ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARD IN NIGERIA: A SWOT ANALYSIS Being Paper presented at 1st Annual National Conference on Humanities, Science and Technology Organised by College of Foundation Studies and Entrepreneurship Education, Hussaini Adamu Federal Polytechnic, Kazaure, Jigawa State-Nigeria

BY ABDULSALAM MAS’UD, B.Sc. (BUK), M.Sc. (UAD, United Kingdom), CNA Mobile Phone Number: 07036824625 Email: [email protected] Office Address: College of Foundation Studies and Entrepreneurship Education, Hussaini Adamu Federal Polytechnic, Kazaure, Jigawa StateNigeria

Abstract International Financial Reporting Standards (IFRS) adoption is a project which many countries currently being embarked upon. However, this has been problemalistic in some countries, included in these problems are filing a legal action against the standard’s adoption, cost implication and low level of preparedness by both governments and standard implementers. It is on the foregoing that this paper conduct SWOT analysis of IFRS adoption in Nigeria based on international experience. Therefore, on the STRENGTH side of the ledger it was found that Nigeria possesses all the necessary variables for IFRS adoption. However, on the WEAKNESS side it was found that some flaws exist within such variables. Furthermore, despite the numerous OPPORTUNITIES that can be exploited through IFRS adoption, there are number of THREATS that the country need to be conscious on, before the final adoption deadline. Finally, based on the observed deficiencies appropriate recommendations were made.

INTRODUCTION The need for uniformity in financial reporting across the world is what gingered the effort of International Accounting Standard Board (IASB) of the United Kingdom and Financial Accounting Standard Board (FASB) of the United States to come-up with International Financial Reporting Standard (IFRS) as a universally accepted accounting standard that can be used throughout the world. The dream of these famous accounting bodies of harmonising financial reporting in international scene is becoming reality; about 120 countries have accented to IFRS as on March this year (Opara and Alawiye, 2011). In Nigeria, the Federal Executive Council in September last year has mandated Nigerian Accounting Standard Board (NASB) to design a roadmap for IFRS adoption in Nigeria and ensure its fully adoption in the country by January 2012 by listed companies and 2013 by Small and Medium Enterprises (SMEs). It is on the foregoing that this paper reviewed the relevant available literature, conduct a SWOT analysis on IFRS adoption in Nigeria and finally conclusion and recommendations were drawn based on the literature reviewed and the SWOT analysis conducted. BACKGROUND OF INTERNATIOANAL FINANCIAL REPORTING STANDARD To mirror back the evolution of IFRS, it is crucial to emphasize on the formation of its founding organs. International Accounting Standard Committee (IASC) was formed in 1973, countries that served as a catalyst for its naissance include; Australia, Canada, France, Japan, Mexico, the Netherlands and the United Kingdom with Ireland, the United States and West Germany (Benson, 1979 cited in Gyasi, 210). It was their intent to have one harmonised language of international financial reporting, which can accelerate international business and ease understanding of international

financial transactions, that these advanced countries geared the establishment of IASC. Norbes and Parker (2004) assert that the committee has long-standing relationship with International Federation of Accountants (IFAC) as far back as 1983. This relationship has strengthen its efforts and amply contributed to its objective realisation. During the time of its active existence IASC issued 41 standards that guide the preparation and presentation of financial statement but its main bottleneck was inability to enforce the standard adoption by the greater segment of the world more especially the countries with weaker financial and capital market systems such communist economies of Russia and China (Gyasi, 2010). In 2001, International Accounting Standard Board (IASB) was evolved as an independent regulatory accounting body based in London, United Kingdom. The body which succeeded the IASC is funded by the contribution of private sector institutions and produces the global standard for the preparation of public company financial statement (Makinde, 2009). The main rationale behind its development was to ensure the uniformity in global financial reporting language, which is popularly known as harmonisation or standardisation of financial reporting. Therefore, in understanding the importance of joint effort, IASB invited the FASB for group work. The idea of this joint effort was to bring about a common set of accounting standards by the end of 2011. Therefore, this initiative resulted to the issuance of International Financial reporting Standard (IFRS), which replaced International Accounting Standard (IAS). Presently, approximately 120 countries have fully conformed with the IFRS while the remaining; especially the major countries have established timeliness for convergence with or adoption of IFRS (Opara and Alawiye, 2011). It is now understandable that the current global accounting standard is IFRS and it’s issued through the joint effort of IASB and FASB, and it receives global assent of

