Adoption Of IFRS In Nigeria And Implementation Challenges

Published on August 16, 2016

SECTION ONE

INTRODUCTION                   

1.1   BACKGROUD OF THE STUDY

In the past few years, many developed and developing countries have adopted
international financial Reporting Standards (IFRS) as the basis for financial reporting. This
is because globalization of capital market is an irreversible process, and there are many
potential benefits to be gained from mutually recognized and prospected international
accounting standards.

The move towards developing an acceptable global high quality financial reporting
standard started in 1973 when the International Accounting standards committee (IASC)
was formed by professional Accounting bodies from Canada, USA, United Kingdom,
Germany, France, Neitherland, Australia, Mexico and Japan. The IASC was to formulate
uniform and global accountings aimed at reducing the discrepancies in International
Accounting principles and reporting practices.

In this light, the IASC was established and has actively been championing the uniformity
and standardization of accounting principles for the past few years. In April 2001, the IASC
was reorganized into International Accounting standard Board (IASB). Thenceforth, the
IASB has updated the already existing International Accounting Standards and referred to
them as International Financial Reporting standards (IFRS). IFRSs are single set of high
quality understandable standard for general purpose of financial reporting which are
principles based in contrast to the rules based approach.

While some countries have been using these standards for decades, they are however new
for transition economies like Nigeria. In Nigeria, implementation IFRS was launched in
September 2010, but the successful adoption and implementation of these standards
remain a mirage in Nigeria. The adoption was organized such that all the stakeholders will
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, (Jubril and Michael, 2010). The light of this therefore, this study
focused on the process of adopting the IFRS in Nigeria as a developing economy, the
benefits and the challenges of IFRS, bearing in mind the prevailing domestic legal and
regulatory framework.

1.2       STATEMENT OF THE PROBLEMS

The statement of the problems of this research work among others was as   follows:

1. High cost of the first time implementation of IFRS

2. Low level of public awareness for preparers and users of financial statements,
regulators, educators, auditors and other stakeholders.

 Difficulty in understanding the impacts of IFRS on various sectors of the economy

and their economic operations respectively.

1.3 OBJECTIVES OF THE STUDY

The broad objective of this study is to analyze the challenges facing the implementation of
IFRS in the Nigerian Money Deposit Banks.

Specifically, the study seeks to:     

1. ascertain if the first time implementation of IFRS is costly and expensive.

2. examine the level of public awareness by the stakeholders in the use of these
standards.

 examine the influence of existing Nigerian laws on the smooth transition to IFRS.

1.4 RESEARCH QUESTIONS

The focus of this study is to evaluate the implementation challenges facing the adoption of
the International Financial Reporting Standard among the Nigerian Money Deposit Banks.
And also answers will be provided to the following questions.

1. Is the first time implementation of IFRS costly and expensive?

2. What is the level of public awareness of stakeholders on these standards?

 Does existing Nigerian laws has any influence on the smooth transition process to
IFRS?
1.5 RESEARCH HYPOTHESES:
Taking into consideration the nature and extent of the problems stated so far, it is
necessary to formulate the following hypotheses:

H1:   First time implementation of IFRS is not expensive and costly.

Ho2:  IFRS public awareness is not very low among all the stakeholders in Nigeria.

Ho3: There is no any significant influence of existing Nigerian laws on the smooth transition
process to IFRS.

1.6  THE SCOPE OF THE STUDY

This study focused on the evaluation of the challenges facing the adoption of IFRS in the
Nigerian Money Deposit Banks with special emphasis on Guaranty Trust Bank plc. in Ilorin
metropolis.

1.7 JUSTIFICATION FOR THE STUDY

In today’s dynamic and globalization of accounting and financial information and
interpretation, openness and transparency in annual reporting on an unprecedented scale
may be inevitable with the use of International Financial Reporting Standards (IFRS).

Increasing demands for financial reporting accuracy and transparency, coupled with
growing complexity and volume of  accounting standards and regulations all over the
world, have put a premium on ongoing global convergence efforts and Nigeria’s
commitment to adopt IFRS, (Jubril, 2010).

With the IFRS implementation ongoing in Nigeria, this study is therefore aim to assess the
implementation challenges facing its smooth adoption, using the Nigerian Banking sector
as a case study. This information can be of immense benefits to other companies
implementing IFRS in Nigeria, the relevant stakeholders as well as standard-setters and
regulators around the world.

