CHAPTER 1

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

International Financial Reporting Standards (IFRS) are principles based set of standards that establish broad rules and also dictate specific treatments. IFRS consists of (I) IFRS issued after 2001; (2) International Accounting Standards (lAS) issued before 2001 (3) Interpretations originated from the International Financial Reporting Interpretation Committee (IFRIC) issued after 2001 ;(4)Standards Interpretation Committee (SIC) issued before 2001 and (5) Framework for the Preparation and Presentation of Financial Statements. Accenture (2008) Land,. (2002) The Framework for the Preparation and Presentation of Financial Statements describes the principles underling IFRS. It is the foundation of IFRSs. IFRS financial statements consist of:

(1) Statement of financial position

(2) Comprehensive income statement;

(3) Statement of changes in Equity (SOCE) or a statement of recognized income expenses (SORIE);

(4) Cash flow statement;

(5) Notes (including Summary of the significant accounting policies).

There is abundant literature on international accounting harmonization which covers areas such as: the degree of harmonization BalI, (2006) whether international accounting harmonization is appropriate (Barth, (2006) , According to Succher and Jindrichovska (2004), there has been sparingly little academic empirical research on what has happened when IFRS are implemented within a country, though there are recent world bank reports on the subject Bhattacharjee, (2009). The objective of the world bank reports are. to assess the comparability of national accounting and auditing standards with International Accounting Standards (lASs) and International Standards on Auditing respectively and the degree to which corporate entities comply with established accounting and auditing standards in the country (Bushman (2006)

 Another area which has been neglected in the literature and studies is the impact of IFRS implementation on the company itself which is the subject of the current study. As of 1st January 2012 all listed companies in Nigeria had to adopt IAS/IFRS in order to prepare their financial statements. This decision was issued by the Nigerian government through the minister of trade and investment dated 28th July, 2008. it was aimed at enhancing the competitiveness of the Nigerian capital markets by a way of establishing a single set of globalised and homogeneous,” investor friendly, oriented” and internationally recognized accounting standards. Cairns, (1999). The decision to adopt IAS/IFRS in a wide and important economic area such as Nigeria cannot be over – emphasis, but in doing that the government need to consider several factors that may affect the adoption of IFRS in developing countries (Christensen, (2008) which of course Nigeria is part and parcel, despite the fact that research stream concerning international accounting standards had gained international relevance in most of the developed nations of the world. Nevertheless, IFRS adoption in Nigeria will offer a unique opportunity for researchers to explore possible ways of assessing the level of compliance and implementation of the subject matter. Dumontier, (1998) the first objective of the literature on international accounting standards/ international financial reporting standards is to provide an in-depth analysis on why there is need for a dual or option to choose either the NGAAP or IFRS in order to dampen the effects of the new FRS adoption, rather than mandating a single global set of financial accounting standards as issued out by the proposed roadmap. ECB (2004). The current Global Financial Crises has once again brought to the fore the importance of accurate and reliable financial reporting in the

Stability of financial markets and the interdependence between its various sub sectors. Most commentators have traced the origin of the crisis to the unprecedented growth in the provision of credits and the lowering of credit underwriting standards by Banks in the developed Economies of the west particularly the United States of America (US). However, the effect of the crisis has grown to envelop the world Capital Market, Banking, Insurance and Pension sub sectors. Ernst and Young (2008), whatever the causes of the crisis that might have been, what is certain is that the world cannot go back to doing business as usual. That is why the global transition to IFRS is a welcomed development. This summit is yet another forum therefore to encourage and appreciate the implementation of IFRS in Nigeria.

