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EFFECTS OF MANDATORY ADOPTION OF IFRS ON THE FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA


Project topic for Accounting department

ABSTRACT

The global accounting standards have resulted to a rise in market liquidity, fall in transaction costs for investors, and cost of capital reduction. This study is set out to address the problem that has prompted this research by studying the effects of mandatory adoption of IFRS on the financial performance of Deposit Money Banks in Nigeria. To achieve this objective, an ex-post facto research design was employed in which secondary data were collected from 6 DMBs. The collected data were summarized and analysed in a clear and understandable way using descriptive statistics and numerical approach. While paired sampled t-test was adopted in testing the three formulated hypotheses. From the analysis, it was found that mandatory adoption of IFRS does not significantly impact on the profitability ratios of Deposit Money Banks in Nigeria; mandatory adoption of IFRS does not significantly impact on the liquidity ratios of Deposit Money Banks in Nigeria; and lastly, mandatory adoption of IFRS does not significantly impact on the leverage ratios of Deposit Money Banks in Nigeria. On the basis of these findings, it was concluded that IFRS adoption has positively impacted the overall financial performance and position of banks. Under IFRS, important indicators of financial performance are profitability, liquidity and leverage. Given the fair value perspective of IFRS, its adoption is likely to introduce volatility in income statement and statement of financial position figures. Therefore, the study recommended that Government and the regulators should ensure that there is availability of training facilities and materials for professional accountants on the concept of IFRS and on issues relating to its implementation and conversion.

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

            The global financial crisis has given much impetus to the importance of financial reporting in the banking industry. The pattern of financial reporting varies in different countries or regions. This variation stands in the way of accountability and sound comparability of financial reports among different countries (Kamal &Bhuiyan, 2003). The use of different accounting frameworks in different countries creates confusion for users of financial statements resulting into inefficiency in capital markets across the world (Sankar, 2012).

            Thus, the need for a uniform set of globally accepted accounting standards has prompted many countries to pursue convergence of national accounting standards with International Financial Reporting Standards (IFRS). For standardization and harmonization of accounting and financial reporting, the International Financial Reporting Standards (IFRS) were developed. It is worthy of note that an unparalleled mark of compromise was reached between the two most powerful accounting standard setting bodies: the Financial Accounting Standards Board (FASB) based in the United States of America and the International Accounting Standards Board (IASB) based in United Kingdom in 2002. The Norwalk Agreement of 2002 was a major record achievement in that it brought together the FASB and the IASB to agree to develop a set of high quality accounting standards for both local and international transactions. These standards are referred to as the International Financial Reporting Standards (IFRS) (Yahaya, Yusuf & Dania, 2015).

            In Nigeria, IFRS was officially adopted in 2012. Nigeria’s leading private sector companies, particularly banks adopted IFRS in 2010. The global financial crisis, which started in 2008 and has continued to ravage and cause convulsion of a number of economies, added impetus to the demand for and importance of accountability and sound financial reporting in the  banking industry (Yahaya, Yusuf, Dania 2015). It was expected that the adoption of IFRS would reduce earnings variability and improve accounting quality (Tanko, 2012). It will reduce information asymmetry and would subsequently smoothen communications among managers, shareholders, creditors and other interested parties (Bushman and Smith, 2001), resulting in lower agency cost (Healy and Palepu, 2001). Lower information asymmetry would also lead to lower costs of equity and debt financing (El – gazzar et al, 1999; Botosan and Plumlee, 2002).

            Nigerian banks over the years have been observed to exhibit weak disclosures in financial statement, operational inefficiencies, undercapitalization and a weak corporate governance practices that impedes their performance and make out it difficult to detect problems easily. The quality and standard  of financial reporting in Nigerian banking sector seems not to match the high standard of reporting in the banking sector of more developed countries (Garba, 2013). As a result of this, Nigerian banking industry has undergone numerous reforms. This includes the increase in the minimum paid in capital of banks from 2 billion Nigerian Naira US $ 14m) to 25 billion Nigerian Naira (US $ 173m). this led to the consolidation of most banks. Other reforms include the special examination of banks, the move from accounting year to calendar year to improve transparency and comparability of financial results, the creation of AMCOM (Asset Management Company) to purchase the non-performing loan from banks.

            In addition the Central bank of Nigeria issued a circular on the format banks were expected to show in their annual financial statements, the maximum of years that a CEO could work was restricted to ten years. Also, the cashless policy was introduced and the convergence to IFRS by the end of 2012 to mention a few. It is noteworthy that before January 2012 these three banks in Nigeria, Access Bank, Guarantee Trust Bank and Zenith Bank started preparing and publishing their financial report according to IFRS. It was revealed that four months after the Central Bank of Nigeria’s time limit banks were still experiencing difficulties in understanding the value IFRS offers to their business and the trust from their banking partner in other countries. It was discovered in a paper published by Price Water Coopers (2006), that even some big organizations have taken more time to present their response to IFRS.