Researchers and students in other developing countries which are yet to adopt the IFRS
may also find this study relevant in knowing the likely implementation challenges that their
countries may encounter in adopting the Standards. Also finding of this study will
contribute to the pool of information needed in making relevant economic policies both in
Nigeria and any other part of the world.

1.8 OUTLINE OF THE STUDY

The study was structured into five chapters. Chapter one focused on the introductory
aspect of the study. Chapter two presented the literature review on the subject matter.
Methodology adopted in the study was stated in chapter three. Chapter four presented the
data, results and the findings of the study. Finally, chapter five gave the summary,
conclusion and appropriate recommendations based on the findings from the study.

1.9   DEFINITION OF TERMS

1. IFRS: Means International Financial Reporting Standards. It represent a unified

global commitment to developing a single set of high quality, globally accepted
accounting standards whose aim is to provide transparent and comparable
information that is in the public interest through general purpose financial
statements (Herbert, 2010).

2. Convergence: Convergence means the process of converging or bringing together

international standards issued by the IASB and existing standards issued by national
standard setters, with the aim of eliminating alternatives in accounting for economic
transactions and events (Odia and Ogiedu, 2013)

 Adoption: Adoption implies that national rules are set aside and replaced by IFRS
requirement. Adoption of IFRS means full scale implementation or usage of IFRS
without any variation.

1. Comparison: This is the means of assessing the similarities between the financial

statements prepared in different parts of the world. Without a common set of
accounting and financing reporting standard it would be difficult to compare
financial information prepared by entities located in different parts of the world.

      
CHAPTER TWO
LITERATURE REVIEW
2.1INTRODUCTION
In this literature review, it is the opinion of the researcher to examine and review various
views of scholars and researchers of every related concept to this topic of discussion. This
section was categorized into Conceptual, Theoretical and Empirical Framework.

2.2 CONCEPTUAL FRAMEWORK

 FINANCIAL REPORTING

 The objective of general purpose of financial statement is to provide information about the
financial position, financial performance and cash flows of an entity that is useful to a wide
range of users in making economic decision.

Financial statement is prepared for the purpose of presenting the financial health of an
organization to the various stakeholders which can be classified into two groups, the
internal and external user. Internal relates to management, employees and while external
are creditors and equity investors, government i.e. interest group and potential investors.
Apart from this basic role, financial statement also shows the performance of management
stewardship of the resource entrusted to it.

The objective of financial statements is to provide information about the financial position,
performance, and changes in financial position of an entity that is useful to a wide range of
users in making economic decision. (e.g whether to sell or hold an investment in the
entity). Users include present and potential investors, employees, lenders, suppliers and
other trade creditors, customers, government and their agencies and the public. Since
investors are the providers of risk capital, it is presumed that financial statements that
meet their needs will also meet most of the need of other users.

2.3THEORITICAL BACKGROUND
There is no generally accepted theory governing financial reporting disclosure (AL-
Shammri, 2005; Schipper, 2007). This study is based on New Institutional Theory.

New Institutional Theory

The new institutional theory has been widely used by various researchers in sociology,
political science, business and management as well as information system and technology.
The increasing use of institution theory in other research areas is also prevalent over the
years. The corner stone year of the new institutional theory would have to be 1977 when
John Meyer Published his paper ‘‘the effect of education as institution’’ in the American
journal of sociology.

In the accounting research are, new institutional theory has been used to explain many
case studies in management accounting, auditing and institutional accounting. Accounting
as one of the tools to produce information from the organization cannot be separated from
the organization norms, value and behaviour. Many longitudinal case study of management
accounting use new institutional theory as a powerful tool to understand the behaviour of
an organization over time. Not only in the micro level, new institutional theory has been
used to explain the behaviour of a country or state in adopting accounting standards.

In the context of IFRS convergence initiatives, institutionalization can be  viewed as a social
process through which a country accept that national accounting standards are absorbed in
the interest of international accounting harmonization (craig, 2007). In the field of
international accounting research, especially research on IFRS adoption/convergence, new
institutional theory has been used both in quantitative and qualitative research.

