ABSTRACT

The study ascertained the effect of International Financial Reporting Standards (IFRS) adoption on financial ratios of manufacturing firms in Nigeria. The study specifically evaluated six categories of ratios: activity ratios, cash flow ratios, growth ratios, liquidity ratios, leverage ratios, and profitability ratios computed under IFRS and Ng-GAAP regimes. The study is anchored on corporate disclosure theory. The study made use of Ex-post Facto Research Design. The population of the study is made up of eighty-eight (88) manufacturing firms quoted on the floor of the Nigerian Stock Exchange (NSE) as at end of 2011 and 2012 financial years. Five companies in the agricultural sector, thirty-three companies in the consumer goods sector, six conglomerates, ten companies in the health care products sector, eleven companies in information & communication technology, and twenty-three companies in the industrial goods sector. The study employed two statistical techniques in validating the hypotheses, the Independent Samples Mann-Whitney U Test for variables found to be non-normal, while independent samples t-test was applied to variables found to be normal. Simple linear regression was used to test for dependence of the ratios, that is, if the Ng-GAAP ratios were significant in explaining the variation in the IFRS ratios. The study finds significant variation between activity ratios, cash flow ratios, growth ratios, liquidity ratios, leverage ratios, and profitability ratios of manufacturing firms computed under IFRS and Nigerian GAAP (SAS) regimes. Based on this, the study recommends a country specific re-assessment of the standards before adoption due to considerably differing cultural, legal, environmental and social arena. A focus on relevance of financial information than overload. The standards need to be streamlined to focus on relevant areas in financial reporting and presentation rather than an overload of information which may affect the understandability and relevance of such information to stakeholders involved in financial reporting. Finally, the comprehensive review of the qualitative features/characteristics of financial statements.

CHAPTER ONE

INTRODUCTION

1. Background of the Study

Financial accounting is concerned with how best to provide useful accounting information to assist decision-makers (Foster, 1986) and is based on some assumptions, rules and agreements which are known as Generally Accepted Accounting Principles (GAAP) (Walton & Aerts, 2009). An important medium useful for the communication of accounting information to users is the financial statement (Foster, 1986). Financial statements are described as the end product of the accounting process, which is aimed at providing qualitative and quantitative information on the performance of the organisation in order for users to make informed decisions (Ilaboya, 2008). Financial statements provide information on the income and expenses of a company in a fiscal year captured in the statement of profit or loss and other comprehensive income and details of assets and liabilities owed shown in the statement of financial position.

In addition, it also provides other relevant information contained in the statement of value added, changes in equity if any and statement of cash flows of the firm within a defined period of time to which it relates (Krstić & ĐorĎević, 2010; Iyoha & Faboyede, 2011). The manner in which an entity whether private or public present information in its financial statements is of paramount importance as financial statements remain a central feature of financial reporting, a principal means of communicating financial information to those outside an entity (Elliot & Elliot, 2011). Firms in Nigeria usually prepare financial statements at the end of their accounting year or any period usually yearly that is twelve (12) months (Omoye, 2013).

Financial accounting operates within a framework (Donwa, Mgbame, & Idemudia, 2015) and requires the use of standards to guard against arbitrary judgements and practices by accountants. Accounting Standard is defined as ‗an information system through which financial and monetized information is generated for economic, social and political decisions‘ (Izedonmi, 2001). Accounting standards are important determinants of financial reporting quality (Ding, Hope, Jeanjean & Stolowy, 2007) and guide the preparation and presentation of financial statements and often serve as reference point for statutory or financial audit (Igbokwe, 2014). Without standards, evaluating failure or success becomes an unscientific act liable to various interpretations and bias commentary. They form the basis for accounting measurements and disclosures, etc. and are usually backed by statute in most jurisdictions for example CAMA, etc. (Igbokwe, 2014).

Various national accounting bodies develop and issue standards to regulate accounting practice in their respective countries (Umoren & Enang, 2015).This gave rise to the proliferation of standards in various countries of the world, a phenomenon commonly referred to as ‗standards overload‘ (Blanchette, Raciciot, & Girard, 2011). According to Radebaugh and Gray (1993) the differing accounting standards resulted from the different economic, historical, institutional and cultural environments of their respective countries. Such differences reduce the quality, comparability, reliability and relevance of financial information (Ding, Hope, Jeanjean, & Stolowy, 2007). The quality of financial reporting is indispensable to the needs of users who require them for investment and other decision making purposes (Okpala, 2012). Reliable financial statements play a key role in financial markets, which are integral to the success and well-being of households and businesses, the economy, and global participants and stakeholders in the capital and money markets (Franzel, 2012).