Is there any need for a single global set of financial accounting standards for Nigeria? A single global set of

financial reporting standards are not optimal. Ernst and Young (2009 Robust competition between standards setters is more desirable. In the context of the proposed roadmap, allowing listed companies in Nigeria to choose between using NGAAP and IFRS has a higher likelihood of generating high quality financial reporting. Also the attention should be devoted to auditing because accounting standards setters have recently undervalued the importance of verifiability as qualitative characteristics in setting accounting standards. Reconciliation should be between the accounting and auditing standards is necessary in order to ensure proper implementation of both NG-GAAP and IFRS. In the aspect of governance and funding mechanism of standards – setting boards are very vital for creating independence as well as responsiveness to the needs of preparers and users of accounting reports. Gassen, (2006) the current governance and funding policies of NASB really instill confidence unlike that of IFRS which need to be reconstituted because it lacks confidence in the independence or responsiveness of the IASB. Bushman R., Piotroski, (2006). The last but not the least, the roadmap and the cost benefit analysis fails to take cogent actions on the educational sector, even in the time

past, NASB has failed in its duty to strictly monitor the inculcating of the NG-GAAP into the curricular of learning in the country. Gassen, (2006)”

Globalization of capital markets is an irreversible process, and there are many potential benefits to be gained from mutually recognized and respected international accounting standards. The adoption c uniform standards cut the costs of doing business across borders by reducing the need for supplementary information. They make bon more comparable. Thereby enhancing evaluation  and analysis by users of financial statements (Adekoye, 2011). Users become more confident of the information they are provided with and presumably, this reduces uncertainty, promotes an efficient allocation of resources and reduces capital costs (Ahmed, 2011). To bridge the gap between accounting standards among countries, the International Accounting Standards Committee (IASC) was founded ii 1973 by a group of professional accounting practitioners The LASC was to formulate uniform and global accounting standards aimed at reducing the discrepancies in international accounting principles and reporting practices. In this light, the International Accounting Standards Committee (IASC) was established. Since its establishment the IASC has actively been championing the uniformity and standardization of accounting principles for over two decades (Ernst and Young (2008) In April 2001, the International Accounting Standards Board (IASB) took over the setting of International Accounting Standards from the International Accounting Standards Committee (IASC). Thenceforth, the IASB updated the already existing International Accounting Standards and referred to them as International Financial Reporting Standards (IFRS).

In Nigeria, adoption of IFRS was launched in September 2010, by the Honorable Minister, Federal Ministry of Commerce and Industry; Senator Jubril Martins-kuye (OFR) The adoption was organized such that all stakeholders use the IFRS by January 2014. The adoption was scheduled to start with Public Listed Entities and Significant Public Interest Entities who are expected to adopt the IFRS by January 2012. All Other Public Interest Entities are expected to mandatorily adopt the IFRS for statutory purposes by January 2013, and Small and Medium-sized Entities shall mandatorily adopt IFRS by January 2014. In the light of this therefore, this study focused on the process of adopting the IFRS in Nigeria as a developing economy. Specifically, the study examined the development of the accounting profession in Nigeria, the legal and regulatory framework of accounting, IFRS adoption process, benefits and challenges of IFRS adoption. Finally, conclusions are drawn and recommendation made.

The expansion of International Trade and the accessibility to foreign stock and debt market has given impetus to increasing the debate on whether or not there is need to be a global set of accounting standards. As companies compete globally for scarce resources, investors and creditors as well as multinational companies are required to bear the cost of reconciling financial statements that are prepared using national standards It was argued that a common set of practices will provide a “level playing field” for all companies worldwide (Murphy, 2000). IFRS are standards and interpretations adopted by the International Accounting Standards Board (IASB). They include: International Financial Reporting Standards (IFRS), International Accounting Standards (lAS) and interpretation originated by the International Reporting Standards Interpretation Committee (IFRSIC) (Oyedele, 2011). IFRS represent a single set of high quality, globally accepted accounting standards that can enhance comparability of financial reporting across the globe.

