EFFECT OF IFRS ADOPTION ON FINANCIAL PERFORMANCE OF MONEY BANKS IN NIGERIA

EFFECT OF IFRS ADOPTION ON FINANCIAL PERFORMANCE OF MONEY BANKS IN NIGERIA A CASE STUDY OF ZENITH BANK PLC

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TABLE OF CONTENT

Title page

Approval page

Dedication

Acknowledgment

Abstract

Table of content

CHAPTER ONE

1.0   INTRODUCTION

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

2.0   LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1        sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1    Introductions

4.2    Data analysis

CHAPTER FIVE

5.1    Introduction

5.2    Summary

5.3    Conclusion

5.4    Recommendation

Appendix

 

 

 

 

 

 

 

 

 

Abstract

The main objective of the study is to examine the effect of International Financial Reporting Standards (IFRS) adoption on the performance Deposit Money Banks in Nigeria. while the specific objectives involved the examination of the effects of the adoption of IFRS on the reported profitability of the bank, to ascertain the impact of IFRS adoption on the reported liquidity of the Nigerian Deposit Money Banks. The globalization of business had necessitated the introduction of International Financial Reporting Standards (IFRS) in order to present 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. However, accounting under IFRS and pre-changeover Nigerian accounting standards hampers the consistency of information in the financial statements due to the application of fair value accounting and thus affects the performance of Nigerian Banks

 

 

 

        CHAPTER ONE

                                        INTRODUCTION

1.1 Background of the study

Accounting Standard is a set of rules, which prescribes the methods by which accounts should be prepared and presented. Therefore, IFRS are principles that establish the general rules by which specific items in the financial statement are to be treated. The financial statement is a source of information for determining the financial position, performance, and changes in financial position of an entity. The users of financial statement (mostly investors) use information derived from financial reports to make useful and informed economic decisions that will affect their investments. 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, etal, 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 value of accounting information is determined by how well it meets the needs of users. Hence, most accounting studies are done to assess the usefulness of information provided by the accounting process. Value of accounting information is affected by a number of factors. Accounting standards are the most important factors (Verriest, 2007). High quality accounting standards and their appropriate enforcement are seen as providing consistent, comparable, relevant and reliable financial information. A considerable number of accounting literature has examines different aspects of accounting quality. Though, there is no one generally accepted definition of accounting quality, different dimensions of this construct have been shared. Most of the recent studies commonly develop measures of quality using value relevance approach. Value relevance approach can be employed to assess usefulness of accounting information for stakeholders. Beaver (2012) indicates that the theoretical groundwork of value relevance studies is a combination of valuation theory and accounting theory that allows the researcher to predict how accounting variables and other information relating to market value will behave. Therefore, value relevance approach is an instrument to estimate value relevance of accounting information, which is important to the well-being of the economy (Beuselinck, 2013). In recent times, a number of Nigerian companies have raised capital from international capital markets; others have established significant presence in other jurisdictions. Also, a good number of Nigerian financial entities hold the securities of non-Nigerian issuers. Thus, for a better understanding and appreciation of the risks and, consequently, making decisions about the flow of global economic capital, it makes sense that financial statements prepared in Nigeria use global financial reporting standards. Reforms in Nigeria, like other emerging markets, extended to accounting as a consequence of development in financial markets and economic growth (Jahun, 2012). For example, the Financial Reporting Council of Nigeria Act requires all companies to prepare their financial statements in accordance with the International Financial Reporting Standards (IFRS). Moreover, since 2009 all deposit money banks listed on the Nigerian Stock Exchange (NSE) adopted IFRS to publish financial statements (Deloitte, 2010). Despite all efforts by the Central Bank of Nigeria to develop a sound Financial System Strategy (FSS), a crucial gap in the literature remains. 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 introduction of IFRS represents a significant change in banks’ 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) 39 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 effect of IFRS adoption on financial performance of money banks in Nigeria with emphasis on Zenith bank.