The proponents of harmonization argue that if all firms follow the same set of accounting standards, external financial reports of firms would provide more uniform disclosures (Purvis, Gerson, & Diamond, 1991; Ding, Hope, Jeanjean, & Stolowy, 2007; Armstrong, Barth, Jagolinzer, & Riedl, 2010), enhance comparability across countries, improve reliability, thereby making them more useful for investors and other users (Gastón, García, Jarne, & Gadea, 2010).With globalization and integration of the world‘s economy (Lawrence, 1996; Ocansey & Enahoro, 2014) due to expansion of capital transactions and dispersion of economic agents (Silva, Couto, & Cordeiro, 2007), companies have become global players. This has led to a pressing need for the global convergence or harmonization of accounting standards and practices.

According to Silva, Couto, and Cordeiro (2007) the object of international accounting convergence is to minimize the negative effects that result from the diversity of accounting practices in different countries. This stemmed the drive for the development of International Financial Reporting Standards (IFRS), a principle-based standard by the International Accounting Standards Board (IASB) to ensure improved transparency, uniformity and comparability of financial reporting across the world (Jacob & Madu, 2009; IASB, 2010; Blanchette, Raciciot & Girard, 2011). IFRS comprise of four types of documents, viz: IAS (41); IFRSs (16); the Standing Interpretation Committee Statements, SICs (33); and the International Financial Reporting Issues Committee Statements, IFRICs (21).

IFRS includes standards, interpretations and framework which are continuously evolving, and affects financial statements in four conceptual areas, namely; presentation, disclosure, recognition and measurement (Edogbanya & Kamardin, 2014).

In Nigeria, the Statement of Accounting Standards (SASs) was the primary standard(s) in use before the adoption of the new global standards and was initially issued by the Nigerian Accounting Standards Board (NASB). The Nigerian Accounting Standards Board (NASB) was charged with the responsibility of developing and issuing accounting standards (referred to as Statements of Accounting Standards) in the country. The Statements of Accounting Standards are developed to ensure a high degree of standardization in publishing financial statements (Mary, Okoye, & Adediran, 2013). On the international scene, between 1973 and 2000, International Accounting Standards (IAS) were issued by the International Accounting Standards Committee (IASC), a body established in 1973 by the professional accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, Netherlands, United Kingdom, Ireland, and the United States (Beke, 2013).

IASC was set up on the initiative of Sir Henry Benson during the 10th World Congress of Accountants at Sydney, Australia, in 1972 (Ezejelue, 2001). In 2001, the IASB was constituted and took over from the defunct IASC. The subsequent standards issued by the IASB were described under the label of “International Financial Reporting Standards”, however the Board continues to recognise (and accept as legitimate) the IASs issued by the defunct IASC (Oduware, 2012). The rate of adoption of these standards received a significant boost in 2002, with the adoption by the European Union (EU) regulation 1606/2002 mandating that all companies listed on the stock exchange in any EU country prepare, from accounting periods beginning on or after January 1, 2005, their consolidated financial statements in accordance with IFRS (Gastón, García, Jarne, & Gadea, 2010; Iyoha & Faboyede, 2011; Blanchette, Raciciot & Girard, 2011; Lourenço & Branco, 2015).

Presently all 27 countries of the EU have adopted the standards (Terzi, Oktem, & Sen, 2013). Daske, Hail, Leuz, and Verdi (2008) observed that the adoption of IFRS by over 100 countries is one of the most significant changes in the world accounting history. The IFRS Foundation (2014) discovered that as at March 13, 2014, 130 countries both in and out of Africa, e.g. Ghana in 2007, Nigeria and South Africa in 2012 have adopted IFRS. These countries have adopted IFRS as their main standards in the preparation of corporate accounts, due to the quest for uniformity, reliability and comparability of financial statements of companies (Oduware, 2012; Adibah Wan Ismail, Anuar Kamarudin, van Zijl, & Dunstan, 2013).