approximately 120 countries, with other countries like Nigeria wishing to assent or adopt it in the near future. ECONOMIC SUBSTANCE OF IFRS One of the economic substances of IFRS is harmonisation. In the first place, harmonisation makes it possible for international investors and financial analysts to have analogous and complete financial information of multinational corporations. It aid the investment decision; in this, it assists them in understanding the type of multinational to buy shares or in what international venture to invest (Gyasi, 2010; Makinde, 2009). Secondly, harmonised accounting standard enables international grantors such as World Bank, African Development Bank etc to easily compare the performance of their borrowers. Finally, harmonisation enables the accounting firms who audit the financial statement of the multinational companies to use a uniform standard instead of using local standard for each subsidiary or associated company (Nobes and Parker, 2004). Another economic substance of IFRS is fair value accounting (Ball, 2006). Conventional and local accounting standards use historical cost concept. IFRS also addressed long lasting accounting problem of “revenue recognition” which many conventional and local accounting standards are yet to properly addressed (Zakari, 2010). Another economic importance of IFRS is earning and reporting quality. Ewert and Wagenhofer (2005) find that high quality accounting standards such as IFRS improves reporting quality. Strengthening this view, Soderstrom and Sun (2007) stressed that adoption of a common set of accounting standards such IFRS improves earnings quality since management will be more willing to report the financial position of its business using such standards so as to attract investors or improve the confidence of its existing shareholders upon its activities. Barth et al. (2006) argue that firms that adopt IFRS are less committed to

engage in earnings smoothing practices and are more expected to recognize losses in appropriate time. CHALLENGES OF IFRS ADOPTION IN SOME COUNTRIES Familiarity with existing system and anticipated problems in adopting new system are among the reasons why change is always resisted. In this IFRS is not an exception. Some problems are evident in adopting IFRS in number of countries. In Germany one of the problems faced in adopting IFRS is whether the existing Generally Accepted Accounting Principles (German GAAP) will adapt to, or co-exist with IFRS (UNCTD, 2006a). We can comprehend that the main problem faced by Germany in transiting to IFRS was whether a trade-off will be established between the existing German-GAAP and IFRS, or IFRS would replace the existing GermanGAAP. Conversely, the decision was that the two regulations will co-exist for the mean time. The result of the decision was tabulated below:

United Nation Conference on Trade and Development (2006a, p. 10) Up to 2007, both German GAAP and IFRS co-exist in Germany, having developed IFRS for Small and Medium Scale Enterprises (SMEs), IFRS take precedence in preparation and presentation of financial statement in Germany (UNCTD, 2006a).

Another problem faced by German companies is the understanding of relevant transition phases due to its complexity. The transition architectures designed the six phases as a guideline for the affected companies. This can be depicted as follows: Figure 2: Possible phases in transition to IFRS in company (s)

Source: United Nation conference on Trade and Development, (2006a, p.16) Understanding the above six phases is of paramount importance not only for German companies but also for whatever company intending for transition to IFRS. Deloitte (2004) conducted a survey in 88 listed companies in one of the German Stock Exchanges; the result was that an average company needs 5.7month to plant the transition and 7.7 months for implementing the new standard. At least, a company needs 12-18months for planning and transiting to new accounting standard (UNCTD, 2006a). In India, one of the major hardships evidenced in transition to IFRS was the level of preparedness by some Indian firms. To deprive from this problem, some Indian companies challenged the implementation of IFRS in India (UNCTD, 2006b). This source further disclosed that when Institute of Chartered Accountant of India (ICAI) issued AS 19 on Leases, which correspond with one of the IFRS, the leasing companies challenged its implementation in a court in India. Similarly, the issuance of AS 22 on Accounting for Taxes in Income, which for the first time introduced the international concept of deferred taxation and it is consistent with IFRS, was