When a country decides to adopt IFRS and abandon their previous accounting standard, the
main reason should be economical such as IFRS will bring economic benefit to the country.
The economic benefit can be the decline in the cost of capital or the significant increase of
foreign investors in the country’s capital market. However, some studies suggest that the
reason of a country adopting IFRS is not economical but more on achieving institutional
legitimization.

Institutional theory has long been established as an important perspective in accounting

research, because it provides insight into institutional dynamics in accounting (Lounsbury,
2007). The usefulness of institutional theory has largely been driven by theoretical
perspectives which broadly define accounting standards and practices as social institutions
that are embedded in the institutional environment.

2.4 EMPIRICAL REVIEW

Accounting researchers have investigated relationship between corporate characteristics
and disclosures in corporate annual reports since 1960s. Early works on this subject was
pioneered by Cerf (as cited in Frmgen (1964) and afterwards, many studies have examined
the quality of information disclosures in various contexts.

Examples of such studies are: Owusu – Ansah (1998), Ho and Wong (2001), Joshi and
Ramadhan (2002), Chau and Gray (2002), Naser et al. (2002); Naser and Nuseibeh (2003),
Akhtaruddin (2005). Each of this studies has been distinguished by differences in research
setting, differences in definition of the explanatory variables, differences in disclosure
index construction and differences in statistical analysis. Overall, the finding regards the
compliances level of companies and the relationship between the levels of disclosure and
various corporate attributes are mixed.

In a study carried out by Nwakaeze (2010), sought to correlate the non-compliance with
the financial standards and governance code in 20 selected public quoted companies on the
Nigerian stock exchange (NSE) in the Delta State. The population of the study was made up
of 20 public companies quoted on NSE. The instrument for data collection was
questionnaire. Data collected was analyzed using percentages and chi – square. The study
revealed  that  there  is  a  general  problem  of  accurate  financial  reporting  of  accounts 
of some public companies which resulted in misleading of the prospective investors and
the general public at large. The authors recommend that stipulated penalties go to deviants
as to enforce a credible reporting system.

2.5 SUMMARY
This chapter begins by elucidating the crucial role of International Financial Reporting
Standard (IFRS) in providing detail and comprehensive financial reporting to a wide range
of users in making economic decision and how its adoption gives room for direct border
comparison of financial statements. In most of the studies reviewed, findings indicate that,
though adoption of IFRS can significantly raise the level of reliance and quality of financial
statement but its successful implementation is faced with some challenges in Nigeria.
In the theoretical background, the usefulness and relevance of the new institutional theory
to this study was examined. The new institutional theory has largely been driven by
theoretical perspectives which broadly define accounting standards and practices as social
institutions that are embedded in the institutional environment. Institutionalization can be
viewed as a social process through which a country accept that national accounting
standards are absorbed in the interest of international accounting harmonization.

The empirical studies on the IFRS adoption in Nigeria and its challenges indicated that
there are so many benefits attributable to its implementation, however, in spite of this,
several challenges are often encountered in the cause of transition to IFRS.

CHAPTER THREE
RESEARCH METHODOLOGY
3.1 INTRODUCTION
This section highlight the methodology adopted: it includes the types and sources of data,
research design, population of the study, sampling technique, method of data collection and
method of data analysis.

3.2 RESEARCH DESIGN

In order to achieve the aim of this research, a survey research design was employed to
study the adoption of IFRS in Nigeria and the implementation challenges in the banking
industry. Research survey involves studying a group of items that are sample of a bigger
population for the purpose of analyzing data collected. According to Asika (1991) research
design means the structuring of investigation aimed at identifying variables and their
relationship to one another.

3.3 POPULATION AND SAMPLING TECHNIQUES

The population for this study was made up of all the staff of Guaranty Trust Bank Plc. (GTB)
in Ilorin Metropolis as at May 2014 totaling One hundred and six (106) out of which sample
of 85 was drawn using Yamane’s sampling size formula for the purpose of this study.

3.4 METHOD OF DATA COLLECTION

The method used in collecting data for the purpose of this research is the use of
questionnaires. However, Journals, textbooks and other online materials were reviewed.

3.5 METHOD OF DATA ANALYSIS

In analyzing the data collected for the study, the simple percentage method of analyzing
was adopted. Also the Z-score statistical method was used in testing hypothesis formulated
for this study.

