IMPACT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS ON EARNINGS

IMPACT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS ON EARNINGS

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Globalization of the world’s capital markets has brought the increasing need for comparable and reliable financial information to support these markets’ varied transactions and operations. Transparency and relevance are attributes of financial reporting. Accounting information that meets these attributes increases investors’ confidence, leading to enhanced capital flow. The recent financial crisis has been partly blamed on the erosion of investors’ confidence, owing to the perceived lack of transparency in financial markets. Devalle et al. (2010) posited that opaque markets aggravate information asymmetry between insiders and outsiders, impeding the efficient allocation of resources. The International Accounting Standards Board (I.A.S.B.) has equally acknowledged the need to improve financial reporting quality globally. Consequently, the I.A.S.B. promotes the application of a common set of financial reporting standards as a solution.

Further, extant literature suggests that applying diverse accounting standards worldwide often results in different criteria for resources accounting (I.A.S.B., 2009; Lorchir, 2015). Analysts view that this creates inconsistencies in global investors’ investment information, which was narrowed by the worldwide application of IFRS. In this regard, complying with IFRS is expected to facilitate informed trading and reduce adverse selection in the market. Information asymmetry puts small investors less likely than their sophisticated counterparts to generate financial information from alternative sources at a disadvantage in the market (Ball, 2006). The notion behind promoting a common set of high-quality standards worldwide is that the risk and cost of processing financial information to investors reduce.

Shehu (2015) opined that in Nigeria, the information disclosure requirements in the financial statements under Nigerian Generally Accepted Accounting Principles (N.G.A.A.P.) were grossly inadequate to effectively bridge the information asymmetry between companies and the users of the financial statements. He further posited that financial information quality in Nigeria remains weak compared with many advanced jurisdictions. As a result, they were hampering the growth of efficient equity markets. A common complaint among investors in Nigeria is that financial information on company performance is either unavailable or, if provided, lacks reliability. Hence, he conceived that companies would disclose more of their financial information with the transition to IFRS. However, small profit earning through manipulation of the accounting information revealed, otherwise known as earnings management, has hampered the financial disclosure quality to the shareholders and other stakeholders of the listed conglomerates in Nigeria.

Earnings could be used to tell the truth and in cheating or misleading. Therefore, the difference between real and reported earnings impacts earnings quality, described by the capital markets as a summary indicator of financial reporting quality (Francis & Schipper 2008). Corporate scandals like Enron, WorldCom, Parmalat, and, more specifically, Afribank Nigeria P.L.C., Cadbury Nigeria P.L.C., and other corporate fraud in Nigeria have continued to raise questions about earnings quality in Nigeria and the world at large.

As the debate on the effects of global IFRS adoption continues, little is known about Nigeria’s outcome despite IFRS adoption, hence creating a gap. Studies like those of Houge et al., 2014; Jeweher et al., 2014; Umobong et al., 2015, Priscilla et al., 2015; Yasas et al., 2019) have continued to submit empirical shreds of evidence supporting and refuting the capability of IFRS to enhance earnings quality. However, a consensus is yet to reach the efficacy of mandatory IFRS adoption’s impact on earnings quality in developing countries. This realization suggests that the debate remains unsettled, and there is a need for further empirical evidence on different jurisdictions to enrich the discussion (Bruggemann et al., 2013). Specifically, current studies have not looked at Africa closely in this accounting research area, even as African countries have adopted the IFRS and set timelines for mandatory adoption (PwC, 2014). This study supports the existing literature in developed economies with few in developing climes to include Nigeria. Thus this study makes an attempt to examine the impact of International Financial Reporting Standards on Earning.

1.1       STATEMENT OF RESEARCH PROBLEM

Although many countries have faced challenges n their decisions to adopt IFRS, its wide spread adoption have been promoted by the argument that the benefits outweigh the costs. Recently there has been a push towards the adoption of IFRS developed an issued by the International Accounting Standards Board (IASB). The organization should enable regulators and other key players to gauge the effectiveness of the financial reporting system in place such has training and development for practitioners and new members, due diligence for accounting standard and the overall institutional and professional organization conducive for effective standards application. Therefore, implementation of IFRS would reduce information irregularity and strengthens the communication like between all shareholders and also reduces the cost of preparing different version of financial statements where an organization is a multi-national. It is against this problem that the study seek to examine the impact of international Financial Reporting Standard on earning.

1.2       OBJECTIVE OF THE STUDY

The general objective of the study is to examine the impact of International Financial Reporting Standard on Earning with particular interest in First Bank of Nigeria

The specific objectives include the following:

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 impact on earning of First Bank of Nigeria Plc.
3. To find out the role 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.

