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07030248044CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The international convergence of accounting standards is no longer a recent concept. According to Nobes (2006), the notion first came to light in the late 1950s in response to post World War II economic integration and related increases in cross-border capital flows. The charge to promote a collective set of accounting standards emanated from international differences downsized by investment opportunities (IFAC, 2008). The merging of the diverse accounting standards and the evolutionary changes that resulted in the development of IFRS has been a contemporary issue in the world of accounting. At first, a lot of efforts centred on harmonization which brought about reducing differences among the accounting principles used in major capital markets around the world. The notion of harmonization was reinstated by the concept of convergence; the development of a single set of high quality, international accounting standards that would be used in at least all major capital markets in the 2008s. However, Herbert (2010) ascertained that various attempts have been made and are still on-going to eliminate or reduce many of the major differences in accounting standards through a process known as harmonization. As a result of the inherent adversity during the era, internationalization of accounting standards was presumed as an endeavour of conflicts (Choi & Mueller, 1984). This conflict is entrenched in the process of standard setting which is publicly instigated in some countries and, in others, through the private professional accountancy bodies. These societal alterations in the manner of standard setting inevitably gave rise to the vogue of diverse standards in diverse countries. Nigerian banks over the years have been observed to exhibit weak disclosures in financial statement, operational inefficiencies, undercapitalization and a weak corporate governance practice that impedes their performance, profitability and makes it difficult to detect problems easily. The quality and standard of financial reporting in Nigerian banking sector seems not to match the high standard of reporting in the banking sector of more developed countries (Garba, 2013). As a result of this, Nigerian banking industry has undergone numerous reforms. The move towards globalization is a concern for many countries particularly developing countries as it has the potential of having a deep impact on the economy at large. The adoption of IFRS as a global and uniform standard is gaining ground as more countries are adopting IFRS or have intentions of adopting the standard. The European Union commenced the adoption in 2012 by ensuring that all listed companies in the European Union implement IFRS in their financial report (Odia and Ogiedu, 2013). The development of a globally acceptable standard originally commenced in 1973 as a result of the coming together of a group of qualified accounting professionals of major countries to form IASC (International accounting standard committee). These countries are UK, Ireland, United States, Australia, Canada, France, Germany, Japan, Mexico and Netherlands. They focused on developing a global accounting standard which will replace local standards, harmonize the differences in financial report due to diversities in legal systems, business structures and tax systems around the world. Hence, the users of financial information can adequately compare the financial statements of different companies to evaluate their financial performance and position. There has also been some opposition to the adoption of IFRS particularly for developing countries like Nigeria. It has been argued that Nigeria and many developing countries have weak institutions, unpredictable economic and political environments which may undermine the successful implementation of IFRS (Tanko, 2012).In their study on the development process of financial reporting standards around the world and its practical results in developing countries, Alp and Ustandag (2009) showed that Turkey experienced lots of challenges in the implementation of IFRS. These challenges include the complicated nature of IFRS, difficulties in the application, enforcement issues and possible knowledge shortfall. This research therefore focused on the effect of IFRS adoption on the profitability of listed deposit money banks in Nigeria.
1.2 STATEMENT OF PROBLEM
Scholars have argued that the characteristics of local business environments and institutional frameworks determine the form and contents of accounting standards in developing countries. Developing countries, including Nigeria, are characterized by delicate institutions and unstable economic and political environments, which are not beneficial to assimilation of IFRS [Muhammad, 2015]. Regardless of the arguments, several countries and companies have adopted IFRS and there is irresistible need to review the outcome. There are mixed results as to whether the adoption of the IFRS improves the performance of business institutions or not [Muhammad, 2015]. Lantto and Sahlström (2009), for instance, present such results as the adoption of IFRS affects financial ratios of firms in Finland. They found that liquidity ratios decrease under IFRS, while leverage and profitability ratios increase. As evident from the foregoing, a good number of studies carried out in different countries have highlighted the benefits of having single set of financial reporting standards across the globe in supporting the adoption of IFRS globally. Few of the studies had given contradictory views questioning the relevance of IFRS adoption in developing and emerging economies [Mutai, 2014]. The fact that financial reports exist to satisfy the diverse needs of numerous users such as the investors, management, employees, government, researchers, and so on, determines the need to evaluate its overwhelming impact. The problem is that banks have incentives to withhold or manipulate information in certain situations (poor performance). This is because the publication of such information imposes both direct and indirect cost on the disclosing firm [Mutai, 2014]. Besides the cost of collating, processing, communicating and auditing the information to be published, the position of the disclosing firm may be damaged when such information is used by competitors, government agencies, trade unions, clients or suppliers. In light of this therefore, this study focuses on the effects of IFRS on selected Banks in Nigeria. The study is said to determine the effect of IFRS adoption on bank profitability in Nigeria.
1.3 AIMS OF THE STUDY
The major purpose of this study is to examine the effect of international financial reporting standard adoption on profitability of listed deposit money banks in Nigeria. Other general objectives of the study are:
1.4 RESEARCH QUESTIONS
1.5 RESEARCH HYPOTHESES
Hypothesis 1
H0: There is no significant effect of international financial reporting standard adoption on profitability of listed deposit money banks in Nigeria.
H1: There is a significant effect of international financial reporting standard adoption on profitability of listed deposit money banks in Nigeria.
Hypothesis 2
H0: There is no significant relationship between international financial reporting standard adoption and profitability of listed deposit money banks in Nigeria.
H1: There is a significant relationship between international financial reporting standard adoption and profitability of listed deposit money banks in Nigeria
1.6 SIGNIFICANCE OF THE STUDY
The findings of the study is expected to be of immense significance to the government and firms in Nigeria will appreciate from the findings of the study the need to adopt and swing into full implementation of International financial reporting Standards as the economic implications of its adoption will be unveiled. The government will be fully aware of the gains of full disclosure requirements of IFRS adoptions as it affects transparency, comparability, credibility, informative, and comprehensiveness of financial information. Again, Nigerian government ministries and beyond will be brought to terms, the realities of IFRS adoption and the economic benefits. Preparers and users of public sector accounting information will also be encouraged on the need for full disclosure arising from IFRS adoption as it influences accountability, transparency and credibility of accounting information. Again, the result will guide members of the public on the likely gains or otherwise arising from the adoption of International financial reporting Standards and their effects on financial reporting.
1.7 SCOPE OF THE STUDY
The study is based on the effect of international financial reporting standard adoption on profitability of listed deposit money banks in Nigeria. A case study of listed deposit money banks in Lagos state.
1.8 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.
1.8 DEFINITION OF TERMS
International Financial Reporting Standard: (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB).
Profitability: Is the state or condition of yielding a financial profit or gain. It is often measured by price to earnings ratio.
Deposit Money Bank: are resident depository corporations and quasi-corporations who have any liabilities in the form of deposits payable on demand, transferable by cheque or otherwise usable for making payments.
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