THE IMPACT OF INTERNATIONAL FINANCIAL STANDARDS (IFRS) ON THE QUALITY OF FINANCIAL STATEMENT

1.1 Introduction

Nigeria adopted IFRS for quoted companies in the year 2012 to replace the Nigerian Statements of Accounting Standards (SAS). Okafor and Ogiedu (2011) found evidence that IFRS have the potential for yielding greater benefits such as better information for equity holders and regulators, enhanced comparability and improved transparency of results, improve business performance management and impact on other business functions apart from financial reporting. IFRS application is more beneficial to countries with more developed stock markets and better institutional framework than in countries without these characteristics. This is contrary to public expectation because IFRS suppose to be more beneficial to emerging economies than developed capital markets because of low quality standards in those economies (Rudra and Bhattacharjee, 2012).

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.

1.2 Background of Study

IFRS is a globally-accepted set of accounting Standards and Interpretations established by International Accounting Standards Board (IASB) and International Financial Reporting Interpretation Committee (IFRIC) which was actually created as a common global language for accountants all around the world and it was expected to become the key financial reporting standards for all business entities. The fundamental objective of IFRS is to develop, in the public interest, a single set of high quality, globally accepted financial accounting standards based upon clearly articulated principles (IASB, 2012).

Prior to the adoption of IFRS in Nigeria, all companies in Nigeria have been complying with Standards issued by The Nigerian Accounting Standards Board (NASB) which has now metamorphosed to Financial Reporting Council of Nigeria (FRCN). The NASB announced its Roadmap to convergence with IFRS in September 2010. The Roadmap requires publicly Listed Companies and significant public interest entities to comply with IFRS commencing from 1st January, 2012.While other public interest entities have been required to comply starting from 1st January, 2013 and small and medium sized entities expected to comply for period ending after 1st January, 2014. Despite the belief by some of the inevitability of the global acceptance of IFRS, it is has been argued that Nigerian GAAP is still the better standard, and that a certain level of quality will be lost with full adoption of IFRS (Barth, 2007). In addition, certain companies without significant customers or operations outside their home countries may resist IFRS because they may not have the capability and a market incentive to prepare IFRS financial statements (Tanko, 2012).

Financial statements apart from stating the financial position and performance of an organization, provides other information such as the value added, changes in equity if any and cash flows of the enterprise within a defined period of time to which it relates (Iyoha and Faboyede, 2011). The quality of financial reporting is indispensable to the need of users who requires them for investment and other decision making purposes. Financial reporting can only be regarded as useful if it represents the economic substance of an organization in terms of relevance, reliability, comparability, and aids interpretation simplicity (Penmam, 1984). Ahmed (2003) stated that useful accounting information derived from qualitative financial reports help in efficient allocation of resources by reducing dissemination of information asymmetry and improving pricing of securities. To prepare and audit financial statements, some accounting conventions and principles known as standards have been put in place by appropriate body set up for the purpose to encourage uniformity and reliability.

The implementation of IFRS in Nigeria was motivated by the need to develop high quality financial reporting in order to enhance sound financial and healthy economy and in the wave of globalization; multi-national companies and investment are on the increase. Therefore, the adoption of IFRS in Nigeria is expected to advance the compilation of meaningful data of reporting entities’ performance for comparability and reliability, facilitate and enhance effective decision making, attract foreign investment, enhance easy access to external capital and low cost of doing trans-border businesses (Madawaki, 2014). The decision to adopt IFRS in a wide and important economic area such as Nigeria cannot be over – emphasized, However, to achieve that the government need to consider several factors that may affect the adoption of IFRS in developing countries (Zeghal & Mhedbi, 2006), in which Nigeria is among.

IFRS Standards which are usually regarded as principle-based system were established to ensure a high degree of transparency of financial statements, to get better corporate transparency and to enhance the usefulness of financial reporting (Budrina, 2014; Chen, Tang, Jiang & Lin 2010; IASB 2012). The central focus is to meet the needs of the wide range of users in economic decisions and contribute positively to a healthy financial market. However, the major concern about the conversion to IFRS is that it is more principle-based and there is a fear that the companies may apply the same rules differently thereby causing varying results. Furthermore, principle-based standards give managers more flexibility to engage in earnings management and consequently resulting in high level of earnings manipulation (Callao, 2010).

IFRS comes with a lot of changes in way and manner the information contained in the company’s financial statements are reported. For instance, the introduction of fair value principle, which is regarded as the most important implication of IFRS, motivates more debate on the adoption of the standards. More clearly, IFRS required the usage of fair value contrary to the book value as used by Nigerian GAAP. It is believed that fair value provides up-to-date information about assets as it reflects their real value. However, impairment test is carried on goodwill under IFRS, while it expected to be amortized under NGAAP. This implies that managers have more flexibility under IFRS and may intend to use their accounting decisions to manipulate impairment test of goodwill which could affect the quality of reported earnings.