Cairns, (1999), emphasized the fact that universal financial reporting standards will increase market liquidity, decrease transaction costs for investors, lower cost of capital and facilitate international capital formation and flows, various studies conducted on the adoption of IFRS at country level indicated that countries that adopted IFRS experienced huge increases in direct foreign investment (DFI) flows across countries (Irvine and Lucas, 2006). Cal and Wong (2010),in a study of global capital markets demonstrated that capital markets of countries that had adopted IFRS recorded high degree of integration among them after their IFRS adoption compared with the period before adoption. In a study on financial data of public listed in 15 member states of the European Union (EU) before and after full adoption of IFRS in 2005 Adekoya, (2011). Found that of accounting quality indicators improved after IFRS in the EU. Accenture (2008). In a study on the question of usefulness of IAS/IFRS for developing countries using a case study 3bwe, Chamisa (2000), analyzed the impact of the adoption standards on the accounting practices of listed companies. bhattacharjee, (2009).

Similarly, in a study on adoption of IFRS at firm level, Meeks and n (2009), demonstrated that firms adopting IFRS had exhibited accounting quality in the post-adoption period than they did in pre-adoption period. In a study of financial data of firms covering countries, Barth (2008), confirmed that firms applying IAS/IFRS experienced an improvement in accounting quality between the adoption and post-adoption periods. Latridis (2010), concluded on basis of data collected from firms listed on the London Stock exchange that IFRS implementation has favorably affected the financial performance (measured by profitability and growth potentials). Ball, (2006).

There are also growing number of studies that question the relevance of IFRS in developing and emerging economies. ECB

(2004) also reported that the development of globalized set of accounting standards provides other benefits that are not so relevant to developing and emerging nations. The adoption of IFRS will save Multinational Corporations the expense of preparing more than one set of accounts for different national jurisdictions, the professional status of accounting bodies will be enhanced and the big accounting firms will benefit in their efforts to expand the global market for their services. Barth, (2006).

1.2 STATEMENT OF THE PROBLEM

Most studies on IERS have concentrated on it as a financial reporting issue. But financial reporting is one aspect of the total impact of IFRS on corporations. Much more significant is the impact of the set of standards on a company’s organization, philosophy, business structure compliance to the standards, performance management, and internal control and so on. Nigerian GAAP Possible tax challenges Revenue recognition. Based on a single standards that contain general principles No single standards.     

Revenue is recognized when it is capable of objective measurement and value of asset to be received in exchange is reasonably certain a) Likelihood of paying tax on unrealized income b) Difficulty in separation of income for tax purposes. Segment reporting Only required for entities not quoted on stock exchanges Required by entities that carry out different lines of business or located in different geographical points (E.g. — Insurance — Life Vs Non-life, Oil and Gas — Upstream Vs Mid Vs Downstream, etc)

Difficulty in ascertaining the actual profit for tax purposes.

The objective of international accounting according to (IASC,1990 as cited in Chamisa,E.2000 ) is that, “Globalization of capital markets appear to be the driving force behind the proposed changes and while for this reason they may well suit the purposes of the first world nations, their effect on third world countries could be catastrophic” In lieu of the above, developing countries adopt the TERS with the primary aim of satisfying their accounting and financial reporting requirements but not purposely helping in the harmonizing of accounting standards. These developing countries of which Nigeria is not an exception therefore select the standards that would help their course and modify those that would not be extremely beneficial to them. Developing countries pursue international harmonization of these accounting standards as far it does not hamper on the local needs, laws and regulations. If the main objective for the IFRS is to achieve a globalized capital market whiles most developing countries possess weaker or no capital, then surely these standards can be disastrous to some degree.

In addition, Rahaman et al. (2004), is of the view that, “International financial Reporting Standards are “carbon copies” of standards originating from the UK and the USA with strong orientations towards maximizing shareholders wealth rather than the social functions of accounting”. Most emerging and third world countries have weak or no structures to develop good accounting system and for that on the first point of call when it comes to accounting issues is crafting and developing meaningful accounting system rather than adopting already structured standards from the developed countries.

