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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:
What is the impact of IFRS adoption on the
profitability of private sector enterprises in Nigeria?
How IFRS adoption does affect the liquidity
of private sector enterprises in Nigeria?
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:
To examine the effect of IFRS adoption on
the profitability of private sector enterprises in Nigeria.
To assess the effect of IFRS adoption on
the liquidity of private sector enterprises in Nigeria.
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.
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