however challenged by some companies due to its negative effects on their profitability. Another impediment experienced in IFRS in India was its effects on foreign exchange rate, if International Standard relating to foreign exchange rate were implemented it would result to the violation of Schedule VI of India Companies Act 1956. In essence, for this IFRS to be adopted the India Companies Act 1956 need to be amended, which is costly and time consuming considering the rapid economic growth in the country. A further problem evidenced in India’s IFRS adoption as comprehended by (UNCTD, 2006b) was IAS 19 the Employees Benefits. Under IAS 19 three options are available regarding the treatment of actuarial gains and losses. However, in corresponding Indian AS 15, Employee Benefits, the provision made therein was only one among the three alternatives contained in IAS 19. This is an evidence of high disparity between the Indian accounting standard and the IFRS. In South Africa, despite the fact that it is the economic power house of Africa (UNCTD, 2007), it was not deprived from essential hurdles in IFRS implementation. Survey conducted by (Ernst and Young, 2005 and Ernst and Young, 2006 cited in UNCTD, 2007) on transition to IFRS revealed larger intricacy than anticipated, high costs in some instances, poor understanding of the reasoning behind the transition, and potential confusion about company performance information compared to what is obtainable under South African GAAP. South Africa Institute of Chartered Accountants- SAICA (2007 cited in UNCTD, 2007) disclosed how the shortage of accounting work force in South Africa negatively affects the countries IFRS transition project. SAICA (2007) revealed that more than 26% of South African possessing SAICA designations are domicile in South Africa’s Diaspora. Another challenge faced by South African companies in IFRS transition project was time constraint.

Ernst and Young (2006 cited in UNCTD, 2007) disclosed that an average performing company has to take more than one year for its IFRS transition project only few companies take a period of six month. Blaauw (2009) asserted that while early IFRS adoption is recommended in Nigeria, the provisioning loss approach contained in local standard is more appropriate than the incurred loss approach contained in IFRS. IMPERATIVE ELEMENTS FOR IFRS TRANSITION PROJECT IN A COUNTRY Many factors are imperative to IFRS convergence. In Germany, existent strong accounting system (German GAAP) and strong professional accounting body -the Institute of Public Accountants in Germany reduced the expected intricacies in IFRS transition (UNCTD, 2006a). Likewise, in India and South Africa, their professional accounting bodies; ICAI and SAICA respectively have positively impacted on their IFRS transition project. Legal system in India which in most instances not in accord with IFRS provisions (e.g. India Companies Act, 1956) has resulted to bottleneck in IFRS transition in India(UNCTD, 2006b). Strong capital markets such as New York Stock Exchange (NYSE) - the largest stock market in the world, Johannesburg Stock Exchange (JSE) and NASDAQ play important role in their respective capacities in IFRS transition project (UNCTD, 2006a; UNCTD, 2007). German affiliation to European Union (EU) has paved way to the success recorded in the country’s transition to IFRS. The above discussion can further be depicted as follows:

Figure 3: Factor affecting the Adoption of IFRS in developing countries

Source: Gyasi (2010: p.26) NIGERIA: ANALYSIS OF VARIABLES AFFECTING IFRS ADOPTION In term of accounting system, the Nigerian Accounting Standards Board (NASB) sets local accounting standards under the NASB Act of 2003. Originally established in 1982 as a private sector initiative housed in Institute of Chartered Accountants of Nigeria (ICAN). NASB became a government agency in 1992 and reports to the Federal Minister of Commerce. Its membership includes representatives of government and relevant interest groups (ROSC, 2004). Igben (2007) disclosed that, to date NASB issued 23 standards popularly known as Statement of Accounting Standard (SAS). However, in contrasting the SAS with IFRS, high disparity exists (ROSC, 2004). This source also found lack of capacity and adequate resources (4Ms) in NASB. Recognised accounting professional bodies exist in Nigeria; the famous among them are Institute of Chartered Accountants of Nigeria (ICAN) and Association of National Accountants of Nigeria (ANAN); who produce professional and practising accountants. There also exist in Nigeria, the world BIG 4 audit firms (Deloitte, PriceWaterhouseCoopers, Ernst and Young and KPMG) who audit about

90% of Nigerian listed companies (ROSC, 2004). This source also disclosed high gap between qualified accountants and the number of registered companies in Nigeria; in 2003 there are more than 500, 000 registered companies and 22,636 (ICAN, 17500; ANAN, 5,136) qualified accountants. Though not all registered company will require professional accountant, however, the gap is very wide. There also exist in Nigeria such agencies that monitor and enforce the requirements for accounting and financial reporting in the Stock Market. Nigerian Stock Exchange (NSE) approves annual financial statement of listed companies before publication; Securities and Exchange Commission (SEC) monitors compliance. However, conflict of duty exists between NSE and SEC due to lack of capacity by SEC. NSE gives approval as normal, however, it monitors compliance which the function of SEC (ROSC, 2004). Abuja Commodity Exchange monitors compliance of accounting and financial reporting requirements of its listed companies.

