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GLOBAL PRACTICE

Countries of the world over are complying with the provisions of IFRS while the entire world is seen

as a global village where exchange of information and economies depend on each other for survival.

Australia adopted IFRS from 1 January 2005. The assumption made by Australian regulators is that

adoption of IFRS will facilitate cross-border comparability in financial reporting, thereby raising the

visibility of Australian businesses internationally and potentially reducing the cost of capital. The

main motivation is that while the Fourth and Seventh Company Law Directives provide a basis for

harmonised accounts for both individual and groups of companies within the Economic Union (EU),

they did not meet more rigorous disclosure requirements elsewhere in the world, particularly

accounting standards issued by the US Financial Accounting Standards Board (FASB).

As stated by the Treasury Department of the Federal Government: The Government has long

recognised the benefit to Australia of a common global accounting language. In a globalised economy

with large and growing cross-border capital movements, high quality internationally accepted

accounting standards will facilitate cross-border comparisons by investors and enable Australian

companies to access international capital markets at lower cost. Reducing international financial

reporting diversity has been widely touted as a major goal of the Treasury Department, and the

Financial Reporting Council (FRC) which oversees accounting standard setting in Australia. The

Treasury Department of the Australian Government explained what the harmonisation of accounting

standards would actually entail:

Any departures by Australia from IASB standards could rapidly erode the advantages of a common

language and in particular the acceptance overseas of Australian companies’ financial statements as

IASB compliant. With the mandatory introduction of IFRS in the EU and Australia, a reduction in

financial reporting diversity might be expected as stated by Whittington (2005, p.129). The adoption

of international standards by the EU is a good example of the nature of the demand. There was no
existing single set of accounting standards within the EU: rather there was a variety of national

standards of varying degrees of completeness, sophistication and authority, reflecting different

national traditions and institutional arrangements. There are currently 15 countries in the EU, 3 in the

Economic Area, and 10 more countries scheduled to join in 2004 making a total of 28 countries, so

that, without common accounting standards, there could be 28 different national methods of

accounting, in addition to the use of IFRS and of US GAAP which is permitted by some EU countries.

A large number of public companies, exhibiting significant heterogeneity in size, capital structure,

ownership structure and accounting sophistication, have adopted IFRS for the first time (Schipper,

2005). Even in Australia, where standard setters have committed to an established accounting

standards harmonisation program since the mid-1990s, IFRS have nevertheless introduced a raft of

new practices and standards, particularly in controversial areas such as recognition and measurement

of financial instruments, intangibles and investment properties (Reilly & Teoh, 2006). However, while

we might expect the

introduction of IFRS to have some impact on financial reporting diversity, this is not necessarily a

foregone conclusion if prior literature is a guide. For instance, the literature distinguishes between

accounting practice harmonisation and accounting regulation harmonisation (Rahman & Perera,

2002). Harmonizing financial practices cannot necessarily be achieved solely by aligning regulatory

frameworks (such as introducing a new accounting standards regime). For instance, Henry et al.

(2009) observed that among EU companies, net income and shareholders’ equity reconciliation

amounts differ significantly by industry and by legal origin of the firm’s home. The authors raise

questions about the homogeneity of IFRS as implemented by companies in the EU (see also

Clatworthy and Jones, 2008; Gray et al., 2009; Kvaal and Nobes, 2010). Jones and Higgins (2006)

predicted that smaller companies may be less compliant with IFRS in the early years of

implementation given the high cost of the regulation and the lower perceived benefits of IFRS to

smaller companies. Schipper (2005) and Brown and Tarca (2005) emphasised the importance of

appropriate enforcement mechanisms to ensure domestic compliance with IFRS. As observed


by Schipper (2005, p.106): ‘The quality of financial reporting is crucially dependent on vigorous

enforcement that is separate from the financial reporting standard setting function.’ In the absence of

effective enforcement, the ultimate impact of IFRS in reducing international reporting diversity could

be much diminished nor would we necessarily expect the pattern in reduction in financial reporting

diversity across all IFRS adopting nations to be uniform or consistent (see Kvaal and Nobes, 2010).

