FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS: ISSUES AND CHALLENGES WITH REFERENCE TO SELECTED NIGERIAN BANKS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

International financial reporting standard (IFSI) – first-time adoption of IFRS set out the procedure that an entity must follow when it adopts IFRS for the first time as the basis for preparing its general purpose financial statement Adebayo (2011).

Deloitte's guide to IFRS 1 (Nov 2009) establishes the transmission requirement for the preparation of financial statements in accordance with the IFRS for the first time. The general principle is that the IFRS effective at the reporting data are to be applied as if that principle had always been used (retrospectively) to the opening IFRS balance sheet the comparative period and the reporting period however, with certain important expectations, for example, concerning business combination and pension liability.

The purpose of IFRS globally and also specifically for the many listed companies to present the consolidated financial statement in accordance with IFRS and objectives of the standard is to create comparability overtime in an individual entity and between different entities adopting IFRS for the first time at a given data rather than creating comparability between first – time adopter and entities that already apply IFRS.

Adebayo (2011) opined that the purpose of the standard is to ensure that an entity's first IFRS financial statement and its interim financial report for part of the period covered by these financial statement curtain quality information that is transparent for users and comparable overall periods presented, provides a suitable starting point for accounting in accordance with IFRS and can be generated at a cost that does not exceed the benefit. The scope of IFRS 1 does not apply to entities already reporting under IFRS.

It applies to the first set of financial statements that contains an explicit and unreserved statement of compliance with IFRS. IFRS 1 applies to any interim financial statements for a period covered by these first financial statements that are prepared under IFRS. Dellortte (2009).

Standard Interpretation Committee (SIC) 8 required the first-timer adopter to present its financial statements as if they had always been prepared in accordance with the standards and interpretations effective for the period of first-time application and subject to the transitional provisions of the relevant standards.

IFRS 1 requires a first-time adopter to prepare its financial statements in accordance with the standards and interpretations effective at the reporting date, thus disregarding previous versions of IFRS and the transitional provisions of the standards.

Grant Thorton (2012), opined that the main principle of IFRS 1 is to present the first IFRS financial statements using the accounting policies effective at the end of the first reporting period throughout all periods presented. For instance, a company using IFRS for the first time in 2012 with a December year-end would use the accounting policies in force on December 31, 2012, and apply those policies retrospectively.

Therefore, the financial statements are presented as if the first-time adopter had always presented IFRS first statements (important exemptions apply). The first-time adopter established its date of transition which is defined as the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS financial statements. At the date of transition, the first-time adopter prepares an opening statement of financial position. This is the starting point for its accounting under IFRS.

In the opening statement of financial position, the first-time adopter applies its IFRS accounting policies in recognizing and measuring all assets and liabilities and if appropriate, reclassifies items recognized under previous generally accepted accounting policies (GAAP) as another type of asset, liability, or component of equity.

The accounting policies are based on IFRS effective at the end of its first IFRS reporting period (important exemption apply). Also, in preparing the opening statement of the financial position, the first-time adopter may choose the optional exemptions from the retrospective application.

The first-time adopter applies for the mandatory exemptions in all applicable cases. A first time-adopter is also expected to prepare reconciliations between previous generally accepted accounting principles (GAAP) and IFRS and disclose those reconciliations in its first IFRS financial statements and interim reports if applicable.

Steven (2010) opined that the general principle underlying IFRS adoption is that a first-time adopter should apply the version of each IFRS which is effective at the end of its first IFRS reporting period fully retrospective. Therefore, the first IFRS financial statements are presented as if the entity had always applied IFRS which would appear to be a particularly onerous task, IFRS 1 was written to provide some guidance and certain exemptions to this general principle for first-time adopters. IFRS 1 is the standard that governs the manner or way in which a company converts its financial statements to IFRS.

