Adoption of IFRS – literature review

LITERATURE REVIEW

2.0 INTRODUCTION

The decision to adopt IFRS is gaining momentum by the days as more countries embrace the adoption. Generally, it is believed that the adoption arises from the understanding that IFRS is a product with network effect, (Tanko 2012). Iyoha and Jimoh (2011) observe that network effect is said to exist where users find a product or service more valuable as additional users use the same product or service. Therefore, it is however observed that as more and more countries adopt IFRS, it becomes more appealing to others that are yet to consider the adoption. Nevertheless, a number of challenges have been observed and experienced by countries in their decision to adopt IFRS; its worldwide adoption has been promoted on the premise of its perceived benefits which are considered to outweigh its disadvantages.

Deloitte (2010) examine the benefit of the adoption of IFRS on the performance of insurance companies and concluded that there is the three building block approaches in the adoption of the standard; the probability weighted estimates for the future cash flow, discount rate risk adjustment and residual margin for uncertainty. Generally, there is the possibility of the future profits that will cover the cost of the adoption of the standard. IFRS are standards and interpretations adopted by the International Accounting Standards Board (IASB). They include: International Financial Reporting Standards (IFRS), International Accounting Standards (IAS) and interpretation originated by the International Financial 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. This increased comparability of financial information could result in better investment decisions and ensure a more optimal allocation of resources across the global economy (Jacob and Madu, 2009).

There are presently two principal schools of thought in the debate on International Financial Reporting Standards (IFRS) and accounting harmonization or convergence. The First is the argument that a single global set of accounting standards helps to reduce information dissymmetry or imbalance, lowers the cost of capital, and enhances capital flow across borders. The opponents of this school of thought argue that the characteristics of local business environments and institutional frameworks mould the course and substance of accounting standards. Few of such studies are reviewed below.

Armstrong, Barth, Jagolizer and Riedl (2008) did a study titled ‘Market Reaction to Events Surrounding the Adoption of IFRS in Europe’, with the object of unraveling European stock market reaction to events associated with the adoption of IFRS in Europe. A sample of 3,265 European firms was employed over the period 2002 and 2005. The result of the study revealed that Investors in European firms noticed that the expected benefits associated with IFRS adoption will outweigh the expected costs. The study left it to further research to determine whether the expectations were fulfilled.

Similarly, Barth, Landsman, and Land (2008) conducted a study on ‘International Accounting Standards and Accounting Quality’. The intent of the study was, to determine whether IAS was affiliated with financial reporting quality. A sample of 21 countries over a period 1994 and 2003 were engaged. The result evinced that companies that apply IAS were of higher quality than non US companies that do not.

Furthermore, Beneish and Yohn (2008), in a study captioned ‘Information Frictions and Investors Home Bias: A Perspective on the Effect of Global IFRS Adoption on the Extent of Equity Home Bias’, found out that the effect of the increase in foreign investments and businesses sequel to global adoption of IFRS will be small, largely due to ‘Home Bias’.
Hail, Leuz, and Wysocki (2010), conducted a research to observe issues surrounding IFRS adoption in the United State. The areas of focalizations include cost/benefit trade-offs, the effect on capital markets and the economy, financial reporting effects and political, regulatory and legal implications of IFRS adoption. The working paper, ‘Global Accounting Convergence and the Potential Adoption of IFRS by United States: An Analysis of Economic and Policy Factors’, summarized the potential benefits of IFRS adoption as ‘greater market liquidity, a lower cost of capital and a better allocation of capital.’ The research also reveals that financial reporting will likely be enhanced and multinational firms will receive a cost advantage as they will no longer have to report under numerous sets of standards.
On the demerit side, the study evokes that a major impact will be the cost of transition to IFRS. Accordingly, the benefits to U.S. investors may not exceed costs. Furthermore, due to U.S. high quality standards GAAP, financial reporting improvement will be minor. It also suggested that these costs and benefits will vary across firms and will be difficult to trace upon adoption.

2.1 CONCEPTUAL FRAMEWORK

2.1.1 MEANING OF CONVERGENCE WITH IFRS
Convergence means to achieve harmony with IFRS; in precise terms convergence can be considered ‘to design and maintain national accounting standards in a way that financial statements prepared in accordance with national accounting standards draw unreserved statement of compliance with IFRSs’, i.e when the national accounting standards will comply with all the requirements of IFRS.
Convergence does not mean that IFRS should be adopted word by word, e.g replacing the term ‘true & fair’ for ‘present fairly’, in IAS 1, ‘Presentation of Financial Statements’. Such changes do not lead to non-convergence with IFRS. Convergence would enhance international capital flow more freely, enabling companies to develop consistent global practices on accounting problems.