            The introduction of IFRS represents a significant change in bank’s loan loss accounting in Nigeria as regards the recognition and measurement of credit risks. Unlike under the GAAPs, the incurred loss approach of International Accounting Standards (IAS) requires banks to provide only for incurred losses, but not for future expected losses. Given the importance of loan loss provisions in determining reported earnings of banks (Nichols et al., 2009), it is natural to expect changes in these – by their nature highly discretionary – accruals to have significant aggregate effects on banks’ earnings characteristics. It is within this context, therefore, that the study seeks to examine the impact of mandatory adoption of IFRS in Nigeria on the financial performance of deposit money banks.

1.2       Statement of the Problem

            The quest for uniformity, reliability and comparability of financial statements of companies has informed the need for IFRS adoption among various countries of the world. Since “accounting is the language of business”, it is imperative that business around the world can no longer afford to be speaking in different languages with each other while sharing and exchanging results of their international business activities.

            According to Akpan-Essien (2011), the convergence from NGAAP to IFRS will improve comparability, accountability, integrity and transparency in financial reporting. Beke (2011) also stressed the fact that a global accounting standard will result to a rise in market liquidity, fall in transaction costs for investors, and cost of capital reduction. From all this, it is evident that to function in this present world economy and to achieve the maximum gains of international listing, no nation can operate alone in its financial reporting (Garba, 2013).

            Extant literature is complete of studies that seek to examine the mandatory adoption of IFRS in Banks (see Yahaya, Yusuf & Dania, 2015; Sankar, 2012; Umoren&Enang, 2015; Garba, 2013; Akpan – Essien, 2011). However, most of these studies focus on IFRS adoption and value relevance of quality of financial statement, with IFRS adoption and its effect of financial performance reporting receiving less research attention. In addition, the few existing studies on IFRS and Bank performance failed to capture performance indicators like profitability, liquidity and leverage ratios which this present study will incorporates in its investigation. More so, most of these studies adopted different methodologies like survey aside the causal comparative design to be adopted in this present studies.

            Although the basis for this choice is understandable, it however creates a problem of exclusion, and forecloses a further comprehension of the effect of the mandatory adoption of IFRS on the financial performance (proxied by profitability ratios, liquidity and leverage ratios) of Deposit Money Banks firms which make up the bulk of  organizations in the financial sectors of Nigeria. Against this backdrop, this present research addresses this problem by studying the effect of the mandatory adoption of IFRS on the financial performance of Deposit Money Banks in Nigeria.

1.3       Objectives of the Study

            The broad objective of this study is to examine the effect of IFRS on financial performance reporting of Deposit Money Banks in Nigeria. Specifically, this study intends to accomplish the following objectives:

  • To examine the effect of IFRS adoption on the profitability of Deposit Money Banks in Nigeria.
  • To investigate the effect of IFRS adoption on liquidity of Deposit Money Banks in Nigeria.
  • To study the effect of IFRS adoption on financial leverage of Deposit Money Banks in Nigeria.

1.4       Research Questions

            This study seeks to provide answers to the following research questions through findings.

  • To what extent is the effect of IFRS adoption on the profitability of Deposit Money Banks in Nigeria?
  • What is the extent of the effect of IFRS adoption on the liquidity of Deposit Money Banks in Nigeria?
  • How significant is the effect of IFRS adoption on the leverage of Deposit Money Banks in Nigeria?

1.5       Research Hypotheses

            This study formulates the following null hypotheses to serve as a guide in the investigations.

Ho1: Mandatory adoption IFRS does not significantly impact on the           profitability of Deposit Money Banks in Nigeria

Ho2: Mandatory adoption IFRS does not significantly impact on the liquidity of    Deposit Money Banks in Nigeria

Ho3: Mandatory adoption IFRS does not significantly impact on the leverage of    Deposit Money Banks in Nigeria

1.6       Significance of the Study

            The Central Bank of Nigeria (2006) has identified inadequate disclosure and transparency about financial position of banks as one of the major factors in all known banks and financial institutions’ distress and eventual failure. In this vein, Okezie (2010) noted that there is no evidence of any early warnings systems being used by regulators or bank management in the monitoring of bank’s health in Nigeria. Consequently, a study in the areas of information disclosure with particular emphasis on accounting and auditing processes in Nigerian banks is important for several reasons.

            Full disclosure of financial and other qualitative information could act as a warning signal to regulators, management, the investing public and all stakeholders generally as to the health of individual banks in the system. Doguwa (1996) observed that if banks are examine too frequently, valuable resources are wasted, whereas if problem banks are not examine often and early enough, the possibility of failure increases. It is therefore important that bank regulators identify banks that are likely to be unsound or that show signs of weakness before examination teams are sent to the field. This will help in the optimal deployment of examination resources. Faithfull and adequate disclosure of relevant information by the banks will no doubt enhance optimal deployment of examiners by the regulatory authorities and forestall any incipient distress by the banks. This study will identify the gap in information disclosure practices by Nigerian banks.