Adebayo (2011), opined that the International Accounting Standards Board (IASB) created IFRS I to assist companies in the transition to use IFRS as their basis of financial reporting. Based on this, the key principle of IFRS 1 is the full retrospective application of all IFRS standards in effect as of the closing balance sheet data (reporting date) to a company’s first set of IFRS financial statements should present its financial position and performance as if the company had always reported using IFRS.

It outlined the required disclosures that set out the effects of transition on the financial statements, principally through the requirement for reconciliation tables for equity, income, and cash flows, and additionally supports companies through the transition phase by making it easier for them to adopt IFRS. IFRS 1 grants limited exemptions from full retrospective applications in specified areas where the cost of complying with them would likely exceed benefits.

The standard prohibits retrospective application of IFRS in some areas, particularly where the retrospective application would require judgment by management about past conditions after the outcome of a particular transaction is already known. First-time adoption of IFRS is the guidance that is applied during the preparation of a company’s first-time IFRS-based statements.

The standard was created to help or aid companies easily convert to international standards and provides practical accommodations intended to make first-time adoption cost-effective.

Delloitte (2009), opined that a first-time adopter is an entity that for the first time makes an explicit and unreserved statement that its general purpose financial statements comply with (IFRS 1.30. an entity may be a first-time adopter if, in the preceding year, it prepared IFRS financial statements for internal management use as long as those IFRS financial statements were not made available to owners or external parties such as investors or creditors.

If a set of IFRS financial statements was for any reason made available to owners or eternal parties in the year, then the entity will already be considered to be on IFRS and IFRS 1 does not apply. Also, an entity can be a first-time adopter if, in the preceding year, its financial statements asserted compliance with some but not all IFRS or included only a reconciliation of selected figures from previous GAAP to IFRS. Previous GAAP implies the GAAP that an entity followed immediately before adopting IFRS.

An entity is not a first-time adopter if, in the preceding year, its financial statements asserted compliance with IFRS even if the auditor’s report contained a qualification with respect to conformity with IFRS or compliance with both previous GAAP and IFRS.

1.2 STATEMENT OF THE PROBLEM

In the wake of the financial crises in the late 1990s, the international community emphasized the major role that the observance of international standards and codes of best practices can play in strengthening national and international financial systems (Lyaho and Jafaru, 2011).

Thus the Executive Boards of the World Bank and the International Monetary Fund (IMF) recognized a group of twelve (12) areas with their associated standards that are deemed necessary for the institutional underpinning of macroeconomic stability and are central to the operational work of the institutions.

In line with this, Nigeria undertook the review exercise and presented the reports in the observance of standards and codes (ROSC) which was prepared by a team from the world bank between November 2003 and March 2004. The review entails an evaluation exercise that:

The report concluded that the lack of effective and efficient mechanisms to ensure compliance with established accounting and auditing standards contributes to a weak financial reporting environment.

As part of the implementation strategy of ROSC reports recommendation, Nigeria has since decided to adopt IFRS as recommended by the committee on Road Map to the adoption of IFRS in Nigeria that all listed and significant entities are to present their financial reports using IFRS framework by 2012.

Ikpefem (2012), opined that the adoption of IFRS in Nigeria, and the implementation of the Road Map was unveiled by them, the minister for commerce and industry in September 2010 Senator Jubril Martin Kuye (OFR). The Road Map which was in three (3) phases, mandates publicly listed and significant public interest entities to prepare their financial statements based on IFRS by January 1, 2012, while other public interest entities are required to adopt IFRS for statutory purposes by January 1, 2013, and the third phase requires small and medium-sized entities (SMEs) to adopt IFRS by January 1, 2014.

Armstrong (2007), opined that the increasing growth in international trade, cross-border financial transactions, and investments which unavoidably involves the preparation and presentation of accounting reports that are useful across various national borders has brought about the adoption of IFRS by both the developed and developing countries. The adoption of IFRS in Nigeria was planned to commence with publicly listed companies on January 1, 2012, and by end of January 2014, all stakeholders would have complied. As of today, the majority of Nigerian listed companies have adopted IFRS in their reporting and this is considered welcome progress for developing counting like Nigeria.