Central Bank of Nigeria

(CBN) monitors the compliance of accounting and financial reporting requirements of banks and other financial institution while Nigerian Insurance Commission (NIC) monitors that of insurance companies, however, the later lacks capacity (ROSC, 2004). There also exist the laws that guide these monitoring and enforcement procedures. These include NSE Act, 1961; CAMA, 1990; Banks and Other Financial Institution Act (BOFIA) 1990; Investments and Securities Act, 1999 and Insurance Act, 2003. However, in certain instances these laws are not in line with IFRS (ROSC, 2004). In term of economic development, Nigeria is characterised by political instability, corruption, inadequate infrastructures and poor macroeconomic management, but the country has been experiencing strong GDP growth since 2007 (CIA, 2011). Highquality economic reforms implemented by the government are what contributed to

this recorded progress. The following economic performance indicators for Nigeria were obtained from CIA World Factbook: Table 1: Nigerian Economic Performance Indicators Econom ic Indicator GDP (PPP) GDP Real Gro wth GDP Per Capit a (PPP) Labo ur Fo rce Unem ploym ent rate

2009 ($ & %) 346.2b bl 5.6 % 2,300 USD -

2010($ & %) 369.8bbl 6.8 % 2,400 USD 48.33m m l -

Ranking 33 33 182 11 44

Populatio n Belo w po ve rty line Public Debt (% of GDP) Inflation Rate (Co nsum er price) Ma rket Value of Public Trade d Shares Gro wth of In dustrial prod uction Current Account Balance Exte rn al Debt Reserves of F orei gn Exch ang e Stock of Direct Foreign Investm ent -abroad Exch ang e Rate

-

-

-

11.8 % 11.5%

13.4% 13.9 %

119 218

Others 4.9% 2007 est. 70% 2007 est. -

33.32b bl

-

51

-

-

4 (%)

85

-

22.89b bl 10.11b bl 44.76b bl

27.77bbl 11.02bbl 43.36bbl

14 89

-

5.821b bl

6.071bbl

57

-

148.84

150.88

-

-

Source: Author’s tabulation from The World Factbook Data, 2011 It can be deduced that with the exception of some outliers like public debt, inflation, external debt, foreign exchange reserve and exchange rate, the economy is experiencing growth. Regarding the external environment, the country has strong international affiliation; it is a member of Developing Eight (D8), World Bank, World Trade Organisation (WTO), Organisation of Petroleum Exporting Countries (OPEC), African Union (AU) and Economic Community of West African States (ECOWAS). SWOT ANALYSIS FOR IFRS ADOPTION IN NIGERIA In general, this analysis is based on the above literature reviewed. In particular, this paper recognises the importance of the five factors affecting IFRS adoption in developing countries as outlined by Gyasi (2010) in figure 3 above. Hence, they are used in analysing the strengths and weaknesses, however,

the analysis of the

opportunities and threats are based on this writer and other writers’ intuition: Table 2: Swot Analysis for IFRS Adoption in Nigeria SWOT

ANALYSIS

S



T R E N G T H S



W



E A K N E S S E S



  

  

O P O R T U N I T I E S

T H R E A T S

      

     