            Second, that the banks lay a vital role in the economy is no longer in doubt. Banks, in their credit creation capacity, are prime movers of economic life and occupy a significant place in the economy of every nation (Sobodu and Akiode, 1998). Unfortunately, the mega banks resulting from the consolidation process of the 2005 have evidently been inadequate to forestall distress in the banks (CBN, 2010). This can be seen from the avalanche of revelations that preceded the sacking of a number of executive management teams of some otherwise high flying banks in 2009. Consequently, the survival of any bank is beyond the size of the bank even though survival of the banks is a vital ingredient for the general growth of the economy. The result of this study would prove useful in answering some of the questions as to why the CBN medication to banks’ distress is often applied too late to rescue the ‘patient’.

            There cannot be a better time for this study than now when the confidence of the investing public is already shaken by the recent revelations of the CBN consequent upon the discovery of massive irregularities in the management of some banks in Nigeria. The basic reason for the rigorous regulatory and supervisory regime on the banks is to forestall bank failure and ensure their stability. There is a seeming failure of examination approach in ensuring a sustainable financial system and this work will attempt to look at the available options.

            A stable banking system is of paramount interest to the economy holistically where everyone is a stakeholder. Specifically, this study of prime interest to government, depositors, shareholders and the general public. While government and the public want a safe, sound and stable banking industry (Umoh, 1994), depositors are more interested in the safety of, and return on, their deposits as well  as the quality of services rendered by their banks. On the other hand, shareholder (owners) are more interested in their banks’ profitability, soundness and good health while the workers are interested in their sustained employment through the continued existence and profitability of their employer – banks.

            Lastly, students and researchers could find this study useful n that they are interested in how theoretically related variables empirically affect each other. This study is in the same direction, and it will also serve as sources of knowledge for the student and a point of references for researchers.

1.7       Scope of the Study

            This study is motivated by the current state of the banking industry in Nigeria where some ostensibly sound, stable and profitable banks were suddenly found to be weak and terminally distressed by the CBN. The study then examined the effect of international financial reporting standards on the financial performance of the Nigeria banking industry from 2000 – 2015. The selection of this time frame is informed by the fact that the period was underscored by a massive transformation through a guided process of recapitalization and consolidation program anchored by the CBN. Through the process, the number of banks was reduced effectively from eighty – nine (89) to twenty five (25) by the end of the year 2005. The number of banks reduced futher to twenty four (24) following a merger of two of the banks. The banking licenses of fourteen (14) banks were revoked while were involved in massive mergers and acquisitions. Thus this study is limited to the fifteen (15) banks listed on the Nigerian Stock Exchange (NSE).

1.8       Definition of Terms

Financial Reporting: -Financial reporting or financial statements are formal records of the financial activities and position of a business, person or other entity. Financial reporting involves the disclosure of financial information such as profit or loss account, statement of financial position, annual report, director’s report and cash flow statementto the various stakeholders about the financial performance and financial position of the organization over a specified period of time.

Accountability: -Accountability is an assurance that an organization will be evaluated on their performance or behaviour related to something for which they are responsible. It involves being answerable to all an organizations stakeholders for all actions and results.

Comparability: -A quality of accounting information that facilitates the comparison of financial reporting of one company to the financial reporting of another company.

Accounting Framework: -An accounting framework is a published set of criteria that is used to measure, recognize, present, and disclose the information appearing in an entity’s financial statements.

Accounting Standards: -Financial Statements are presented by a company typically following an external standard that specifically guides their preparation. An accounting standard is a common set of principles, standard and procedures that destine the basis of financial accounting policies and practices. The Generally Accepted Accounting principles form the set of accounting standards.

Banking Sector: -The banking sector is the section of the economy devoted to the holding of financial assets for others, investing those financial assets as leverage to create more wealth and the regulation of those activities by government agencies.

Capital Market: -Capital market is a financial market in which long term debt  (over a year) or equity backed securities are bought and sold.

Uniformity: -Uniformity is the practice of requiring organization to record accounting information and prepares financial statements in accordance with a relevant accounting framework.

Integrity: -Integrity is primarily a personal quality. integrity in relation to financial statement is the result of both integrity of those involved in preparing the financial statement and the robustness of processes by which financial statements are prepared.

Debt Financing:-Debt financing means firms raising money for working capital or capital expenditures by selling bonds, bills, or notes to individual and or institutional investors.

Equity:-Equity is the remaining value of an owners interest in a company, after all liabilities have been deducted. Equity = Assets – Liabilities


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