 The Z-score formula is given as:

3.6 DECISION RULE
Reject the null hypothesis (Ho) at the 0.05% level of significance if the Z-score lies outside
the range of -1.96 and 1.96 (i.e. Z > 1.96 or Z < -1.96) and vice versa.

CHAPTER FOUR

SUMMARY, CONCLUSION AND RECOMMENDATIONS

4.1 INTRODUCTION
This chapter summarizes the findings of this research work and likewise presents the
recommendation and conclusions. It also covers the limitations of the studies and the
suggested areas for further research.

4.2 SUMMARY OF FINDINGS

The study examined the adoption of IFRS in Nigeria: Implementation and Challenges
among the Nigerian money deposit banks. Eighty five (85) responses were analyzed using
the simple percentages and Z-test statistical method to test its implementation challenges
in Nigerian Banking industry. The  study  reveals  that  Nigerians  agree  to  adopt IFRS  but 
in  a  gradual  manner, and it was found out that:

1. First time Implementation of IFRS is very expensive and costly;

2. There is a low level of public awareness on the use of IFRS by the stakeholders; and

 Existing Nigerian laws have influence on the smooth transition process to IFRS.

The adoption of IFRS is known to be a herculean task owing to the fact that several
challenges are often encountered in the cause of implementation. These  challenges are 
not  peculiar  to  Nigeria  but  are  common  in  most  countries  that  are  in  the  process  of 
adopting  the global  standard,  although  there  are  some  unique  challenges  that  are 
specific  to  particular  countries. From the study, several challenges requiring resolution
have been identified in various forms. Most outstanding ones are lack of adequate
commitment by the regulatory authorities towards the adoption, low level of awareness
among other stakeholders and inability of existing Nigerian laws to enhance smooth
transition to IFRS.

4.3  CONCLUSION
The study inspected the IFRS implementation challenges in the Nigerian banking sector. It
covers the conceptual framework, theoretical and some empirical review on the subject.

Overall, the objective of this study is to ascertain if the first time implementation of IFRS is
costly and expensive, examine the level of public awareness by the stakeholders in the use
of these standards, to examine the influence of existing Nigerian laws on the smooth
transition, challenges being encountered, and measure taken in order to ensure a smooth
and successful implementation.

Based on aforesaid, the researcher was able to access the level of  implementation of the
initial phase which is targeted on Banks and Other Significant  Public  Listed Entities who
are expected to render their 2012 financial report using IFRS framework. Finding from the
study reveals that so many challenges were encountered which causes some delay.

This delay is attributed to several factors which ranges from challenge of amending the
existing  tax  laws  to  effect  the  changes  in  line  with  the  new  standards,  the  level  of 
education  and experience, level of awareness, Weak enforcement and compliance
mechanism, inadequate technical capacity, improper planning on the part of  management 
as  well  as  inadequate  private  sector participation.

4.4 RECOMMENDATIONS
Sequel to the above summary and conclusion, however for effective IFRS adoption, the
following are suggested:

(i)  Introduction of public awareness programme by government to improve the degree of

compliance with accounting requirements by specified business enterprises. Regulatory
agencies in Nigeria like the CBN, ICAN, FIRS, SEC and NSE should work jointly to design an
awareness programme on the importance of compliance with accounting requirements of
IFRS.

 (ii)  Adequate resources should be put in place to support the sustainable implementation
of IFRS. This includes having consultative groups available to respond promptly to
concerns by users and to provide for their ongoing training. Assisting key stakeholders,
including regulators with training, and possessing the required resources to interpret and
apply the requirements of IFRS is a critical element underlying the successful
implementation of IFRS.

4.5 SUGGESTED AREAS FOR FURTHER RESEARCH

For further study, areas such as

1. Prospects and challenges of International Financial Reporting Standards to

economic development in Nigeria.

2. Adoption of International Financial Reporting Standard in Nigerian Universities.

 IFRS adoptions: Issues, Challenges and Level of compliance in Nigeria.

1. Problems of adoption and application of IFRS in Nigeria

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Al-shammri, A. (2005). An Assessment of Compliance with Accounting Information

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 Ali, M.J., Ahmed, K., and Henry, D. (2004). Disclosure Compliance with National  Accounting
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