1.2 STATEMENT OF THE PROBLEM

Nigerian banks over the years have been observed to exhibit weak disclosures in financial statement, operational inefficiencies, undercapitalization and a weak corporate governance practice that impedes their performance and makes 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 2billion Naira (US $14m) to 25 billion 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 and the creation of AMCOM (Asset Management Company) to purchase the non-performing loan from banks.  Different research has shown contradictory results of companies that adopted IFRS. For instance the financial report presented by Oando Plc for 2009/2010 financial year shows that financial statement prepared using Nigerian generally accepted accounting principles (GAAP) yielded 12.5% increase in revenue better than that prepared under IFRS which gained 11.5% increase. This trend however contradicts the expectations of a robust and higher quality reporting which the promoters of IFRS envisaged. It is against this backdrop that this study seeks to investigate the effect of IFRS adoption on financial performance of deposit money banks in Nigeria.

1.3 OBJECTIVE OF THE STUDY

The main objective of the study is to examine the effect of IFRS adoption on the financial performance of money banks in Nigeria with emphasis on zenith bank, but to aid the completion of the study, the researcher intends to achieve the following specific objective;

1. i) To ascertain the effect of IFRS adoption on the quality of financial reporting in zenith banks
2. ii) To examine if the financial statement of the banks prepared in line with IFRS shows a true and fair view of the banks financial position.

iii) To ascertain if there is any significant relationship between IFRS adoption and banks profitability in Nigeria

1. iv) To examine the impact of IFRS adoption on the usefulness of financial statement reporting to global investors in Nigeria banking sector

1.4 RESEARCH QUESTION

The following research questions were formulated by the researcher to aid the completion of the study;

1. i) Is there any effect of IFRS adoption on the quality of financial reporting in zenith banks?
2. ii) Does the financial statement of the banks prepared in line with IFRS show a true and fair view of the banks financial position?

iii) Is there any significant relationship between IFRS adoption and banks profitability in Nigeria?

1. iv) Does IFRS adoption have any impact on the usefulness of financial statement reporting to global investors in Nigeria banking sector?

1.5 RESEARCH HYPOTHESES

The following null and alternate hypotheses were formulated by the researcher to aid the completion of the study;

H₀: stand for null hypotheses

H₁: stands for alternate hypotheses

Hypotheses1:

H₀: there is no significant relationship between IFRS adoption and banks profitability in Nigeria

H₁: there is a significant relationship between IFRS adoption and banks profitability in Nigeria

Hypotheses2:

H₀: Financial statement of the banks prepared in line with IFRS does not shows a true and fair view of the banks financial position

H₂: Financial statement of the banks prepared in line with IFRS does shows a true and fair view of the banks financial position

1.6 SIGNIFICANCE OF THE STUDY

The study will place emphasis on the effect of IFRS adoption on financial performance of deposit money banks in Nigeria. The following will benefit from the study

1.The study will enlighten accountants on the latest development in accounting profession

2. The study will attract potential investors to the company.
3. The study will also enable Nigeria Accounting standard Board (NASB) to adjust to international standard.
   The students, supervisor, government, and the general public will also benefit from it.

1.7 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers effect of IFRS adoption on financial performance of deposit money banks in Nigeria with emphasis on zenith bank.

Studies of this nature are bound to be limited by constraints in the course of the finding. The followings were encountered.

1. Data collection: Well established data are not easily available.
2. Sizeable quantity of information obtained from papers were in organization and sometimes complex.
3. Reluctance of the respondent to fill the questionnaires.

1.8 OPERATIONAL DEFINITION OF TERMS

Accrual Accounting:

Accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. The term “accrual” refers to any individual entry recording revenue or expense in the absence of a cash transaction.

Accounting system: The transition to IFRS may require an entity to undertake significant changes to their core financial systems. The extent of these changes will depend on the current financial systems adopted by entities. Significant changes in systems may lead to an increased risk in the reliability of information produced from the systems.

Quality statement: It is in the best interest of the nation to adopt the IFRS. The transition should be phased so that the objectives are achieved within the time-frame as outlined in the roadmap.

IFRS: IFRS a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements

Deposit money banks:  Deposit money banks are resident depository corporations and quasi-corporations which have any liabilities in the form of deposits payable on demand, transferable by cheque or otherwise usable for making payments   

Financial performance: Financial performance refers to the act of performing financial activity. In broader sense, financial performance refers to the degree to which financial objectives being or has been accomplished.   

1.9 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 (background of the study), statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study etc. Chapter two being the review of the related literature presents the theoretical framework, conceptual framework and other areas concerning the subject matter.     Chapter three is a research methodology covers deals on the research design and methods 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.

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