INTRODUCTION
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
iii.       the directors among them hold not less than 51 percent of its equity share capital.
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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.
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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.
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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:
1.4      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).
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1.6      Research Questions
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.
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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.
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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.
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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 yearâ€Â 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).