Accounting System:  NASB, ANAN, ICAN, BIG4 AUDITS FIRMS Capital Market:  NSE, SEC and Abuja Commodity Exchange Economic Development:  Strong GDP and GDP growth, Positive growth in current account etc Legal System:  CAMA,1990; BOFIA, 1991; Insurance Act, 2003 etc External Environment:  Strong international affiliation with, D8, WTO, OPEC, AU, ECOWAS etc Accounting System:  NASB lacks independence, capacity and resources (ROSC, 2004)  Great disparity between SAS and IFRS (ROSC, 2004)  Conflict between ICAN and ANAN (ROSC, 2004)  Wide gap between the number of registered companies and number of qualified accountants leading to the shortage of qualified accountants (ROSC, 2004) Capital Market:  Conflicts of duties between NSE and SEC (ROSC, 2004)  SEC is some time weak in its monitoring functions (ROSC, 2004) Economic development:  Some economic performance indicators such as consumer price inflation, inflationary exchange rate, poverty level etc are very poor (World Factbook, 2011) Legal system:  Some provisions of CAMA, 1990; BOFIA, 1991, Insurance Act, 2003 etc are not in line with IFRS (ROSC, 2004) External Environment:  For example EU in 2005 has mandated and assisted its member States on IFRS adoption (UNCTD, 2006a); however, this work did not come across any information relating to the effort of D8, WTO, OPEC, AU, and ECOWAS in mandating or assisting their member States on IFRS adoption. More confidence in Nigerian Companies, more importantly those in the banking sector Confidence in Nigerian Capital Market Turning the Nigerian Capital Market global Accessing capital by Nigerian companies from abroad Increasing the flow of Foreign Direct Investment (FDI) into Nigeria Increase confidence in Nigerian economy in the eye of International Financial Organisation such as World Bank, African Development Bank and other international lenders International rating; the implementation of IFRS by ACCESS BANK OF NIGERIA PLC in March this year before the final adoption deadline of January, 2012 has made the analysts ranked Nigeria among TOP 120 IFRS adopters in the world (see Opara and Alawiye, 2011).

IFRS is more complex than SAS The tendency of new market valuation. There is difference in equity classification between IFRS and local standard (UNCTD, 2006a). The ability of Nigerian companies to cope with constant changes in IFRS. IFRS is frequently being updated; however, SAS remained unrevised for long. Transition cost; the procurement of relevant IT facilities and IT reorganisation cost and capacity building costs e.g. seminars, workshops etc Level of preparedness; is the deadline of January 2012 compatible for all listed companies in Nigeria? Consider US, despite the level of its economic development the US Securities and Exchange Commission has proposed to adopt IFRS by 2014 In the short-run there may be confusion of company performance under the use of IFRS and the previous use of SAS

Source: Author’s analysis, 2011

CONCLUSION The paper reviews the relevant literature on the adoption IFRS in some part of the world base on which a SWOT analysis is conducted for the adoption of IFRS in Nigeria. On the STRENGTH side of the ledger, it was found that Nigeria has all the necessary variables for IFRS adoption. However, on WEAKNESS side it was found that there are some flaws in such variables. Based on these strengths and weaknesses the following opportunities and threats were identified. The opportunities includes; More confidence in Nigerian Companies, more importantly those in the banking sector, confidence in Nigerian Capital Market, turning the Nigerian Capital Market global, accessing capital by Nigerian companies from abroad, increasing FDI flow to Nigeria, increase confidence in Nigerian economy in the eye of International Financial Organisations such as World Bank and African Development Bank. Nevertheless, the threats include; IFRS is more complex than SAS, the tendency of new market valuation of companies’ equity; there is difference in equity classification between IFRS and local standard, the ability of Nigerian companies to cope with constant changes in IFRS. Others are the transition cost; the procurement of relevant IT facilities and IT reorganisation cost, capacity building costs, and the level of preparedness by the Nigerian listed and non-listed companies. Based on the above findings, the paper recommends the following:  NASB should be independent like IASB and it shall be equipped with all the necessary capacity and resources for executing its duties.  Though the Federal Executive Council has mandated NASB to comeup

with

road

map

for

IFRS

implementation,

however

such

implementation plan should be simple like that of Germany. In addition,

interactive sessions, seminars and workshops should be organised by NASB for stakeholders.  The Federal Executive Council may wish to authorise the review of Nigerian Company Laws such as CAMA, BOFIA, Insurance Act etc so as to prevent potential conflict between the provision of these laws and that of IFRS. Similar problem happens in India.  Disagreement between professional accounting bodies should be resolved, and increased commitment is needed on their part to produce more qualified accountants to tighten the gap between numbers of qualified

accountants and

the

registered

companies.

Qualified

accountants are the catalysts to IFRS adoption project.  The SEC should be equipped with all the needed resources, so that it will competently carryout its regulatory functions in the stock market.  Strict economic measures should be in place to control some economic performance indicators such as consumer price inflation and inflationary exchange rate that are vital in IFRS adoption.  Multinational Organisations such as WTO, D8, OPEC, AU and ECOWAS should technically or otherwise assist their member countries in IFRS adoption, just like EU does.

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