Previously in Nigeria, GAAP comprised the Companies and Allied Matters Act (CAMA) 1990 as amended to date, Statement of Accounting Standards (SAS), Insurance Act (2003), Banks and Other Financial Institutions Act (BOFIA 2002 as amended) and other local laws (e.g., Central Bank of Nigeria Regulations, etc.). However, in 2010 the Federal Executive Council (FEC) accepted the recommendations of the Committee on the Roadmap to the Adoption of International Financial Reporting Standards (IFRS) in Nigeria that it will be in the interest of the Nigerian economy for reporting entities in Nigeria to adopt IFRS, as a single globally accepted, high-quality accounting standards (IFRS Adoption Roadmap Committee, 2010). The IFRS Adoption Roadmap was stipulated in three phases. Since the issuance of IFRSs, authors and scholars alike have identified various benefits with convergence, such as the uniformity of financial statements (Istrate, 2013), reduction in the cost of capital (Istrate, 2013; Herbert, Tsegba, Ohanele, & Anyahara, 2013), improved quality and transparency of published information (Istrate, 2013) and diminished information asymmetry and risk (Herbert, Tsegba, Ohanele, & Anyahara, 2013).

With the mandatory adoption of IFRS in numerous countries, a broad spectrum of studies was also directed at examining the impact on financial statement

elements (e.g. Silva, Couto, & Cordeiro, 2007; Blanchette, Raciciot, & Girard, 2011). Moreover, there has been an increase in the number of Nigerian manufacturing companies that have raised capital from international markets; and also established significant presence in other jurisdictions, such as the UK, USA, and etc. of which a condition for international presence is the adoption of IFRS.

It is against this backdrop that the present study; seek to quantitatively examine the effect of IFRS on financial ratios of manufacturing firms in Nigeria.

1.2             Statement of the Problem

Studies have addressed the impact of IFRS adoption within and comparatively across countries, examining issues, such as, earnings management and the effect on financial ratios (Jermakowicz, 2004; Van Tendeloo & Vanstraelen, 2005; Daske & Gebhardt, 2006: Callao, Jarne, & Laínez, 2007; Ernstberger & Vogler, 2008; Jeanjean &Stolowy, 2008; Callao &Jarne, 2010; Devalle, Onali, & Magarini, 2010; Iatridis & Rouvolis, 2010), these studies focus on European countries (with a broad spectrum of studies covering firms in the UK, USA, Spain, and other EUcountries). This stemmed from the early adoption of the standards in developed countries, (e.g. the European Union (EU) regulations in 2002 requiring listed companies to prepare consolidated accounts for accounting periods beginning on or after 1 January 2005 in compliance with IFRS), when compared to their developing counterparts.

Therefore with the vast majority of these studies carried out in developed countries there exists a lacuna in the literatures, taking into account the differences between developed and developing countries (Umobong, 2015). Moreover, most developed nations (for example, the pioneer members of the IASC) had promulgated standards close to or similar to IFRS, might provide

little or no insight on the differing effects of the application of the new standards (Cai, Rahman, & Courtenay, 2012) in a developing country setting.

Hofstede and Hofstede (2005) observed that developing countries are substantially different from developed markets in terms of the institutional, organisational and market aspects of the economy and society. Also, the literature reveals that the level of reliable and adequate information by listed companies in developing countries lags behind that in developed ones and government regulatory forces are less effective in driving the enforcement of existing accounting standards (Ali, Ahmed, & Henry, 2004). Studies, have shown that developing countries are characterised by weaker and less mature capital markets (Gibson, 2003; Lins, 2003), limited regulatory enforcement (Berghe, 2002) and more concentrated ownership (Claessens, Djankov, & Lang, 2000; Shleifer &Vishny, 1997; Thillainathan, 1998), which arguably leads to greater information asymmetry.

Moreover, Osisioma (2010) observed that one resulting aftermath of the global financial crisis of 2008, was the plunge in value of manufacturing firms, particularly the automobile industry, which experienced a decline in sales, the accumulation of unsold stocks, plummeting of demand, and profits reached their nadir (Osisioma, 2010). Moreover, the application of IFRS in countries with institutional contexts different from the Anglo-Saxon scenario may result in different outcomes (Karampinis & Hevas, 2011; Albu, Albu, & Alexander, 2014).