2.1.2 BENEFITS OF CONVERGENCE TO IFRS
Globalization has prompted more and more countries to open their doors to foreign investment and as business themselves expand across borders, both the public and private sectors are expected to recognize the benefits of having a commonly understood financial reporting framework supported by strong globally accepted auditing standards. But suffice to say that some of the benefits include:
(i). Single Reporting ‘ Convergence with IFRS eliminates multiple reporting such as Nigeria GAAP, IFRS, and Nigeria GAAP
(ii). Greater comparability of financial information for investors as a result of transparent financial reporting of company’s activities; among sectors, countries and companies
(iii). Greater willingness on the part of investors to invest across borders will enable entities to have access to global capital markets and eliminates barriers to cross border listing. It will also bring in foreign capital flows to the country. Common accounting standards help investors to understand available investment opportunities as opposed to financial statements prepared under different set of national accounting standards.
(iv). Lower cost of capital; more efficient allocation of resources;
(v). Higher economic growth.
(vi). Convergence to IFRS gives Nigerian professionals opportunities to sell their services as experts in different parts of the world.
(vii). IFRS balance sheet will be closer to economic value because historical cost will be substituted by fair values for several balance sheet items, which enable a corporate to know its true worth.
(viii). Convergence will place better quality of financial reporting due to consistent application of accounting principles and reliability of financial statements. Trust and reliance can be place by investors, analysts and other stakeholders in a company’s financial statements.
Global convergence is best explained by the objective as enunciated in the International Accounting Standards Committee Foundation (IASCF) constitution, which states that the ultimate aims of the IASB and other accounting standard setters are: to develop, in the public interest, a single set of high quality, understandable and enforceable global accountings that require quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world’s capital markets and other users make economic decisions; to promote the use and rigorous application of those standards; in fulfilling the objectives with (a) and (b) above, to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies; and to bring about unison of national accounting standards and international Financial Reporting (IFRSs) to high quality level.
There are two schools of thoughts to convergence. There is the one that promotes adoption (a complete replacement of national accounting standards with IASB’s standards) and the other, which tends to adaptation (modification of IASB’s standards to suit peculiarities of local market, culture and economy without compromising the accounting standards and disclosure requirements of the IASBs standards and basis of conclusions. The adoption and implementation of the international standards in a country takes place in an environment that is affected by factors unique to that country, for example, the economy, politics, laws and regulations, and culture. A reason that seems to cut across countries for not fully incorporating IFRSs and ISAs is the irresistible urge to amend the international standards to provide for national specifities.
Juan (2005) identified two barriers to convergence.

The first is the translation of the standards to the different languages and the reduction of the complexity and structure of the international accounting standards, without losing quality. However, to have a common language as soon as possible cannot be overemphasized. Wong (2004) in his study of those issues that affect the adoption and implementation of IFRSs and ISAs, opined that time lag in adopting the international standards is due mainly to translation of the standards. For example, in one country a five-year time lag was experienced due to the need for translation of the ISAs. Adoption refers to ‘harmonization’, ‘transformation’. The World Bank, in Wong (2004) noted that there can be full adoption of IFRSs, but with time lag; selective adoption of IFRSs; and national standards ‘based on’ IFRSs.

2.1.3 BENEFITS AND CHALLENGES OF THE IMPLEMENTATION OF IFRS IN NIGERIA
Results arising from investigation conducted on the European Union member states highlighted how IFRS has benefited European countries in terms of attracting Foreign Direct Investment (FDI). IFRS will position Nigerian companies in the global market place as well as ensure transparency, accountability and integrity in financial reporting in Nigeria which is a prerequisite for the attraction of investment that will promote economic development. It will provide international investors the ability to make well-informed, useful and meaningful comparison of investment portfolio in Nigeria and other countries. Multinational companies with the aid of IFRS financial statement provide for easy consolidation of financial statements. It promotes better management control systems. IFRS statements are easier to comply with the financial requirements of overseas stock. It also facilitates ease of cross border transactions and trading within the region through common accounting practice especially in underdeveloped regions of the world like the Economic Community of West African States (ECOWAS). It will help to facilitate compilation of meaningful data on the performance of enterprises within the ECOWAS and other regions of the world. It will assist Nigeria, the federal and state government, local governments inclusive, in attracting international investors as the adoption of IFRS financials promotes easy monitoring of overseas investments. Transparency and better accountability in government Ministries, Departments and Agencies (MDA) will be promoted through the IFRS adoption in the public sector accounting and management of resources. It will also lead to increase in government revenue as a result of transparency and integrity in reporting. Easier access to capital is also facilitated through IFRS. Despite the aforementioned envisaged benefits there are still challenges. There is the urgent need to improve the level of public awareness especially among investors and regulatory authorities in Nigeria. There is also chronic shortage of professionals that are competent to implement the IFRS within the given time frame as contained in the schedule of the Nigerian roadmap for its adoption (i.e. January 2012 – January 2014).