This study, therefore, intends to ascertain or determine the issues and challenges of adoption of IFRS 1-first time adoption of IFRS by Nigerian Banks.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to examine the issues and challenges of the adoption of IFRS (First-Time adoption) by banks in Nigeria. Specific objectives include:

1.4 RESEARCH QUESTION

1.5 RESEARCH HYPOTHESES

Ho: banks in Nigeria do not select and apply accounting policies that comply with IFRS.

Ho: banks in Nigeria do not apply for any optional exemptions from the application of a new accounting principle according to IFRS 1.

Ho: Banks in Nigeria do not apply for mandatory exemptions from the application of a new accounting principle according to IFRS 1.

1.6 SIGNIFICANCE OF THE STUDY

The study will be of great significant value to many corporate organizations. It will provide an insight into a comparative analysis of the degree of adoption of IFRS in Nigeria hence guiding or assisting the financial reporting council of Nigeria (FRCN) in the harmonization of the accounting system and structure in Nigeria. The study is also significant to government investors, regulatory bodies, educators, researchers, accountants, auditors, and scholars, particularly in the field of accounting.

The findings of this work will enable regulators and other key players to gauge the effectiveness and transparency of the financial reporting system in Nigeria and put in place necessary updates such as training and development for practitioners and new members, due diligence in accounting standardization, overall institutional and professional organization conducive for effective standards application in Nigeria.

This study is also of immense benefits apart from assurance of useful and meaningful decisions on investment portfolio in Nigeria but there would be the attraction of Foreign Direct Investment (FDI) (Jubril, 2010). Also, this study creates easier access to external capital, reduction in the cost of doing business across borders by removing the need for supplementary information from Nigeria companies, easier regulation of financial information in the country, and enhance knowledge of global financial reporting standard in Tertiary Institutions (Jubril, 2012).

1.7 DEFINITION OF TERMS

To examine whether banks in Nigeria select accounting policies that comply with IFRS and apply them retrospectively to all periods.
To determine whether banks in Nigeria apply any of the optional exemptions in the first IFRS financial statements from the application of a new accounting principle.
To ascertain whether banks in Nigeria apply the mandatory exceptions from the application of new accounting policies.
Assesses the strengths and weaknesses of existing institutional frameworks that underpin financial accounting practices.
Determine the comparability of national accounting and auditing standards with internationally recognized standards (IAS)
Examine the degree of compliance with national accounting and auditing standards and
Evaluates the effectiveness of enforcement mechanisms for ensuring compliance with existing national standards, rules, and regulations.

To what extent do banks in Nigeria apply accounting policies that comply with IFRS?
To what extent do banks in Nigeria apply any of the optional exemptions from the application of a new accounting principle?
To what extent do banks in Nigeria apply the mandatory exceptions from the application of a new accounting principle?

First-Time adoption of IFRS: This is the guidance that is applied during the preparation of a company’s first-time IFRS-based statements.
Retrospective application: A retrospective application is the application of a new accounting principle as if that principle had always been applied.
First IFRS financial statements: First annual financial statements in which an entity adopts IFRS by an explicit and unreserved statement of compliance with IFRS.
Date of transition: Beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS financial statements.
First IFRS reporting period: The reporting period ending on the reporting date of an entity’s first IFRS financial statements.
First-time adopter: An entity that presents its first IFRS financial statements.
Previous GAAP: The basis of accounting that a first-time adopter used immediately before adopting IFRS.
Reporting date: The end of the last period covered by financial statements or by an interim financial report.
Opening IFRS balance sheet: The entity’s balance sheet (published or unpublished) at the date of transition.
Globalization: This is a set of economic processes that deal with trade in goods and services and enhance cross-border finance such as foreign direct investment and migration in search of employment. ...

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