Globalisation, capital market crash and the Enron’scase led the accounting profession to insist on the need for a single set of high quality reporting standards. International Financial Reporting Standards (IFRS) were first adopted in 2005 by EU countries while Nigeria agreed to adopt in 2012. The question is: How does IFRS adoption improve the value relevance of accounting information? Several studies have explored the value relevance of IFRS adoption;however, they are based on foreign countries while Nigerian researches do not contain empirical evidence as they are mostly theoretical. This study therefore seeks to investigate the impact of IFRS adoption on value relevance of financial information of listed Deposit Money Banks (DMBs) in Nigeria.. The study used correlation research design anddata on Earnings per Share (EPS), Change in Earnings per Share (CEPS), Book Value per Share (BVPS)and share price (SP) were sourced from published annual reports of listed banks and cashcraft asset management. Moreover, Edwards Bells and Olhson (1995) model was adopted to conduct a pre (2006-2009) and post (2010-2013) IFRS analyses on seven (7) listed banks. Using the Generalized Least Square (GLS) the study documented that: Pre- IFRS financial information is value relevant; post IFRS financial information has very weak value relevance and post IFRS financial information has no relative value relevance over pre- IFRS financial information. The study therefore, recommends a need for strong enforcement effort, rigorous IFRS training and good corporate governance.