2.1.4 REQUIREMENTS FOR THE IMPLEMENTATIONOF IFRS IN NIGERIA
To achieve international convergence, requires consensus by countries especially in respect of international standards that will serve as the foundation for financial reporting and auditing globally and taking steps to encourage implementation. If there are any impediments to our ability to follow professional standards, the Institute of Chartered Accountants of Nigeria, the Nigeria Accounting Standards Board, together with international and other standard setters, regulators, governments, and others must work together. Companies, auditors, user and regulators would need to get familiar with fair measurement techniques in the preparation of financial statements.
We need accounting standards that are consistent, comprehensive and based on clear principles that communicate economic reality and, in the global world which we are living, homogenous enough so as to allow their use and facilitate understanding by everyone. Adequate corporate governance practices are required, which among other things, should ensure appropriate internal controls and effective implementation of these accounting standards. There is need for the existence of efficient and effective audits which should grant external reliability to the information prepared by the companies following the referred standards. Besides there should be a supervision or quality control mechanism accompanied by a disciplinary system, which should ensure the effective compliance with the earlier mentioned conditions. In addition, companies need to explain the impact of IFRS convergence to their investors to enable them readily accept the shift from Nigeria GAAP to IFRS.

2.1.5 OBSTACLES/INTRIGUES TO IMPLEMENTATION OF IFRS IN NIGERIA
The Oxford English Dictionary explains intrigue as a secret plan or something that will arouse the interest or curiosity. In this context, intrigue is referred to as obstacles/ challenges that could stall the implementation of IFRS. Some of the likely obstacles envisaged during adoption and implementation of IFRS are:
(i). Awareness about international Practices: with the new system where we have GAAP for different countries users will view financial statements from different perspective. It is therefore important that awareness needs to be created among the users of financial statement.
(ii). Training – One of the obstacles to full implementation of IFRS is absence of training facilities and academic curriculum in Nigeria. Have we trained IFRS resource persons on ground? If not between now and 2014, stakeholders should train IFRS personnel and introduce IFRS in universities accounting curriculum.
(iii). Taxation- IFRS convergence will create problem. How do taxation laws address the treatment of tax liabilities arising from on convergence from Nigeria GAAP to IFRS. Where this is not taken care of, it would duplicate administrative work for the organization.
(iv). Fair Value ‘ In IFRS format, Fair value is used in measurement of most items of financial statements and this lead to volatility and subjectivity in financial statements in arriving at the fair value. Where this adjustment is reflected in income statements as gain or losses, it remains a contentious issue if it should be applied in computing distributable profit
(v). Management Compensation Plan: Because of the new financial statements reporting format envisaged under IFRS which is quite different from Nigeria GAAP, the terms and conditions relating to management compensation plans would have to be change. Therefore, contracts terms and conditions of management staff will be re-negotiated.
(vi). Reporting Systems- Companies will need to ensure that existing business reporting model is amended to suit the disclosure and reporting requirements of IFRS which is distinct from Nigeria reporting requirements. To correct this anomaly, information systems should be put in place to capture new requirements relating to fixed assets, segment disclosures, related party transaction, etc. Good internal control would help minimize the risk of business disruptions
(vii). Amendments to the Existing law: IFRS will lead to inconsistencies with existing laws such Companies and Allied Matters Act 1990, Securities and Exchange Commission laws, banking laws and regulations and Insurance laws and regulations. Presently, the reporting requirements are governed by various regulators in Nigeria and their provisions override other laws. Whereas IFRS does not recognize such overriding laws, steps to amend these laws must be taken to ensure that the laws are amended well in time.
The dimension of cultural settings of nations and regulations are issues that need to be addressed in the adoption of IFRS. Presently, Islamic banking which is being practiced in many countries of the world, including the advanced capitalist countries of Great Britain and the United States of America, under Non-interest/Profit Sharing Banking in Banking eliminate interest in all banking operations. This is in addition to the compulsory requirement for all Islamic banks to contribute a certain amount of their wealth yearly by way of an alms tax for the less privileged members of the society. Has IFRS taken cognizance of these? Wong (2004), with the assistance of senior International Federation of Accountants (IFAC) staff members, engaged in discussion regarding the potential challenges in adopting and implementing the international standards and came up with the following:
(i). Issues of incentives ‘ the various factors which might encourage or discourage national decision makers from their adoption;
(ii). Issues of regulation ‘ regulatory challenges in their adoption;
(iii). Issues of culture ‘ challenges arising from cultural barriers in their adoption and implementation.
(iv). Issues of scale ‘ implementation barriers associated with the relative costs of compliance for small and medium sized entities and accounting firms;
(v). Issues of understandability ‘ their complexity and structure;
(vi). Issues of translation ‘ the ease of their translation and the resources available to undertake the translation;
(vii). Issues of education ‘ the education and training of students and professional accountants in the international standards.

