The Value Relevance Of Reconciliation Adjustments Of First-Time IFR Adopters: Evidence From The Nigerian Deposit Money Banks

Project and Seminar Material for Accountancy / Accounting

Project and Seminar Material for Accountancy / Accounting


The paper examines the value relevance of IFRS reconciliation adjustments made by listed Nigerian deposit money banks (DMBs) following the mandatory adoption of IFRS as the national accounting standards effective 1, January 2012. Using the IFRS reconciliation adjustments disclosed in the 2012 annual reports of DMBs and adopting the Ohlson (1995) price model, the study fails to find evidence that the IFRS reconciliation adjustments are value relevant. The paper argues that investors see IFRS reconciliation adjustments as pure accounting translation without any cash flow implications. It further argues that the enhanced regulatory surveillance could explain the result.

Chapter One


Following increasing worldwide movement towards adoption of International Financial Reporting Standards (IFRS) as the preferred accounting regime, the Federal Executive Council of Nigeria on 28th October, 2010 approved the adoption of IFRS in Nigeria. The approved Roadmap for the adoption of IFRS mandates the implementation of IFRS in three phases viz: (i) publicly listed entities and significant public interest entities, 1 January 2012, (ii) other public interest entities, 1 January 2013, and (iii) small and medium sized entities,1 January 2014. Thus listed deposit money banks (DMBs) were mandated to prepare their financial statements for the year ended 31st December, 2012 based on IFRS.

To prepare the first IFRS financial statements, the DMBs must comply with the requirements of IFRS 1(First Time Adoption of International Financial Reporting Standards). IFRS 1 requires, amongst other things, that the first time adopters prepare opening IFRS Statement of Financial Position and perform IFRS reconciliation [reconcile accounting numbers based on local GAAP, i.e from Statement of Accounting Standards(SAS) issued by the Nigerian Accounting Standards Board (NASB) to IFRS] so as to provide comparative data for the first IFRS financial statement. SAS/IFRS reconciliation involves restating the last financial statement prepared on the basis of Statement of Accounting Standards (SAS) to IFRS principles which essentially entails (i) recognizing all assets and liabilities whose recognition is required under IFRS; (ii) derecognizing items as assets or liabilities if IFRS do not permit such recognition, (iii) reclassifying items that it recognized under SAS as one type of asset or liability or components of equity but are different types of asset, liability or component of equity under IFRS, and (iv) measuring all recognized assets and liabilities according to IFRS principles (IASB, 2004).

The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors in making investment decisions. To be decision useful, the financial information must, in addition to other characteristics, be relevant. The IASB Conceptual Framework states that information is relevant if it influences the economic decisions of users by helping them to evaluate past, present and future events or confirming or correcting their past evaluations. In view of this, this paper seeks to assess whether or not the reconciliation adjustments performed by the Nigerian DMBs who are first time adopters of IFRS are the value relevant. If value relevant, to what extent are the reconciliation adjustments incrementally value relevant?

Using a sample of Nigerian listed DMBs who are first time adopters of IFRS in 2012, the paper fails to document that the reconciliation adjustments are value relevant. This contradicts prior studies (Horton and Serafeim, 2010; Barth et al, 2014, Hung and Subramanyam, 2007). It is possible that the market does not value the reconciliation because it sees the reconciliation as pure accounting change that does not involve any cash flow implication. The high level sensitization awareness that precedes the commencement of the implementation of IFRS could have dampened the surprise element of change of accounting regime. The fact that the Nigerian DMBs are audited exclusively by the Big 4 auditors who have been applying IAS on items not covered by SAS could also affect the investors’ reactions to the reconciliation adjustments.

The paper makes significant contribution to the literature on the effect of mandatory adoption of IFRS on accounting quality especially on value relevance. To the best of our knowledge this paper is the first to examine the value relevance of IFRS reconciliation in the banking industry in Nigeria. Focusing on a single industry eliminates the problem of industry effect. The banking industry offers an interesting setting to examine the value relevance of IFRS reconciliation. Though it is highly regulated and audited by the Big 4 auditors, the Nigerian banking industry is bedeviled by fraudulent financial reporting and other sundry malpractices. A joint NDIC/CBN examination of the banks led to shocking discovery of ingenious creative accounting and fraud leading to the sacking of executive management of eight banks out of the ten banks declared insolvent in 2009 (Sanusi, 2010).The shares of the banks are the most traded on the Nigeria Stock Exchange and therefore deserve research attention.

The rest of the paper is structured as follows: Section 2 presents institutional background, prior research and hypotheses. In Section 3 is the research design while Section 4 contains the findings and discussion. The concluding remark is in Section 5.

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