CHAPTER ONE

INTRODUCTION

BACKGROUND TO THE STUDY.

Historically, the introduction of an acceptable global high quality financial reporting

standards was initiated in 1973 when the International Accounting Standard Committee (IASC)

was formed by sixteen (16) professional bodies from different countries such as United States of

America, United Kingdom, France, Canada, Germany, Australia, Japan, Netherlands and Mexico

(Garuba and Donwa, 2011). According to Ezeani and Oladele (2012), this body was properly

recognized in 2001 and later transformed into the International Accounting Standards Board

(IASB) which developed accounting standards and related interpretations jointly referred to as

the International Financial Reporting Standards (IFRS). The quality of financial reporting is

indispensable to the need of users who require them for investment and other decision making

purposes (Fashina and Adegbite, 2014). Financial reports can only be regarded as useful if it

represents the “economic substance” of an organization in terms of relevance, reliability,

comparability, understandability, timeliness and simplifies interpretation of accounting numbers

(Kenneth, 2012). Before the IFRS adoption era, most countries had their own standards with

local bodies responsible for developing and issuance of the local standards even if some of them

align largely with the International Accounting Standards. In this vein and in the Nigerian

context, the Nigerian Accounting Standards Board was responsible for developing and issuing

standards known as Statements of Accounting Standards and in the new dispensation, the body

was renamed Financial Reporting Council of Nigeria as the regulatory body overseeing the

adoption and implementation IFRS (Kenneth 2012). Globalization and trade liberalization have
made the whole world to become a global village. Business organizations (financial institutions

inclusive) now operate beyond their national boundaries. In other words, they have become

multinationals. However, with the globalization of business and capital markets, there has been

an ever growing need for global comparability of financial statements (Shaun & Malley1992).

Accordingly, with increasing globalization of the marketplace, international investors need

access to financial information based on harmonized accounting standards and procedures (Beke,

2011). Hence, the need to harmonize and consolidate corporate accounting practices that ensures

high quality of financial statements information. This led to the development of International

Financial Reporting Standards by the International Accounting Standards Board (hereafter

referred to as IASB) to be adopted in the world’s global and international capital markets in the

preparation of financial statements. Consequently, various countries around the world have

moved and are moving towards IFRS adoption (Baker, 2008). In the words of Smith and Bergen

(2009) the continued globalization of the world’s economy has resulted in the adoption of IFRS

by over 100 countries inclusive of five G-8 countries. Therefore keeping pace with developments

and to ensure that Nigeria is not left out from the globalization wave, on 28 July 2010, the

Nigerian Federal Executive Council approved 1 January 2012 as the effective date for

convergence of accounting standards in Nigeria with IFRS. The Council subsequently directed

the Nigerian Accounting Standards Board now Financial Reporting Council of Nigeria (hereafter

referred to as FRCN), under the supervision of the Nigerian Federal Ministry of Commerce and

Industry, to take further necessary actions to give effect to Councils' approval by replacing the

Nigeria local GAAP with IFRS.

Many countries all over the world including Nigeria are now IFRS-compliant. As a

corollary, it is now less costly for investors to compare and evaluate firms inside and outside
industries (Covrig, Defond, and Hung, 2007). As Nigeria now belongs to the league of IFRS-

adopting countries with effect from 2012, perhaps persuaded by the gains it promises, it however

remains to be convincingly empirically established the extent to which this set of accounting

standards has impacted on financial reporting practices in Nigeria. This study therefore is an

attempt to provide evidence on the impact of IFRS on the financial reporting of banks in Nigeria.

1.2 STATEMENT OF THE PROBLEM

Banks represent a significant sector of the economy and play a major role in maintaining

confidence in the monetary system. There is therefore considerable and widespread interest in

their management and performance. The quality of their financial report will help to foster public

confidence in the banks, as well as, in evaluating their performance.

The fundamental issue is the significant roles that International Financial Reporting

Standards play in the reporting behaviour of banks. Perhaps, the greatest argument against

financial accounting and disclosure standards is that the inhibit initiative, as the decision has

already been made for the reporting entities. Yet, others argue that standards, by their very

nature, rarely take account of their peculiarities of the individual business (Okaro, 2012). In

reality establishing the proper scope of the standard is one of the most difficult challenges.