Liu, Yao, Hu, and Liu (2011) observed that national accounting standard setters and regulators who plan to converge with IFRS should assess the relevance of IFRS to their national needs. The International Accounting Standards Committee (IASC) Foundation has documented the ‗‗need to have an

understanding of the impact of IFRS as they are adopted in particular regions‘‘ (IASB, 2004, Para. 93). Studies have therefore called for the assessment of IFRS application in different national settings (Nobes, 2006, 2011; Irvine, 2008; Kvaal & Nobes, 2010; Guerreiro, Rodrigues, & Craig, 2012; Albu, Albu, & Alexander, 2014).

In line with this, studies have been undertaken in Nigeria aimed at examining the impact of IFRS adoption on financial ratios. These studies however focus majorly on activity, liquidity or profitability ratios, with the growth ratios, cash flow ratios, and leverage ratios usually neglected (Umobong, 2015; Donwa, Mgbame, & Idemudia, 2015;Abdul-baki, Uthman, & Sanni, 2014). Majority, of the studies examine a single ratio within a particular category. The study by Umobong (2015) examined only three financial ratios: Earnings per Share, Price Earnings Ratio and Dividend Yield, in examining the market performance of a purposively chosen sample of manufacturing firms in Nigeria. Donwa, Mgbame, and Idemudia (2015) used a sample of five firms in Oil & Gas sector of Nigeria examined Asset Turnover of Oil & Gas firms in Nigeria before and after IFRS adoption.

The study by Abdul-baki, Uthman, and Sanni (2014), examined the impact of IFRS adoption on Oil &Gas entities, examined profitability and investment ratios. Despite these efforts, Abata (2015) posit that the adoption has not been taken seriously in Nigeria. Therefore a more comprehensive investigation using a large data set would provide more significant results on the effects of IFRS adoption on the financial ratios of manufacturing firms. Also, the study identifies and makes use of six categories of ratios.

Ukpai (2013) observed that since the adoption of IFRS in Nigeria, professionals and their likes show confusions, apprehensions and uncertainties regarding terminologies and arrangements of elements of financial statements in arriving

at ratios or its analysis (interpretation).The study addressed the objectives by seeking significant differences between accounting figures and financial ratios under the two sets of standards (i.e. Statement of Accounting Standards and IFRS).

The study also examined the relationship of financial ratios computed under the two regimes. Prior studies have majorly focused on assessing the magnitude of difference between the ratios.

It is therefore important for accounting preparers, regulators and investors, world-wide, to gain insight regarding whether IFRS adoption improves financial information to investors for valuation purposes (Chalmers, Clinch, & Godfrey, 2009).

1.3                   Objective of the Study

The main objective of the study is to ascertain the effect of International Financial Reporting Standards (IFRS) adoption on financial ratios of manufacturing firms in Nigeria. The specific objectives of the study are as follows:

1. To assess the level of variation between activity ratios of manufacturing firms in Nigeria computed under IFRS and Ng-GAAP regimes.
2. To assess the level of variation between cash flow ratios of manufacturing firms in Nigeria computed under IFRS and Ng-GAAP regimes.
3. To examine the extent of variation between growth ratios of manufacturing firms in Nigeria computed under IFRS and Ng-GAAP regimes.
4. To examine the extent of variation between liquidity ratios of manufacturing firms in Nigeria computed under IFRS and Ng-GAAP regimes.
5. To ascertain the level of variation between leverage ratios of manufacturing firms in Nigeria computed under IFRS and Ng-GAAP regimes.

• To ascertain the level of variation between profitability ratios of manufacturing firms in Nigeria computed under IFRS and Ng-GAAP regimes

1.4             Research Questions

Emanating from the above objectives, the following questions were addressed in this study

1. What is the level of variation between the activity ratios of manufacturing firms computed under IFRS and Nigerian GAAP regimes?
2. What is the level of variation between the cash flow ratios of manufacturing firms computed under IFRS and Nigerian GAAP regimes?
3. What is the extent of change between the growth ratios of manufacturing firms computed under the two regimes?
4. What is the extent of change between liquidity ratios of manufacturing firms computed under the two regimes changed?
5. To what level has the leverage ratios of manufacturing firms computed under the two regimes varied?
6. To what level has the profitability ratios of manufacturing firms computed under the two regimes varied?