2.1.6 DECISION MAKING ON THE BASIS OF FINANCIAL INFORMATION
Investment in the capital market can be undertaking by an investor for three basic objectives:
(i) Wealth maximization;
(ii) Liquidity maintenance; and
(iii) Risk minimization.
This implies that a rational investor is influenced by these objectives when making investment decisions. As Masomi and Ghayekhloo (2011) observed, under the paradigm of traditional financial economics, decision makers are considered to be rational and utility maximizing. According to Chandra and Kumar (2008), investor rationality is defined as being reasonable and making decisions that are in their best interest. Somil (2007) observed that the proponent of the theory of rational investor assume that an individual makes a decision on the basis of the principles of maximization, self-interest and consistent choice. According to Somil (2007), rationality also assumes that an investor has perfect information of his surroundings and makes the decisions with the sole objective of profit maximization.
In order to improve the usage of financial information in the context of the decision making process, we need to analyze financial statements. In that context, we can describe financial statement analysis as the process where we convert data from financial statements into usable information for business quality measurement by different analytical techniques, which is very important in the process of rational management. Therefore, to know the current level of business quality is very significant in the context of future business management, since we try to ensure company’s development and existence on the market. Financial statement analysis comes before the management process that is before the process of planning which is the component of the management process.
Planning is very important for good management. Good financial plan has to consider all company’s strength and weaknesses.
The task of financial statement analysis is to recognize good characteristics of the company so that we could use the most of those advantages, but also to recognize company’s weaknesses in order to take corrective actions. Because of that, we can say that management of the company is the most significant user of financial statement analysis.
In the process of financial statements analysis it is possible to use the whole range of different instruments and procedures. First of all, it considers comparative financial statements and the horizontal analysis procedure together with structural financial statements and the vertical analysis procedure. By horizontal analysis which is based on the comparative financial statements we try to examine the tendency and dynamics of changes of particular basic financial statements positions.
We estimate business efficiency and security of the company on the basis of observed changes. On the other hand, structural financial statements are the base for vertical analysis which allows insight into financial statement structure. Financial statements structure is very significant in the context of business quality.
By financial statement analysis we get acquainted with the business quality, but the questions of the analysis are not solved by horizontal and vertical analysis procedures of statement of financial position, statement of profit and loss account and cash flow statement. In the context of measuring business quality on the basis of financial statements, the most significant are different financial ratios formed from basic financial statements. However, the following ratios need to be examined before taking investment decisions.
(i). Liquidity ratios ‘ Measure Company’s capability to pay its payable current liabilities.
(ii). Leverage ratios ‘ measure how the company is financed from creditors’ resources.
(ii). Activity ratios ‘ measure how efficiently company uses its own resources.
(iv). Economy ratios ‘ measure relation between revenues and expenses, that is, they show how much revenue is achieved per unit of expenses.
(v). Profitability ratios ‘ measure the return of the invested capital and show the highest managerial efficiency.
(vi). Investibility ratios ‘ measure efficiency of investment in ordinary shares.
With the convergence to IFRS, the above ratio could be easily determined with utmost satisfaction by both foreign and domestic investors resulting in high interest on investment.

