INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) ADOPTION AND VALUE RELEVANCE OF FINANCIAL INFORMATION OF QUOTED DEPOSIT BANKS IN NIGERIA
1.1 Background of the Study
Accounting and finance literature on value relevance research began in early of 1960 with seminar work of Ball and Brown (1968) who extensively examined relevance of financial information in order to assess usefulness of financial information to equity investors. This line of research investigated under capital market based accounting and finance research represents simultaneous testing of relevance and reliability of financial information (Pervan and Bartulovic, 2013). The literature on the value relevance studies is vast and has been studied in many perspectives. For example, seminal work of Miller and Modigliani in 1966 considered as the first study investigated relationship between accounting figures and other financial parameters; they also investigated market values of equity which include cost of capital based in electric utility industry. Value relevance studies also tested whether mandatory or voluntary adoption of IFRS improved quality financial information.
International Financial Reporting Standards (IFRS) is a set of principle –based issued and established by International Accounting Standards Board (IASB) and generally accepted by different countries around the world to ensure comparability and transparency in accounting practice (Desoky and Mousa, 2014).The establishment of such standards by IASB aimed at achieving harmonization and promotion of financial practices to ensure consistency in reporting format across countries which should minimize cost of processing financial information to investors and improving efficiency of capital markets (Wen et al, 2011). Recently around the world more than 120 countries and reporting jurisdictions required domestic listed companies to prepare their financial statements in accordance with IFRS (Mousa and Desoky, 2014). The adoption and implementation of IFRS has been one of the most important events in accounting history of different countries around the world which induce significant changes in the financial practices (Kousenidis, et al, 2010). However, changes are found to vary among countries and reported to be more serious in countries that had a code-law accounting system (Ball et al., 2000). Before implementation of IFRS, existed accounting system affected by severe government and legalistic influences which is in contrast with a common-law accounting system countries like North America (Kousenidis, et al, 2010). In a common law accounting system there is a proper description of IFRS and accounting is mainly affected by the market practitioners (Ball et al., 2000). With growing adoption and implementation of IFRS by different countries around the world, many researchers aimed to find out empirically whether the new accounting standards has improved relevance of financial information reported to the users.
In Nigeria, the banking sector which this study is based on forms one of the pillars of economic development. It intermediates funds between the surplus and the deficit economic units, thus stimulating and promoting investments and economic growth and development. It follows that increase in investment in the banking sector will lead to improved performance of the economy. However, for any meaningful investment to occur in the banking sector, quality financial information regarding share price and other performance indicators are essential. Investors, who are usually different from the management of the investments, only rely on the information supplied by management in the financial statements, in assessing the risk and value of a firm before deciding either to invest or to disinvest. The ability of the financial statement to effectively and satisfactorily guide investors on their investment decisions depends on the value relevance of the information in the financial statements.
According to Vishnani and Shah (2008), value relevance implies ability of the financial information contained in the financial statements to explain the stock market measures. A value relevant variable is that data or amount in the financial statement that guide investors in their pricing of shares. Investment decision, therefore, centres on the association between stock returns or share price and accounting related information such as earnings, cash flows, book value of equity, firm’s size, etc.
1.2 Statement of the Problem
In view of the strategic importance of the banking sector to economic development in Nigeria, as it accounts for almost 31% of the total market capitalization, that is N3.91tn out of N18.95tn (NSE, 2014), and the fact that banking sector was the first among the listed public entities in Nigeria to fully adopt IFRS, a study on the value relevance of financial information of selected banks in Nigeria becomes important in order to examine the effects of the mandatory adoption of IFRS on the value relevance (quality) of financial information of banks in Nigeria. Besides, a set of financial information are meant for diverse users; ranging from management, owners, creditors, employees, government agencies, regulatory authorities, investors, analysts, etc. Particularly, investors wish to know which items in the financial information are values relevant for investment decisions. Based on the need for the provision of feedback on whether the change to IFRS has improved accounting quality, this study will examine the relationship between IFRS adoption and value relevance of financial information of quoted deposit banks in Nigeria.
1.3 Research Questions
- What is the relationship between international financial reporting standards IFRS adoption and value relevance of financial information of quoted deposit bank in Nigeria?
- What is the effect of international financial reporting standards IFRS adoption on value relevance of financial information of quoted deposit bank in Nigeria?
- What are the differences in value relevance of financial information of the quoted deposit bank in Nigeria before and after IFRS adoption?
1.4 Objectives of the Study
The following are the objectives of this study:
- To examine the relationship between international financial reporting standards IFRS adoption and value relevance of financial information of quoted deposit bank in Nigeria.
- To examine the effect of international financial reporting standards IFRS adoption on value relevance of financial information of quoted deposit bank in Nigeria.
- To analyze the differences in value relevance of financial information of the quoted deposit bank in Nigeria before and after IFRS adoption.
1.5 Hypotheses of the Study
HO: there is no significant difference in the value relevance of financial information of quoted banks before and after the adoption of IFRS
H1: there is significant difference in the value relevance of financial information of quoted banks before and after the adoption of IFRS
1.6 Justification of the study
The following provided a functional justification for this study:
- The findings from this study will be very useful for business managers particularly banks in the understanding of the relationship between international financial reporting standards IFRS adoption and value relevance of financial information of quoted deposit bank in Nigeria.
- This research will be a contribution to the body of literature in the area of international financial reporting standards IFRS adoption and value relevance of financial information of quoted deposit bank in Nigeria, thereby constituting the empirical literature for future research in the subject area.
1.7 Scope and Limitation of the Study
This study is limited to the quoted deposit banks in Nigeria. It will also cover the relationship between international financial reporting standards IFRS adoption and value relevance of financial information of quoted deposit bank in Nigeria.
LIMITATION OF STUDY
Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
Definition of Terms
Financial information: A financial statement (or financial report) is a formal record of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form easy to understand.
Quality: the standard of something as measured against other things of a similar kind; the degree of excellence of something.
Standards: an idea or thing used as a measure, norm, or model in comparative evaluations
Investment: the action or process of investing money for profit or material result
Ball, R., & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 6(2), 159-178.
Desoky, A.M., and Mousa, G.A. (2014).The value relevance and predictability of IFRS accounting information: The case of GCC stock markets. International Journal of Accounting and Financial Reporting,4 (2)
Kousenidis, D., Ladas, A. and Negakis, C. (2010). Value relevance of accounting Information in the preand post-IFRS accounting periods. European Research Studies,VIII (1)
NSE (2014). Market Capitalization. [Online] Available: http://www.nse.com.ng/Pages/default.aspx?c=MARKCAP.
Vishnani S., and Shah B. K.,2008, Value relevance of published financial statements- With special Emphasis on Impact of cash flow reporting”, International Research Journal of Finance and Economics, 17, 84-90.
Wen Q, Fong,M and Oliver,J.(2012). Does IFRS convergence improve quality of accounting information?. - Evidence from the Chinese stock market. Corporate Ownership & Control,9(4).