The scope of the standard could range from very broad to very narrow. How, then, is the

standard setter able to determine the optimal scope of a standard─ the point at which the scope

is sufficiently broad so as to be applicable to an appropriate group of economic transactions and

events, but not so broad that numerous scope exceptions are needed?

Also, critics argue that the cost of implementing accounting standards may not have been

matched by the extra benefits in terms of improved quality of reporting in the banks generally.

The standard setting process itself has been flawed (Okaro, 2012).
 Thus, if IFRS are to merit acceptance, financial statements in which they are incorporated

must supply dependable information for decision making. These decisions made in an economic

setting, subject to important changes, can be relied upon, only if; such standards are adhered to

consistently. Changes in accounting policies should be limited to those that will lead to improved

standards.

Even if the standard setting process is impeccable, can their application in the banking

industry, on the part of accountants, be said to be with a high degree of integrity, competence and

social responsibility? Given the strategic nature of banking in the Nigerian economy, there is a

need for proper standard setting process and measures to ensure their compliance and analyze the

adverse effects, if any, on the financial reporting system.

1.3 OBJECTIVES OF THE STUDY

The general objective of the study is to examine the impact of IFRS on financial reporting

of banks in Nigeria. The specific objectives of the study include:

1. To identify the accounting and reporting practices of banks that needs to be strengthened.

2. To examine if IFRS in Nigeria has improved the quality of its financial reporting.

3. To find out the role the IFRS plays in banking institutions in Nigeria.

1.4 RESEARCH QUESTIONS

The following research questions will form the basis of this study:

1. What accounting and reporting practices are to be strengthened?

2. Has IFRS improved the quality of financial reporting?

3. What role does financial reporting play in banking institutions in Nigeria?

It is necessary to establish if indeed there is a relationship between accounting standards

issued and the quality of financial reporting of banks. This will serve as a guide in searching for

data on our investigation.

Hypothesis One

H01: IFRS do not improve the quality of financial reporting in Nigerian banks.

Hypothesis Two

H02: There is no significant relationship between IFRS and financial reporting in Nigerian

banks.

1.6 SIGNIFICANCE OF THE STUDY

The issue of IFRS for banks engaged in the newly introduced universal banking scheme

has laid emphasis on the strategic nature of banking in the Nigerian economy. This study is of

tremendous benefit to entire society.

This study would be of immense value as it would act as a secondary aid to students of

other higher institutions who may want to research into financial reporting of banks.

The study is also in partial fulfilment of the requirements for the award of degree in

accountancy to the researcher.

1.7 SCOPE AND LIMITATIONS OF THE STUDY

on areas relating to the impact of Financial Reporting Council of Nigeria, the process involved in

setting standards and the roles they have played so far.

The following limitations were encountered during the research:

1. Financial constraint: the financial status of the researcher, being a student, did not allow for

the adoption of some additional thorough data collection procedures and methods such as

personal interviewing of correspondents.

2. Time constraint: the research work was undertaken during the time of studying of the

researcher. Substantial time had to be apportioned between the project work and the course

work. Hence, the researcher could not go the extra mile in reaching the remote places were

the banks are situated; the researcher was also limited to Akwa Ibom state only.

3. Correspondence constraint: the collection of primary data was undertaken through the

administration of questionnaires. Some of these questionnaires were not returned, while some

where poorly or partly filled. This affected the sample responses retrieved to an extent. There

was also an observed reticence by respondents on this topic of study.

4. Poor state of library facilities:

1.8 DEFINITION OF TERMS

1. Accounting Standards: Accounting standards specify when and how economic events are to

be recognized, measured and displayed. External entities such as banks, investors, and

regulatory agencies rely on accounting standards to ensure relevant and accurate information

is provided about the entity.

organization's financial status to management, investors and the government

3. Bank: A bank is a financial institution that accepts deposits from the public and creates

credit. Lending activities can be performed either directly or indirectly through capital

markets.

4. IFRS: International Financial Reporting Standards are standards issued by the IFRS

foundation and International Accounting Standard Board (IASB) to provide a common

global language for business affairs so that company accounts are understandable and

comparable across international boundaries.