2.1.7 NIGERIAN STOCK MARKET DEVELOPMENT AND ECONOMIC GROWTH
The stock market is very vital to any economy because it encourages savings and real investment in any healthy economic environment (Ologunde, Elumilade and Asaolu, 2006). This is achieved through aggregate savings that are channeled into real investment via stock market exchange which increases the stock market growth and invariably economic growth of the country. In other words, through the secondary market, the stock market converts long ‘ term or perpetual investment enlarged which in turn accelerate economic growth.
It has been posited that without high levels of domestic savings, broadly based human capital, good macro-economic management and limited price distortions, there would be no basis for economic growth. Investment is one of the driving forces of economic growth (Wilson, 2005). It is widely believed that savings and investment must go hand in hand for sustained economic growth. Thus policies to assist the financial sector, especially banks whose traditional business is financial intermediation which captures non-financial savings, to increase household and corporate savings are considered central.
In the developed world, stock market is the crucial tool that drives any economy on it path to growth and development. According to Osaze (2007) capital market of which stock market is sub set aids economic growth in the following ways:
(i) Promotion of commodities exchanges to facilitate liquidity for agricultural products in an organized market;
(ii) Internationalization of capital market by cross-border listings, cross listing on other stock exchange and provision of investment information on all securities listed on the Nigeria Stock Exchange to the international community. This encourages foreign inflows of capital through equity;
(iii) Changes in ownership of businesses take place through the purchase and/or sale of stock and
(iv) Promotion of small and medium sized industries through the second ‘ tier Securities Market.
However, some problems still affect the development of Nigerian Stock Market. The Nigerian Stock Market is still very small in relation to other emerging markets. As at 2003, South Africa, Brazil, Egypt and Malaysia had equity listings of 450, 399, 1148 and 865 respectively, while Nigeria had only 214 equity listings (Osaze, 2007). Not only that, the proportion of the adult population that own ordinary shares is till rather small as follows:
Nigeria””’..4%
United Kingdom”’.16%
France””’.18%
Japan”””18%
Germany””.19%
United States””’21%
Sweden””’22%
Hong Kong””’.38%
Extracted from Osaze, 2007.