Table of Contents

Title Page Declaration Certification Dedication Acknowledgements Abstract

Table of Contents List of Tables

List of Appendices

x i ii iii iv v vii




1.1 Background to the Study 1

1.2 Statement of the Problem 6

1.3 Objectives of the Study 8

1.4 Hypotheses of the Study 8

1.5 Scope of the Study 9

1.6 Significance of the Study 9


2.1 Introduction 11

2.2 Concept of Value Relevance 11

2.3 Concept of  Relevance and Reliability 16

2.4International Financial Reporting Standard: Concept and Overview21

2.5 Financial Information : Earnings and Book value 32

2.6 Empirical Research on Value Relevance and Financial Information 34

2.7 Overview and Structure of Nigerian Banking Industry 50

2.8 Theoretical Framework 52

2.9 Summary 56


3.1 Introduction 56

3.2 Research Design 58

3.3 Population and Sample 58

3.4 Source and Method of Data Collection 59

3.5 Data Analysis Techniques59

3.6 Variables measurement60

3.7 Model Specification 62

3.8 Summary 62



Data Presentation63

Pre IFRS Results Presentation and Discussion of Findings63

Post IFRS Results Presentation and Discussion of Findings71

Policy Implications of Findings80





Limitations of the Study85



List of Tables

Table Tittle Page  

PreIFRS Descriptive Statistics

Pre IFRS Correlation Matrix65


4.3.3 Pre IFRS Multicollinearity 68

4.3.4 Pre IFRS Random Effect Regression 69

4.4.1 Post IFRS Descriptive Statistics 73

4.4.2 Post IFRS Correlation Matrix 74

Post IFRS Multicollinearity Test

Post IFRS Random Effect Regression

77 76

List of Appendices

Appendix Description Page

Appendix A Population and Sample of study I

Appendix B Pre- IFRS data II

Appendix C Post –IFRS data III

Appendix D Pre IFRS Descriptive Statistics IV

Appendix E Pre IFRS Correlation Matrix V

Appendix F Pre IFRS Multicollinearity Test VI

Appendix G Pre IFRS Heteroskedasticity Test VII

Appendix H Pre Fixed Effect Regression VIII

Appendix I Pre IFRS Random Effect GLS Regression IX

Appendix J Pre Hausman Specification Test X

Appendix K Post IFRS Descriptive Statistics XII

Appendix L Post IFRS Correlation Matrix XIII

Appendix M Post IFRS Multi-collinearity Test XIV

Appendix N Post IFRS Heteroskedasticity Test XV

Appendix O Post IFRS Fixed Effect Regression XVI

Appendix P Post IFRS Random Effect Regression XVII

Appendix Q Post IFRS Hausman Specification Test XVIII


Background to the study

The primary function of accounting is the provision of information necessary for evaluation of past business decision, which consists of current operating profit and realizable cost saving (Edward & Bell, 1961). Financial information is the output of accounting process and should be duly communicated to users to enhance decision making. As such, Bello (2009), opined that corporate organisations use accounting to communicate to all stakeholders about their operating performance and position at a particular time period. However, the role of accounting cannot be over emphasized as Psaroulis (2011) stated that Accounting is a very important aspect in any business operation which involves the measurement and provision of accurate financial information to managers, investors, tax authorities, and other stakeholders to help them make decisions about how they should allocate the resources of a company, organization, or public agency.

Investors are not in a position to directly assess the performance of the company in which they intend to invest as they usually depend on financial statements prepared by the management of the company. Karunarathne & Rajapakse (2011) opined that rational investors use financial reports and disclosures to assess the risk and the value of the firm. Based on this Fisher and Jordan (2005), purported that an overwhelming weight is placed by analyst and investors on information contained in the financial statements of firms because of its vouchsafed as its forms and contents are controlled under variety of rules, regulations and statutes.

There are set of rules and regulations that guide the practice of accounting and reporting in different countries leading Ikpefan & Akande (2012) to state that accounting is business language while financial reporting is for communicating and they are both regulated

by Generally Accepted Accounting Practices (GAAP) which are usually country based. The Nigerian GAAP like other countries has a unique characteristic that has been a subject of argument which is the historical cost accounting. In this regard, Kirkulak and Balsari (2009); Cohen (1982); Kirkman (1974) argued about the irrelevance of historical cost accounting in decision making especially, in the time of unstable price or inflation as it misrepresents firms real position. On another hand, financial reporting inconsistencies has persisted due to varying reporting standards and requirements in different countries and as such posed great challenges to international investors (Pologeorgis, 2013).

In view of the above, the International Accounting Standards Board (IASB) sought a workable solution to alleviate the existing complexity, conflict and confusion created by inconsistency and the lack of streamlined accounting standards in financial reporting (Pologeorgis, 2013). Prior to 2005, all countries were at liberty to choose reporting system that suits them and most countries reported based on historical cost. But with the event of capital market crash and Enrons case which were argued on the basis of irrelevant information produced from historical cost accounting, the need for one quality standard of accounting across the globe then gained ground.

The International Financial Reporting Standards (IFRS) was developed in 2001, launched for adoption in 2005 and the EU countries had voluntarily adopted at that time. According to Ikpefan and Akande (2012), accounting framework has been shaped by IFRS to provide for recognition, measurement, presentation and disclosure requirement relating to transactions and events that are reflected in the financial statements. While Pologeorgis (2013) clearly stated that IFRS as opposed to rule based GAAP, is principle based in that it begins with the objectives of good reporting and then provides guidance on how the specific objective relates to a given situation. IFRS is regarded as a set of high quality accounting standard as compared to national GAAP (Dimos, 2011). Furthermore, Gyasi (2010) noted

that the adoption of IFRS would enhance the quality and credibility of accounting information as its impacts is on internationalisation of economic trade, foreign investment and globalisation of business ventures.

The adoption of IFRS definitely affects many aspects of accounting. In view of this, Delloite (2013) reported that the inception of IFRS has led to the use of a variety of definitions for elements of financial statements like assets, liabilities, equity, income and expenses. It has also resulted in the use of different criteria for the recognition and measurement of items in the financial statements. In addition, Galaen & Stenheim (2010) recognised that the shift to IFRS represents substantial change in recognition and measurement of accounting numbers and it is reasonable to believe that adoption of IFRS will affect the quality of accounting numbers.