1.3       RESEARCH QUESTIONS

1. Does IFRS aid quality of financial statement in First Bank of Nigeria Plc?
2. Does International Financial Reporting Standards (IFRS) in Nigeria has impact on earning of First Bank of Nigeria Plc?
3.  Does IFRS play any significant role in banking institutions in Nigeria?
4. Has there been effective implementation in adoption of IFRS in First Bank of Nigeria Plc?
5. Is there any problem confronting the staff of First Bank of Nigeria Plc Lagos in enhancing quality financial statement?

1.4       RESEARCH HYPOTHESIS

HYPOTHESIS 1

H0:      International Financial Reporting Standards does not have significant impact on financial earning in First Bank of Nigeria Plc.

H1:      International Financial Reporting Standards does not have significant impact on financial earning in First Bank of Nigeria Plc.

HYPOTHESIS 2

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 3

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.

1.5       SIGNIFICANCE OF THE STUDY  

International Financial Reporting Standards (IFRS) are accounting principles and guidelines formulated by the International Financial Accounting Committee (IFAC) for global acceptance by countries’ local accounting bodies and institutions. In a world of global warming where international businesses and trade is on the rise, thus, a global standardized accounting method is prominent.

The findings of this research study will be significantly relevant and applicable in so many areas; first and foremost adoption of IFRS will promote transparency and accountability among in the Nigeria business environment (both public and private firms) and the economy at large. It will benefit the shareholders, investors, management, etc. of organization in ensuring credible accounting quality and overall true picture of the company’s performance for investors and general public decision making.

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 is necessary because it 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 others researchers who might want to carry their research on similar topic.

1.6       SCOPE OF THE STUDY

The study concerns about the impact of Internal Financial Reporting Standard on earning with a particular reference to First Bank of Nigeria Plc.

1.7       LIMITATIONS OF THE STUDY

The limitation of this study was the inability of management to divulge certain information which they consider sensitive and fear of publication which might be detrimental to their operation. Another limitation to the study is time constraint. The period within which the study is conducted is short for a thorough research work, hence gathering adequate information becomes very difficult.

Also, finance is one of the limitations of study. The researcher is facing financial constraint to meet all the needed educational requirements including this research study. This caused the researcher to restrict his research to one company for possible completion of the study.

Finally, lack of materials on the topic. This is new in the area of quality of financial statement in Nigeria. Therefore, the researcher resolved to seek friendly approach in order to obtain the needed materials or information from the organization under study through the administration of questionnaire.  

1.8       BRIEF HISTORY OF FIRST BANK OF NIGERIA PLC.

First Bank of Nigeria Plc was established in the year 1894 and headquarters in Marina, the heart of Lagos. It is Nigeria’s largest financial services institution by total assets and gross earnings. First Bank has over 750 branches providing a comprehensive range of retail and corporate financial services.

Since its establishment in 1894, First Bank has consistently built relationships with customers focusing on the fundamentals of good governance, strong liquidity, risk management and leadership.

In 1894 First Bank of Nigeria Plc:

Incorporated in Liverpool as the Bank for British West Africa.

Acquired African Banking Corporation, which was established in 1892.

In 1896:

Opened first international branch in Accra, Ghana.

In 1963: Operates 114 branches across West Africa, when Nigeria became a Republic. Partly because of desire for service; commitment to financial inclusion with over 100 branches as far back as 1963.

In 1969:

• Incorporated locally as the standard Bank of Nigeria Ltd.

In 1971

• Listed on the Nigeria Stock Exchange. Allows Nigerians to buy/own a part of First Bank heritage, into the huge potential of the financial services powerhouse.

In 1979:

• Changes name to First Bank of Nigeria Limited

In 1982:

• London Branch established to foster international banking relationships for Nigerian and foreign businesses alike

In 1991:

• Changes name to First Bank of Nigeria Plc following the Bank and other Financial Institutions Decree (BOFID). Alongside with currency reforms and other initiatives to enhance the payment structure
•  First ATM introduced in Marina as part of ease of convenience, round the clock banking.

In 1999:

• A former MD of First Bank is appointed CBN Governor

In 2002

• Establishes the FBN Bank (UK), regulated by the FSA, the first Nigerian bank to own a full- fledge bank in the UK.
• Established first subsidiary of a Nigerian owned bank in the UK.

1.9       DEFINITION OF TERMS

IFRS: International Financial Reporting Standards

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 judgments and decisions by users of the information

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

INCOME STATEMENT: Income statement is a financial statement that measures a company’s financial performance over a specified period

STATEMENT OF CASH FLOW: Statement of cash flow is a financial statement that shows changes in the balance sheet (financial position) accounts and income affects cash and cash equivalents and breaks the analysis down to operating, investing, and financing activities.