Aside the afore mentioned, in the Nigerian Stock Market there is high concentration with the top ten companies controlling 47% of market capitalization between 1999 ‘ 2004 (Osaze, 2007). This makes the market venerable to shocks and price instabilities from the dominating stocks of banking sectors in 2008 after the bubble burst. It is therefore important that any consideration of a stock market in an emerging economy must be closely linked with its expected essential purpose (Ojo, 2010).
2.1.8 EXPERIENCES OF COUNTRIES THAT HAVE IMPLEMENTED IFRS
German GAAP was not recognized outside Germany because it placed too much emphasis on the prudence principle, and allowed for the creation of hidden reserves, thereby, giving room for artificial profits and making it difficult to identify companies that were in crises. It also had too many accounting policy choices especially in relation to measurement of inventory. With these problems, financial reports of German companies prepared in accordance with German GAAP were not accepted in the New York stock exchange in order to meet their increased demand for capital and internationalize their operations. This led to legislation in 1998 to adopt international accounting standard (UNCTAD, 2008).
However, Germany chose a lees rigorous approach to the adoption of international accounting standards. For listed companies, IFRS was mandatory since 2005 but only for group accounts. German GAAP is still mandatory as IFRS is prohibited for individual company accounts of listed companies. For non-listed companies, IFRS is optional for group accounts but prohibited for individual company’s account. Comparatively, IFRS is required for only a small number of German companies taking into consideration the over 3 million non-listed companies which prepare separate or consolidated financial statements. Most German companies see IFRS as voluminous and complex. German SMEs consider that implementation of IFRS serves only the purpose of capital market investors.
Accounting standards in India are formulated on the basis of international accounting standards since the Institute of Chartered Accountants of India (ICAI) became an associate member of the International Accounting Standards Committee (IASC) in June 1973. However, India’s accounting standards integrates IFRS in relation to their custom, current laws, practices and business environment. India is experiencing challenges of complying with IFRS especially in the area of differences in legal and regulatory accounting requirements. For example, the disclosure requirements of IAS 34 on interim financial reporting are not in accordance with the formats of unaudited quarterly or half yearly results prescribed in the listing requirements of the Securities and Exchange Board of India. Also, IAS 21: The effects of Changes in Foreign Exchange Rates differ with schedule IV of the companies Act of 1965. Already companies in India have gone to court to challenge these standards. This implies that their level of preparedness is limited. Indian SMEs too may face problems because the cost of compliance is not commensurate with the expected benefits. For these reasons, adoption of IFRS in India is not full. India has learned that the adoption of IFRS is not a mere accounting exercise but entails a transition which requires everyone to learn the new language and new way of working (UNCTAD, 2008).
After the issuance of IFRS in 2001, the United State’s FASB and IASB pledged to make their accounting standards compatible by removing differences that exist in their accounting standards within jointly identified priority areas. Up to 2007, this was done only in some few areas, such as, accounting for changes in accounting standards, accounting errors for correction and accounting for share-based compensation (Wharton School, 2007). Only then in 2007 did SEC lift the requirement for companies listed in the US to provide US GAAP financial statements. In 2008, SEC voted for an updated convergence roadmap proposing a switch to a single set of standards for all US firms by 2016 (Simon, 2008). Thus, US approach to convergence is gradual.
Zambian regulatory authorities adopted IFRS from 1January 2005 particularly for banks and financial institutions. The adoption of IFRS was in adjusting their regulatory capital to accommodate the overall impact of unrealized gains or losses arising from the valuation of IFRS models. Zambian companies have a major challenge of implementing IFRS due to lack of active markets where market prices can be obtained to comply with fair value accounting rules of IFRS (Mwape, 2010). Fair Value Accounting is a way to measure assets and liabilities that appear on a company’s balance sheet. It is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (Laux, C &Luez, C. (2009). However, Zambia’s greatest problem with implementing IFRS is with IAS 39. It gave them teething problems due to gaps in accounting skills.
Jermakowicz and Gornik (2006) finds in their study of 112 EU publicly traded companies listed on major European stock exchanges that the IFRS implementation process was perceived as costly, complex and burdensome. Epstein (2011) further averred that the implications for accountants, attorneys, chief financial officers, corporate directors and multinational corporations are significant and immediate, which includes training on the differences between IFRS and GAAP, financial scrutiny of international joint ventures, and international accounting reviews.
IFRS is principles-based, rather than rules-based. A principles-based philosophy means that the goal of each standard is to arrive at a reasonable valuation and that there are many ways to get there. This gives companies the freedom to adapt IFRS to their particular situation, which leads to more easily read and useful statements. (Angie, 2004). However, there is a downside to the flexibility that IFRS allows namely, that companies can utilize only the methods they wish to, allowing the financial statements to show only desired results. This can lead to revenue or profit manipulation, can be used to conceal financial problems in the company and can even encourage fraud. For example, changing the method of inventory valuation can bring more income into the current year’s profit and loss statement, making the company appear more profitable than it really is. With the documentation by Green (2009) that opaque procedures employed by most Nigerian banks have eroded the confidence of investors in the Nigerian banking sector, the flexibility that IFRS allows companies to utilize the methods they wish will be abused instead to manipulate revenue and profit and conceal financial problems in Nigerian firms and even encourage fraud. IFRS requires that changes to the application of the rules must be justifiable. However, companies might invent reasons for making the changes. Rules-based standards would ensure that all companies are valuing their statements the same way.