Consequently, fair value measurement has been noticed to be one of the most prominent changes in IFRS as Agostino, Drago & Silipo (2009) Put forth that one critical element is that IFRS rely heavily on fair value accounting as opposed to concept of historical cost. Moreover, Christensen and Niklovaev (2009) stated that adoption of fair value will allow for wider use of fair value for non-financial assets. However, it has been criticized as Dimos (2011) noted that the use of fair value in financial reporting is not unanimously accepted based on the argument of unreliable numbers, especially when assets and liabilities are unique and their measurement is based on subjective assumption. Argument in favour of fair value opined by Christensen and Niklolaev (2009) is that commitment to fair value accounting does not favour returns on asset and makes holding of unproductive assets more expensive and when fair value estimates are reliable it improves performance measurement.

According to Khanagha (2011), the value and quality of accounting information are determined by how well it meets the needs of users and that value relevance study is the evaluation of the relationship between accounting information and capital market values.

Value relevance of accounting information has to do with when accounting information can rightly predict the changes in share price that is value relevant information enable investors to make informed decision. The degree of value relevance is a function of the development of accounting regulation, control mechanisms, business cycle, internationalization and economic development and industry structure (Hellstrom, 2005). This accounting must follow development trends and recognise changes that could affect it relevance for decision making especially with the switch over to IFRS which is said to be of high quality.

In this regards, Ojo (2008) observed that the benefits of high quality standards which should be derived from the adoption of IFRS such as relevance, reliability and understandability      will      certainly      ensure      that      users      of      financial information benefit from better decision making as well as restoring the confidence of investors in the aftermath of economic, capital market and financial crises, which have damaged the credibility of audits and financial reporting. Furthermore, IFRS are expected to improve the comparability of financial statements, strengthen corporate transparency and enhance the quality of financial reporting (Herbert, Tsegba, Ohaneles &Anyahara, 2013) .

In studying value relevance of accounting information the earnings of a firm and the book value of equity are the basic accounting numbers that are used in literature to represent accounting information. In confirmation, Talebnia, Valipour & Askari (2011) opined that earnings and book value per share are measures that different individuals, investors and financial analysts use to evaluate the performance of the enterprise. While earnings provide a measure of how the firm‟s resources are currently used, book value provides a measure of the value of the firm‟s resources independent of how the resources are currently used. Earnings can be said to represent income statement while book values represent the balance sheet. IFRS brought about changes in definition, measurement, recognition of income, intangibles and the use of fair value. Consequently, IFRS affects the accounting figure of earnings and

book value of firm. Therefore, there is a great need to investigate if those accounting information are properly reflected in the consequent stock price.

Furthermore, Chalmers, Clinch & Godfrey (2010) are of the opinion that value relevance of book value and earnings is a natural place to look for impact of IFRS adoption on accounting information given the paramount role equity valuation plays in the IFRS conceptual framework. In line with this Aksoy (2008) opined that the relationship between stock price and the accounting variables of companies have been an interesting issue for researchers as well as managers, investors and other stakeholders of firms for several decades and the interests have focused on accounting earnings and its relationship with stock price or returns. This in turn confirms the argument of Beaver (1989) that no other figure in the financial statement receives more attention by the investment community than Earnings per Share (EPS). Therefore, the primary objective of value relevance research is to investigate whether the financial statements released by firms provide high-quality and valuable accounting information that enables users and investors to make informed decisions (Alfaraih & Alanezi, 2011).

The Nigerian banking industry is the most regulated sector in Nigeria economy. It is highly organised as corporate governance is seriously taken into consideration. The particular effect of IFRS on the banking sector is the motivation for carrying out this research in the banking sector. With IFRS financial instruments classification, impairment, recognition, hedge accounting, definition of debt versus equity have changed for banks and they all give a signal of change in the degree of value relevance of financial information presented by banks in Nigeria.

This research therefore, seeks to examine the impact of IFRS adoption on the value relevance of accounting information. This involves making clear the impact of IFRS on earnings, change in earnings and book values of banks in Nigeria and how that impact

promotes value relevance of information provided by listed Deposit Money Banks (DMBs) in Nigeria.

