CHAPTER ONE

INTRODUCTION

1.1   Background of the Study

Globalization of capital markets requires a unified global accounting, reporting and disclosure set of standards. As a result of increasing volume of cross border capital flows and the growing number of foreign direct investments via mergers and acquisitions in the globalization era, the need for the harmonization of different practices in accounting and the acceptance of worldwide standards has arisen. This worldwide standard is International financial reporting standards (IFRS). Although, there has been series of contentions as regarding the impact of this standard on the quality of financial statements, but this study will provide a clear understanding of their relationship.

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 acceptance of IFRS by different countries around the world, many researchers aimed to find out empirically whether the new accounting standards has improved the quality of financial statements that is reported to the users.

Furthermore, banks constitute one of the pillars of economic development. It intermediates funds between the surplus and the deficit economic units, thus stimulating and promoting investments, 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 quality of such financial statements.

According to Vishnani and Shah (2008), quality of financial statements implies the ability of the financial information contained in the financial statements to explain the stock market measures. The quality variable implies that data or amounts in the financial statement are very correct and can form a useful guide for 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 quality of equity, firm’s size, etc.

1.2   Statement of the Problem

Considering the critical importance of banks to strategic economic development plans in Nigeria, because this accounts for about 31% of the total market capitalization, according to NSE (2014), and the truth that banking sector was the first among the listed public entities in Nigeria to fully accept IFRS, a study on the impact of IFRS on the quality of financial statements of a major bank in Nigeria (First bank Plc) becomes important in order to ascertain the effects of the mandatory acceptance of IFRS on the quality of financial information of banks in Nigeria. Besides, a set of financial statements are meant for diverse users; ranging from management, owners, creditors, respondents, government agencies, regulatory authorities, investors, analysts, etc. Particularly, investors wish to know which items in the financial information are useful 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 impact of IFRS on the quality of financial statements in First Bank Nig. Plc.

1.3   Objectives of the Study

The following are the objectives of this study:

1)  To examine the impact of International Financial Reporting Standards IFRS o the quality of financial statements of First Bank Plc Nigeria.

2)  To examine the benefits ofInternational Financial Reporting Standards IFRS in First Bank Plc Nig.

3)  To analyze the relationship between International Financial Reporting Standards IFRS and the quality of financial statements of First Bank Plc Nigeria.

1.4   Research Questions

1.  What is the impact of International Financial Reporting Standards IFRS o the quality of financial statements of First Bank Plc Nigeria?

2.  What are the benefits of International Financial Reporting Standards IFRS in First Bank Plc Nig?

3.  What is the relationship between International Financial Reporting Standards IFRS and the quality of financial statements of First Bank Plc Nigeria?

1.5   Hypothesis of the Study

HO: There is no significant relationship between International Financial Reporting Standards IFRS and the quality of financial statements of first bank Plcin Nigeria

1.6   Significance of the study

The following provided a functional significance for this study:

1)  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 and the quality of financial statements of bank in Nigeria.

2)  This research will be a contribution to the body of literature in the area of international financial reporting standards IFRS and the quality of financial statements in Nigeria banks, 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 First Banks Plc in Nigeria. It will also cover the relationship between international financial reporting standards IFRS and the quality of financial statements in First Bank Plc in Nigeria.

Definition of Terms

Financial statements: A financial information (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

References

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).

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