2.1.9 CHALLENGES OF IMPLEMENTING IFRS IN NIGERIA
The experiences of deposit money banks in Nigeria that were mandated to adopt IFRS in 2010 show that there are a lot of difficulties in converging to IFRS. They include cost, training and education, differences between local standards (Statement of Accounting Standards; SAS) and IFRS, software problems etc.
Converging to IFRS has a huge cost outlay which include the cost of training personnel to understand the new global standards, cost of acquiring new accounting packages that are needed for the implementation, cost of discarding former accounting packages that are not compatible with IFRS. Cost is the price tag of the forgone SAS to adopt the new IFRS. In this case, it includes the cost of starting new invention (IFRS) and abandonment of the former (SASs).
Training and educating personnel and management saddled with the responsibility of preparing financial statement compliant to IFRS implementation is another problem that is not only costing the banks but also taking away huge man hours. The banks have to organize in-house training, sponsor staff to attend conferences and seminars, both for the purpose of understanding the new global standards.
Another challenge faced by banks in adopting IFRS is that of changing accounting packages that are not compatible with IFRS and acquiring new ones that can enable IFRS implementation. The challenge faced here is not only in terms of cost but training personnel to use new packages.
Differences exist between local standards (SAS) and IFRS, which constitute another challenge that is being faced in the process of converging to IFRS by Nigerian banks. IFRS is less prescriptive than SAS. An example is SAS 10- Accounting by Banks. Some standards in IFRS differ considerably from the local GAAP. Besides, IFRS has more accounting policy choices and may be inconsistent with local legislations of Companies and Allied Matters Act (CAMA) 1990 and Banks and Other Financial Institutions Act (BOFIA) 1991. In addition, IFRS demands more disclosure requirements than SAS and also differ in application and interpretation. Implementation of IFRS has increased the need within the organization to gather analyze and report more data for compliance.
2.1.10 KEY DIFFERENCES BETWEEN NG-GAAP AND IFRS
Nigerian public listed entities are required to present their financial statement reports in accordance with IFRS beginning January 2012. Before then, all Nigeria firms prepared their financial statements in accordance with local standards issued by the Nigeria Accounting Standard Board. The principal differences between Nigerian Accounting Standards (NG-GAAP) and IFRS. As may be observed, the differences appearing in financial statement presentation such as change in equity, income statement and significant management estimates and judgments are concepts that are not addressed in the local standards. There are also significant differences in property, plant and equipment, related parties, segment reporting, leases, impairment and risk management disclosure. Finally significant differences are also found in other areas such as financial guarantees, scope of consolidation and employee benefits. The key difference is shown in the table below.
Table 2.1
TOPIC NG-GAAP IFRS
Financial statement
Presentation Income statement
Balance sheet
Cash flow statement
Value added
statement
Accounting policies
Notes
-Statement of comprehensive income (including income statement).
– Statement of financial position (balance sheet)
– Statement of changes in equity
– Statement of cash flows
– Accounting policies
– Notes
-Significant management estimates and judgments
Property plant and
Equipment Measured using cost
model
Measured using cost model with detailed guidance regarding:
– Componentization
– Useful lives
– Residual values
-Impairment calculations and identifying cash generating units.
Related parties
Limited disclosure
but expected
Detailed guidance on identification of related parties and detailed
disclosure of related parties and transactions
Segment reporting –
More on geography Operation segments based on management’s view.
– Threshold for reportable segments is results or assets of an Individual segment should be 10% or more of all segments.
– If the aggregate revenue of all reported segments on this basis less
than75% of total, then more segments required until 75% threshold is
reached.
IFRS 1- First time
adoption of IFRS
Not applicable Provides guidance and requirements on the transition to IFRS. Also
provides relief for certain items in the preparation of the opening
balance sheet.
Financial
guarantees
Disclosed as
contingent liabilities
Requires financial guarantees to be recognized at their fair value
Scope of
consolidation
General principles Investment under control are consolidated. SPEs are potentially also
consolidated
Employee benefits
General expense
and disclosures on
pensions
-Complex criteria of accounting
-Recognize the undiscounted amount of short-term employee benefits
Risk management
disclosures
Limited disclosure
of foreign exchange
and credit risk
Disclosure required for:
– Credit risk and
– Liquidity risk
– Price risk
– Capital risk management
– Risk management
Leases
Based on general
Guidelines ‘
operating and
finance leases
-Currently similar but updates to IFRSS e.g. IFRIC 4 will lead to only
finance leases hence more items coming unto balance sheet.
– Fair value and amortized costs used in valuations
-Certain transactions/contracts containing hidden leases which needed
to be accounted for
Impairments
– No specific
standard
– Carry out impairment test based on trigger vent
– IFRS 36 ‘ impairment on non ‘ financial assets
– IAS 39 ‘ impairment on financial assets
Financial asset
classification and
valuation
Classification
include:
– Cost
– Amortized cost
Classification include:
– Amortized cost
– Fair value
This is driven by the business model and nature of the instrument.
Source: Oyedele, T. (2011)