For example, in a study of Finnish accounting standards, Pirinen (2005) found that while the effects of

IFRS have been notable, the standards have not caused any drastic changes in accounting practice as

their requirements have been written as alternatives in legislation (EU Directives were written into

Finish accounting legislation in the 1990s). Similar to developments in the UK, Australia had

committed to an accounting standards harmonisation program at least a decade prior to the

introduction of IFRS. Hence, we might expect less overall financial reporting diversity in Australia

and the UK relative to some other EU countries which have tended to exhibit a high degree of

reporting heterogeneity across local GAAPs (Whittington, 2005).

Given the importance of IFRS to the IASB’s mission of reducing intra-country financial reporting

diversity, Jones, S. and Finley, A. (2011) based on a sample of 81,560 firm years, examined whether

the mandatory IFRS regime has led to any significant reductions in overall financial reporting

diversity by companies within the EU and Australia.

Financial reporting diversity according to them is proxy by the variability of several balance sheets,

income statement and cash flow statement ratios measured over the pre-IFRS and post-IFRS periods.

Variability is measured by the coefficient of variation (CV), a scale neutral measure of dispersion of a

probability distribution. This measure avoids many of the methodological problems associated with

index techniques. Notwithstanding some mixed findings, the group mean comparisons and multiple

regression results indicate some statistically significant reductions in the variability of ratio measures

in the post-IFRS period, even after controlling for factors such as firm size, industry and adoption

status (whether a country is an IFRS adopter or not). While the results should be viewed as
preliminary, they provide some tentative support for IASB’s current policy direction towards global

accounting

standards convergence (for instance, the IASB–FASB convergence project). The results also

have implications for other countries contemplating a shift to IFRS, such as the United

States and several Asian nations, including Japan and India. A useful direction for future

research is to determine whether the same results hold using a more extensive post-IFRS

sample.

This study examines three specific hypotheses which are tested using EU and Australian financial

statement data prepared on (i) an IFRS reporting basis and (ii) on the basis of each country’s local or

domestic accounting standards prior to the formal introduction of IFRS. Financial statement data

comprised key financial ratios extracted from reporting periods both before and after the adoption of

IFRS. The null hypotheses of the study are formally set out as follows:

Hypothesis 1: There are no significant reductions in financial reporting diversity among IFRS

adopting countries post the introduction of IFRS, ceteris paribus.

Hypothesis 2: There are no significant reductions in financial reporting diversity among IFRS

adopting countries at the industry level post the introduction of IFRS, ceteris paribus.

Hypothesis 3: There are no significant reductions in financial reporting diversity among larger versus

smaller companies’ post the introduction of IFRS, ceteris paribus

A limitation of this study is that there are no controls for EU companies adopting IFRS prior to 2005.

For instance, many German companies had voluntarily adopted IFRS prior to 2005.

Notwithstanding some mixed results and confounding observations, they conclude there is sufficient

evidence overall to reject the null hypotheses established in their study that the introduction of IFRS
has had no impact on financial reporting diversity at the intra-country or intra-industry level, nor

across firms of different size. However, these results at the date of

the study should only be viewed as preliminary, as IFRS had only recently been introduced to member

nations of the EU and Australia at the date of the study (with 2006 as the first year of reporting for

companies with non-December financial end year dates), there had only a limited set of post-IFRS

observations to base their analysis on. An updated longitudinal study incorporating a greater number

of post-IFRS reporting observations will provide an interesting point of contrast with the current

results.

Furthermore, different methodologies could be used to examine the extent of global accounting

convergence. Notwithstanding certain limitations associated with indexing techniques identified in the

literature, it would be interesting to see whether previous studies which have used such techniques

would yield different results when replicated on post-IFRS data, now that the adoption of IFRS is

mandatory, would the results of these studies be any different?