More so, the fact that these standards were developed with the importance of these developed countries as a yardstick makes the importance of the adoption of IFRS a daunting task. Mir and Rahaman. (2004) argue that accounting should not be treated as the object of providing useful information to investors only, but a craft that serves purpose of divergent interested groups. Since most developing countries would be pursuing different socio-economic development policies,  the usefulness of standards developed with significant from the advanced industrialized nations remains contestable. The bearing of IFRS on the economic growth of developing countries which have adopted them is conflicting bearing. In mind the past empirical studies conducted. Woolley (1998) who studies the bearing, the adoption of lAS has on the economic growth some Asian countries and came to the conclusion that the average economic growth rate of developing countries when grouped by their approach to adoption or non-adoption of lASs was not significantly different which underscores the point that the adopters were not off nor worse off as compared to the non-adopters. However, a similar study conducted in Africa observed a higher level economic growth for countries that adopted with some form of modification of some of the standards to suit the local environmental (Larson, 1993).As such Nigeria will stand the chance of facing difficulty in its quest of adopting a single globalised accounting standards.

1.3 OBJECTIVE OF THE STUDY

The aim of this study is to investigate the effect of International financial Reporting Standards (IFRS) on investors decision in Nigeria. Other specific aims to be accomplished include:

1.       To investigate the impact of IFRS adoption on equity shareholders decision making in Nigeria.

2.       To evaluate the impact of IFRS adoption on preference shareholders decision making in Nigeria.

3.       To access the impact of IFRS adoption on foreign investors decision making in Nigeria.         

1.4 RESEARCH QUESTIONS        

The following question shall be use in the course of this research study   

i) To what extent can the adoption of IFRS affect the decision making of equity shareholders in Nigeria?

ii) To what extent can IFRS adoption affect the decision making of preference shareholders in Nigeria?     

iii) To what extent can the adoption of IFRS affect foreign investors decision in Nigeria?

1.5 RESEARCH HYPOTHESES    

The following are the research hypotheses.         

H01: There is no significant relationship between the IFRS adoption and equity shareholders decision in Nigeria.       

H02. There is no significant relationship between IFRS adoption and preference shareholders decision in Nigeria.       

H03: There is no significant relationship between IFRS adoption and foreign investors  decision making in Nigeria

1.6 SIGNIFICANCE OF THE STUDY     

This research is on the effect of International Financial Reporting standards (IFRS) on investors decision in Nigeria. Therefore they focused towards gaining a detail insight the effect of international Financial Reporting Standards (IFRS) on investors decision in Nigeria. This research work will serve as a framework for scholars and students who are researching into similar topics. Most students of the accountancy department of ken sarowiwa polytechnic bori and other higher institutions of learning The study is led to provide a yardstick for the Nigerian government, companies,  investors , the Nigerian stock exchange, accountant, and the society at large on the effect of International Reporting Standards (IFRS) on investors decision in Nigeria.  

1.7     SCOPE OF THE STUDY     

This study is intended to cover the framework of it content. The scope of this study is limited to selected companies in Rivers State comprising of the Nigeria breweries plc, the Nigeria bottling company, Dangote Nig Ltd. Port Harcourt Rivers State, this will help to give direction to the researcher and the users of this work.

1.8 LIMITATION OF THE STUDY         

The most limiting factor encountered in course of carrying out this research work was lack of fund. Also, the time duration required for the completion was too short, hence not encouraging. Sourcing of material was a difficult task due to the fact that some materials were not available at the time writing.

1.9 DEFINITION OF TERMS         

IFRS: International Financial Reporting Standards      

TRANSFORMATION: Is a process of change from tradolimalism to modern, which is immensely influenced by human being. It is also people and their education and health. EFRAG: European financial Reporting Advisory Group, Europe instance which technical expertise to the European Commission concerning the use of lAS the Europe FASB: Financial Accounting Standards Board, the “n based standard setter GAAP: United States Generally )ted Accounting Principles made by the FASB IASR international Accounting Standards Board, the London based international Accounting Standards setter.

IAS: International Accounting Standards, IASB norms former nomination lAS 32: International Accounting Standards which aims establishing principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. ICA: International Cooperative Alliance ICBA: International Cooperative Banking Alliance IFRS: International Financial Reporting Standards, IASB norms new denomination IFRIC: International Financial Reporting Interpretation Committee, the interpretative body of the IASB.