1.5             Statement of Hypotheses

The following hypotheses were formulated to guide the study. The hypotheses are expressed in the null form.

1. There is no significant variation between activity ratios of manufacturing firms computed under IFRS and Nigerian GAAP (SAS) regimes.
2. There is no significant variation between cash flow ratios of manufacturing firms computed under IFRS and Nigerian GAAP (SAS) regimes.

• There is no significant variation between growth ratios of manufacturing firms computed under IFRS and Nigerian GAAP (SAS) regimes.
• There is no significant variation between liquidity ratios of manufacturing firms computed under IFRS and Nigerian GAAP (SAS) regimes.
• There is no significant variation between leverage ratios of manufacturing firms computed under IFRS and Nigerian GAAP (SAS) regimes.
• There is no significant variation between profitability ratios of manufacturing firms computed under IFRS and Nigerian GAAP (SAS) regimes.

1.6             Significance of the Study

The requirement for mandatory adoption of IFRS in 2012 for publicly listed companies in Nigeria has stemmed interest in the subject. This study would therefore be beneficial to a varying range of stakeholder groups.

First, to Academics and a Contribution to IFRS literature, this study will be useful to academics and practitioners on the effects of IFRS adoption on financial accounting ratios. The effects of IFRS adoption are likely to differ between developed and developing countries, therefore the study contributes to the literature from a developing country perspective on the effects of IFRS adoption on financial ratios of companies in existence in developing countries, this would enable academics further their discussion on the practical relevance or irrelevance of IFRS in developing countries.

This study is also significant to investors. Investors and stock analysts rely on ratio analysis in making investment decisions regarding stock purchases, as well considering past and future prospects. Financial ratios can reveal favourable or unfavourable performances, depending on their trend over time, and relative to those of other companies operating in the same industry. Making financial

decisions based on ratios that are not fully comparable or based on low quality financial information can simply lead to undesirable consequences. The increased quality and comparability of financial statements, from IFRS adoption has a positive impact on the predictive ability of analysts who follow up companies listed on the stock market. The impact of IFRS on financial ratios, will impact the assessment of value relevance but also analysts‘ credit decisions (for example credit scoring models such as Altman, 1968) and contracting decisions by firms that employ financial ratios (for example debt covenants, compensation contracts).

Moreover, the anticipated reaction of investors to IFRS adoption might be positive or negative, depending on the perceived outcome of the convergence, for instance, if the adoption can lead to the lowering of costs of comparing firms‘ financial position and performance across countries, or if the adoption would lead to lower quality financial reporting.

The knowledge gained from this study will also be beneficial to regulators, in understanding the effects of IFRS adoption on financial statement elements. By considering country-specific and institutional factors, this study contributes to the debate on the need to adjust country-specific and institutional factors in line with that suitable for an IFRS regime (such as strong investor protection).

Halabi and Zakaria (2015) have observed that the use of IFRS is not a short-cut to improve corporate governance and financial reporting if certain institutional factors are ignored. The transparency of financial information in developing nations is still low when compared to their developed counterparts; as such the information asymmetry between parties is higher in developing nations than developed nations.

1.7             Scope of the Study

The study covered manufacturing firms in Nigeria, a very vital sector of the economy, the reliability of results are enhanced, as confounding factors, such as a country‘s institutional setting are held constant (Chalmers, Clinch, & Godfrey, 2009). The study therefore focuses on manufacturing companies quoted on the floor of the Nigerian Stock Exchange, and in operation as at end of 2011 and 2012 financial years.

The study is centred on financial ratios, in the accounting and finance literatures an abundance of ratios in various categories exist, the study however, utilises those ratios regarded as primary to the success and survival of firms. The figures to be used in the study would be obtained directly from the published financial statements of the manufacturing firms.

The study covers two time periods:

1. The Pre-transition Period: 2011;
2. Transition period: 2012

To establish equilibrium and avoid study bias, two years were chosen for the study, the year preceding adoption and the year of adoption.

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