Finally, the results tend to provide some tentative support for IASB’s current policy direction towards

global accounting standards convergence (for instance, the IASB–FASB convergence project, also

known as the Norfolk agreement). The results may also have some positive implications for other

countries contemplating a shift to IFRS, such as the United States and several Asian , and African

nations, including Japan, India and Nigeria, if the motivation for adopting IFRS is an expectation that

intra-country financial reporting diversity will be reduced.

PRACTICE IN NIGERIA

The usage of IFRS is expected to be domesticated in each member country so that it could be

put to use. In all the continent of the world, from Europe to Asia, to Africa, to Australia hands

have been of deck to ensure compliance to the worldwide standards. In Nigeria, we are not

left behind; local adoption committee was set up in 2010 to work out modalities of
domesticating IFRS in the country. The committee report was as contained in “the Report of

the Committee on Road Map to the Adoption of International Financial Reporting Standards

in Nigeria”. The committee came up with modalities on the implementation of IFRS in

Nigeria. This report also outlines specific milestones that, if realized, could lead to the

adoption of IFRS in three phases commencing with Public Listed Entities and Significant

Public Interest Entities in Nigeria by 2012, followed by other Public interest Entities in 2013

and Small and Medium-sized Entities in 2014. This Roadmap discusses various areas for

consideration by stakeholders in order to ensure effective adoption of IFRS in Nigeria. The

report contains recommendation for the amendments of various laws and regulations that

have one provision or the other impacting on financial reporting such as Companies and

Allied Matters Act 1990, Banks and Other Financial Institutions Act 1991, Investments and

Securities Act 2007 etc and to ensure uniformity and remove conflicts and ambiguity. The

report also recommends the passage and signing into law of the Financial Reporting Council

Bill which has since been passed to law now been referred to as Financial Reporting Council

of Nigeria Act, 2011. The report also recommended adequate capacity for the regulations,

compliance and enforcement of IFRS in Nigeria.

In Nigeria, all the major sectors of the economy have started implementing the standard to

comply with what is obtainable anywhere in the world. Since 2009, the regulators of financial

sector in Nigeria have advocated full compliance to international standard in order to

compete globally. Financial institutions and Insurance sector are among institutions that are

complying fully with due diligence, international accounting requirements, full disclosure of

their financials and global comparability for stakeholders. First Bank Nigeria Plc (FBN)

adopted International Financial Reporting Standards (IFRS) in the preparation of their

financial statement so also are banks like Guaranty Trust Bank Plc and Access Bank Plc who

currently use IFRS for the presentation of their financial statements. According to First Bank
of Nigeria Annual Report and Accounts for 2011, the notes to the financial statements under

the Statement of significant accounting policies under the basis of consolidation under

Subsidiaries the annual reports states “The acquisition method is used to account for business

combinations. The cost of an acquisition is measured as the fair value of the assets given,

equity instruments issued and liabilities incurred or assumed at the date of exchange, plus

costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and

contingent liabilities assumed in a business combination are measured initially at their fair

values at acquisition date, irrespective of the extent of any non-controlling interest.” The fair

value measurement is been put to use as recommended by the IFRS. Also, Insurance sector is

not left behind as stated in the Annual Report of PRESTIGE ASSURANCE PLC notes to

Financial Statements. The report stated that; the financial statements have been prepared in

accordance with International Financial Reporting Standards (IFRS) as issued by the

International Accounting Standards Board (The IASB). In the company basis of

measurement, the financial statements have been prepared on the historical cost basis except

as detailed below:

i). financial instruments at fair value through profit or loss are measured at fair value,

ii) available-for-sale financial assets are measured at fair value in compliance to the

worldwide standard.

From the above analysis, we can see that corporate organisation in Nigeria are complying

with the adoption and most especially the roadmap adoption as initiated by the committee

recommendation.

IFRS 13 - Fair Value Measurement to Tax Authority


According to Information circular issued in Nigeria (FIRS, 2012) in line with section 8 of

FIRS (Establishment) Act 2007, the tax implications of the adoption of the Standard. All

gains and losses that may arise from fair value measurement shall be disregarded for tax

purposes.

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