2.1.11 ROADMAP FOR THE ADOPTION OF IFRS AND THE IMPLICATIONS IN NIGERIA
The roadmap to the adoption of the IFRSs in Nigeria was its announcement on 2/9/10 by the Federal Government of Nigeria disclosing the schedule for the implementation as follows:
(i) All companies listed on the Nigerian Stock Exchange (NSE) and significant public entities are expected to have complied with IFRS since 1st January, 2012.
(ii) Other public interest entities will commence with effect from 1st January, 2013.
(iii) The commencement year for small and medium sized entities will be with effect from 1st January, 2014.
The implication of the schedule of adoption of the IFRS in Nigeria is the harmonization of the disparity of the existing Nigeria’s standards with that of IFRSs together with the necessity to develop new skills. A transition programme from Nigeria Accounting to IFRSs will be required. Systems and controls are to be designed to ensure consistency in the application of standards.

2.2 EMPIRICAL EVIDENCE
Imhoff (2003) describe the objective of the IFRS standards as a yardstick that enables organizations to provide stakeholders with relevant, reliable and timely information and that such information contributes towards the achievement of orderly capital markets around the world. Adegbe (20111)describe IFRS standards as been accepted as the basis for reporting in major and emerging international financial markets and included by the financial stability forum as one of the key standards for sound financial system and used by the World Bank as part of its standards and codes initiative. Generally speaking, the Adoption of the IFRS in developing countries has been viewed as a change in norms and standards. Price water coopers (2005) for instance, describe the adoption of the standard as a move that will affect organization in the way they compute their taxable income. Ashbaugh and Pincus (2001) further argue that limiting alternatives can increase accounting quality because doing so limits management’s opportunistic discretion in determining accounting amounts.
Despite the mentioned advantages, critiques of the adoption of IFRS argue that there is no conclusive evidence that standards have contributed to improvements in the reporting system and accounting quality of firms (Barth et al, 2007 and Bartou et al 2005). Armstrong et al (2007) and Access Bank, (2010) argue that one single set of accounting standards cannot reflect the differences in national business practices arising from differences in institutions and cultures. In countries where the quality of governance institutions is relatively high, IFRS adoption is likely to be less attractive as high quality institutions represent high opportunity and switching costs to adopting international accounting standards. However in many developing countries, the quality of local governance institutions are low and thus are important determinants of the decision to adopt IFRS (Ball et al, 2000; Leuz et al., 2003; and Ball, 2006). Such countries are likely to suffer from corrupt, slow-moving, or ineffectual governments that are resistant to or incapable of change (La Porta et al, 1999).
Burgstahler et al (2006) and Lang et al (2006) posit that where firms are expected to apply the same accounting standards, as the objective of IFRS tends to achieve may face the problem of differences in reporting practices as a list of such problems have been documented across firms and countries that adopt the IFRS standards. Fan and Wong (2002); Leuz et al (2003) and Haw et al (2004) emphasized the use of institutional reporting incentives as drivers of qualitative financial reporting rather than the accounting standards in force. They documented the significance of institutional incentives as a determining factor that affects firms’ actual reporting and disclosure practices rather than the accounting standards.
Ball, (2001) noted that mandatory accounting rules and regulations such as the IFRS cannot be considered in isolation of other relevant institutions because its (IFRS) effectiveness will depend on the understanding. Daske et al (2007) posits that, some firms, referred to as label adopters, claim that they have adopted IFRS while the degree of adoption could be nil or low and sometimes enforcement of such standards would be nonexistent.
A special study was conducted by the World Bank Group between November, 2003 and March, 2004 on the observance of standards and codes for Nigeria. As part of the aims of the project, they exclaimed the degree of compliance with national accounting standards and determine the comparability of national accounting standards with International Accounting Standards (IASs). In their study they observed that the SASs had not been reviewed or updated in line with the current IFRSs (World Bank, 2004).
Empirically, in comparing domestic standards to IFRS, some studies have shown that there are no significant differences in accounting results with the implication that the Adoption of IFRS does not result in better accounting quality studies in Germany by Tendeloo and Vanstarlen (2005) and Hung and Subramanyam (2007) did find similarities in earnings management and value relevance in comparing results of the national and international standards. Leuz, Nanda and Wysocki (2003) concluded that evidence was adduced to the effect that a positive earnings. The conclusion from this and other similar studies was that firms applying IAS report small positive earnings with lower frequency. Paananen (2008) reports no quality increases in the Swedish case and Elbannan (2011) reports mixed findings in Egypt.
Portes and Rey (2005) in their studies showed that most stock market investors prefers domestic asset but despite this, a geographical pattern of international asset transaction proves that financial information is not equally available to all market participants but where they are readily available in easily understood format, there have been significant consequences on the level of investors activities. UNCTAD (2001) report shows that FDI inflow to Africa declined by (9%) between 2010 ($50 billion) and 2009 ($55 billion). Mangena and Tauringana (2006) in their studies also provided firm level evidence for a sub-saharan African country, Zimbabwe, of positive effect of governance on the fraction accounted for by Foreign Share Ownership of companies. They contended and postulated that because greater disclosure reduces information asymmetry for foreign investors, there should be a positive relationship between foreign share ownership in a listed company and firm level disclosure, especially due to the fact that the foreign investor portfolio are usually minority shareholders and therefore more susceptible to expropriation by local managers or controlling shareholders. They investigated foreign share ownership in Zimbabwe by examining whether differences in foreign share ownership (i.e. percentage shareholding owed by foreign investors) across companies listed in the country’s stock exchange are related to the country-specific difference in disclosure and corporate governance mechanisms. The study reports that foreign share ownership is positively associated with high standard of disclosure and audit committee independence.

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