now known as Financial Reporting Council of Nigeria (FRCN). FRCN is the only recognized independent body in Nigeria responsible for the development and issuance of Statements of Accounting Standards for users and preparers of financial statements, investors, commercial enterprises and regulatory agencies of government.

Private Sector Enterprise:

This refers to those organizations that are owned by private individuals or group of individuals. Private sector enterprises in the context of the study are private and public limited liability companies.

Firm Performance:

This refers to the actual output or results of an organization as measured against its intended goals. Firm performance is contextualized as profitability, liquidity and financial leverage. Profitability refers to the ability of firms to use their resources to generate profits. Liquidity refers to the extent at which a firm meet its short-term obligations as at when due. Financial leverage refers amount of debt used to finance assets.


Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary of the Study

The study examined the implications of the adoption of IFRS on the performance of private enterprises in Nigeria. In specific terms, the study sought to determine the impact of IFRS adoption on the profitability, liquidity and financial leverage of private enterprises in Nigeria between 2013 and 2017. The study established that IFRS was initiated by the International Accounting Standards Board so as to generate a uniform set of high quality standard for financial reporting among firms in different countries in the world. IFRS was approved in July 2010 during the Goodluck Jonathan’s administration. Multinational corporations and publicly listed firms were compelled to adhere to IFRS starting from 1st January, 2012. Other public interest firms were compelled to adhere to IFRS beginning from 1st January, 2013. Similarly, small and medium scale businesses were ordered to comply with IFRS starting from 1st January, 2014. IFRS is designed to replace the national accounting standards of countries in the world. According to Tanko (2012), about different firms in about 120 countries prepare their financial reports in line with IFRS. From the review of literature, the usefulness of adopting and implementing IFRS amongst others are reduction in cost of capital, efficiency in allocation of capital, mobility of international capital, rapid development of the financial system, higher market liquidity, easy comparability of financial reports and improved accuracy and timeliness of financial reports. On the other hand, certain challenges are attached to adopting and implementing IFRS, and they include, huge commitment of financial resource, internal control, intensive training of accounting personnel and weak regulatory framework amongst others.The concept of firm performance was angled from profitability, liquidity and financial leverage. Return on assets (ROA) was reviewed under profitability ratios. Current ratio was reviewed under liquidity ratios and debt ratio was reviewed under financial leverage ratios.In the theoretical framework, four theories namely political cost theory; agency theory, stewardship theory and stakeholder theory are reviewed. In the empirical review, the finding of past studies is inconclusive. While some studies such as Abata (2015) and Ronald (2017) found that IFRS adoption improved the performance of firms, scholars such as Umobong (2015); Umobong and Ibanichukwu (2016) and Adeyemi (2016) contended that IFRS adoption has no tangible effect on firm performance. It is observed that past studies failed to distinguish the kind of firm, whether manufacturing or non-manufacturing, private or public firms, small, medium, large or multinational, quoted or unquoted. Moreover, past studies focused on profitability and earnings quality as performance measures. Other indices of performance such as liquidity, financial leverage, solvency, social responsibility, sales growth and customer satisfaction were not captioned. Against this backdrop, the study contributes to literature by examining the impact of IFRS adoption on the performance (profitability, financial leverage and liquidity) of quoted private sector firms in Nigeria.

The sample consisted of 54 quoted private companies in Nigeria. The data used in the study were obtained from the published financial reports of selected firms. The pooled least squares technique was employed to estimate the coefficient of parameter estimates in the three models specified. Based on the regression results of the hypotheses tested, the major findings of the study are outlined as follows:

  1. The adoption of IFRS had no significant impact on the profitability of selected private enterprises in Nigeria (β=0.03; p>0.05).
  2. The adoption of IFRS had no significant impact on the liquidity of selected private enterprises in Nigeria (β=0.03; p>0.05).
  3. The adoption of IFRS had no significant impact on the financial leverage of selected private enterprises in Nigeria (β= -0.04; p>0.05).

5.2 Conclusion

The International Financial Reporting Standards (IFRS) refers to a series of accounting pronouncements published by the International Accounting Standards Board (IASB) to help preparers of financial statements, throughout the world, produce and present top quality, transparent and comparable financial information. The study has provided empirical evidence that the implementation of IFRS has no significant impact on the performance (profitability, liquidity and leverage) of private enterprises in Nigeria. The adoption of IFRS does not connote automatic improvement in firm performance. It should be noted that the importance and benefit that accrues to adopting IFRS should be weighed with the costs before taking any decisions. The adoption and implementation of IFRS should not be a rushed decision because of the daunting effects it could have on the economy. Many developing countries adopt IFRS in order to gain acceptance in the international community and to prevent the problems that arise where there is limited resources in terms of human, technical, logistics or otherwise to prepare national standards. These reasons however should not the primary motive for adoption because what good will a financial statement be if being reported under IFRS standard becomes irrelevant, untimely, costly, incomprehensive, unreliable and does not give faithful representations to stakeholders. Nigerian quoted firms should pursue the international harmonization of these accounting standards as far it does not negate on their local accounting needs. All in all, the decision to adopt IFRS should not be rushed by private enterprises. It should be carefully thought through politically, legally, culturally, financially and economically.


5.3 Recommendations

Based on the findings and conclusion, the following recommendations are advanced:

  1. Adequate resources should be put in place to support the sustainable implementation of IFRS. This includes having consultative groups available to respond promptly to concerns to users and to provide for their ongoing trainings.
  2. The awareness of professional accountants, regulators and preparers should be raised to improve the knowledge gap. Issues to be addressed include the importance of financial statements prepared under the IFRS framework and importance of compliance with accounting and auditing requirements.
  3. The adoption and implementation of IFRS should be on the basis of cost-benefit analysis. It should not be a decision-based on following the crowd or boarding the IFRS-ship with others without arriving at a destination suitable for landing.
  4. The capacity of regulatory bodies should be strengthened. The adequacy of statutory enforcement provisions should be reviewed as well. Necessary steps should be taken to enhance the capacity of regulators and improve the statutory framework of accounting and auditing to protect public interest.
  5. Professional accounting bodies should align their professional educational requirements with IFAC guidelines. Business ethics should be taught as a separate subject in undergraduate accounting and business programs to widen exposure to practical IFRS applications. Also, workshops, training programmes and seminars should be organized for professional accountants and auditors in the private sector to make them knowledgeable about practical aspect of IFRS. Capacity building of various stakeholders in the accounting profession is a necessity.
  6. Strong accounting institutional framework must be developed to manage IFRS change process. An independent oversight body like the Financial Reporting Council should be strengthened to shoulder the responsibility of setting accounting and auditing standards, monitoring compliance with accounting standards, review auditors’ practice and reporting practices and enforcing sanctions for violations.
  7. IFRS enforcement bodies such as FRC, CBN and SEC should enhance and expand their expertise. As IFRS changes due to amendments to existing standards or new standards being issued by the IASB, these regulatory agencies need to have a plan in place to keep pace with the changes.

5.4 Suggestions for Future Studies

In an attempt to broaden empirical literature on IFRS adoption in Nigeria, the following suggestions are important:

  1. Future studies should extend the scope of the study to small and medium scale enterprises (SMEs) in Nigeria. The impact of IFRS adoption on the performance of SMEs should be investigated.
  2. The study captured firm performance in terms of profitability, liquidity and leverage. Future studies can also assess the impact of IFRS adoption on other performance indicators such as shareholders’ wealth, growth, earnings, survival and stock market assessment of quoted private companies in Nigeria.

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