Furthermore, NGAAP allows convertible debts to be recorded as long-term debt, while the IFRS records convertible bonds separately into the equity component and the debt components. IFRS which is a principle-based accounting method gives managers significant flexibility and discretion and leave more room for earnings manipulation than rule-based accounting standards (NGAAP).

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Impact of International Financial Standards (IFRS) on the Quality of Financial Statement.

1.3 Statement of Problem

Although many countries have faced challenges in their decisions to adopt IFRS, its wide spread adoption has been promoted by the argument that the benefits outweigh the costs. Recently there has been a push towards the adoption of IFRS developed and issued by the International Accounting Standards Board (IASB).

The organizations should enable regulators and other key player to gauge the effectiveness of the financial reporting system in place such as training and development for practitioners and new members, due diligence for Accounting standards and the overall institutional and professional organization conducive for effective standards application.

The effect of IFRS adoption on earnings management has been a subject of concern in the accounting and financial literatures. Empirical accounting researches have been conducted to examine the effects of IFRS adoption and determine the extent to which IFRS provide additional relevant information and improve the information content of financial statement prepared in line with these standards. Prior studies have so far presented mixed results as some studies found an improvement in financial reporting quality after IFRS adoption and widely support the hypothesis that earnings management declined considerably after IFRS adoption. However, this view has not been fully supported by all academicians, regulators and the business communities as their evidence fail to support the hypothesis that IFRS reduce the level of earnings manipulation.

1.4 Aim and Objectives of Study

The aim of the study is to examine the Impact of International Financial Standards (IFRS) on the Quality of Financial Statement using First Bank PLC as a case study. In achieving this aim, the following specific objectives were laid out as follows to:

1. To examine the impact of IFRS on quality of financial statement in First Bank of Nigeria Plc.
2. To examine whether the International Financial Reporting Standards (IFRS) in Nigeria has improved the quality of financial reporting in First Bank of Nigeria Plc.
3. To find out role the of IFRS play in banking institutions in Nigeria.
4. To determine whether IFRS adoption and implementation has been made positive impact in Nigeria.
5. To find out the problems confronting the staff of First Bank of Nigeria Plc in adopting IFRS into system.
6. To make useful recommendations based on the findings of the study.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Does IFRS aid quality of financial statement in First Bank of Nigeria Plc?
• Does International Financial Reporting Standards (IFRS) in Nigeria improve the quality of financial reporting in First Bank of Nigeria Plc?
• Does IFRS play any significant role in banking institutions in Nigeria?
• Has there been effective implementation and adoption of IFRS in First Bank of Nigeria Plc?
• Is there any problem confronting the staff of First Bank of Nigeria Plc, Uyo in enhancing quality financial statement?
• What is the relationship between earnings management and financial performance of quoted manufacturing companies in Nigeria before the adoption of IFRS?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: IFRS does not aid quality of financial statement in First Bank of Nigeria Plc
• H1: IFRS does aid quality of financial statement in First Bank of Nigeria Plc

Hypothesis Two

• H0: IFRS does not play any significant role in banking institutions in Nigeria.
• H1: IFRS play any significant role in banking institutions in Nigeria.

Hypothesis Three

• H0: There is no significance relationship between effective implementation and adoption of IFRS in First Bank of Nigeria Plc.
• H1: There is a significance relationship between effective implementation and adoption of IFRS in First Bank of Nigeria Plc.

1.7 Significance of Study

The ultimate goal of every industry or organization including banks is to quality financial reporting (statement) information is issued to public. This goal can be achieved in the banking sector adopting IFRS for effective financial reporting.

This study necessary because would enable the managers of First Bank of Nigeria Plc, and other banks to improve on their implementation of the standards.

It would also help the employers, employees and the potential investors who may want to invest on the company.

Finally, it would serve as a reference source to students or other researchers who might want to carry out their research on the similar topic.

1.8 Scope of Study

The study of this research is focused on the Impact of International Financial Standards (IFRS) on the Quality of Financial Statement using First Bank PLC in Bauchi State as a case study.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Research material: availability of research material is a major setback to the scope of the study.
3. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
4. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

1.10 Definition of Terms

IFRS: International Financial Reporting Standard.

Financial Statements: Financial statements are a collection of reports about an organization's financial results, conditions and cash flows.

IAS: International Accounting Standards.

GAAP: Generally Accepted Accounting Principles.

Accounting: This is defined as the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information (Frank Wood & A. Sangster, 2005).

Statement of Cash Flow: Statement of cash flow is a financial statement that shows changes in the balance sheet (financial position) accounts and income affect cash and cash equivalents and breaks the analysis down to operating, investing and financing activities (Bodie, Zane; Alex Kane and Alan J. 2004).

1.11 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows:

Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives Summary, Conclusion and Recommendations made of the study