Statement of the problem

Value relevance of accounting information has been a subject of academic debate in the past decades and even presently. It is of great interest to standard setters, investors and researcher since it empirically proves the reflection of accounting information in share prices of firms.

Although, studies on value relevance of GAAP financial information have been embarked on but the results have been inconsistent until the hit of capital market crash and the Enron‟s case. The capital market crash, economic meltdown and the Enron‟s case revealed that firms that were proved to be profit making became insolvent and as such pose a big question as to whether reporting under GAAP is value relevant.

Arising from the economic crises, accounting profession arose to the need of providing value relevant information by introducing a single set accounting standard for global use called IFRS. Empirical works on value relevance and IFRS adoption from foreign countries have produced mixed results that is there is no consensus empirically as to whether accounting information from IFRS adoption are value relevant.

Moreover, it has been realised that empirical works in Nigeria on IFRS adoption and value relevance are not in existence to the best of my knowledge. This is largely owing to the fact that IFRS was adopted in 2012 in Nigeria. Isenmila and Adeyemo (2013) studied the impact of mandatory adoption on institutions using questionnaires while Okafor and Ogiedu (2011) sought to understand the effect, challenges and potential benefits of IFRS adoption by issuing questionnaire and conducting interviews. Conclusively, studies in Nigeria had

focused on theories and forecast of expected impact of IFRS adoption on value relevance of accounting information.

Moreover, the major change that accompanied IFRS is the use of fair value measurement as against historical cost measurement. IFRS 13 defined fair value as the price that would be received to sell an asset in an orderly transaction between market participants at the transaction date. Some scholars have argued that it is more realistic as it gives a fair view of firm book value unlike historical cost.

Furthermore, with particular concern to the banking industry, IFRS has influenced definition, recognition and measurement of intangible assets. This change has direct effect on the earning and book value of firm since intangibles that were capitalised under GAAP are now being expensed in IFRS e.g. research and development cost internal to the firm. Also, intangibles are not capitalised under IFRS unless it has a direct flowing financial benefit. This development gives rise to a need to examine if earnings and book value has improved value relevance.

The interest of standard setters who are interested in the best reporting standard; mixed results in value relevance research; IFRS as a recent phenomenon; argument against fair value; basic changes in measurement, recognition, classification and definition of assets and liabilities; sparse research in Nigeria on IFRS and lack of consensus are the basic issues igniting this study.

However, the introduction of IFRS no doubt has good intention as regards the quality of published accounting information but the questions are: In light of the foregoing, this study raises and intends to provide answers to the following questions:

i. Would IFRS adoption make reported earnings more value relevant?

ii. Would IFRS adoption enhance value relevance of reported book value?

iii. With the adoption of IFRS can users be confident that the published financial information would enhance informed decision?

Objectives of the study

The objectives of this research are to:

i. Examine the value relevance of Pre IFRS financial information (earnings, change in earnings and book values) in DMBs in Nigeria.

ii. Investigate the incremental value relevance of IFRS adoption on financial information (earnings, change in earnings and book values) on DMBs in Nigeria.

iii. Determine the relative value of the post IFRS financial information over the pre IFRS financial information in DMBs in Nigeria.

Hypotheses of the study

Based on the above objectives, the following hypotheses are formulated in null form;

H01: Pre IFRS financial Information has no significant value relevance in the Nigerian DMBs.

H02: Post IFRS financial information has no significant value relevance in the Nigerian DMBs.

H03: There is no significant difference between the value relevance of accounting information of the pre and post IFRS adoption in the DMBs in Nigeria.

Scope of the study

This research work examines the value relevance of accounting information using pre and post IFRS based financial information that is, the ability of accounting information to predict share price before and after adoption of IFRS in Nigeria. The domain of the study is the listed DMBs from 2006 to 2013 and performance variables such as earnings per share (EPS), change in EPS (DEPS) and book value per share (BVPS) as well as value variable were employed. Data for this study were collected from the annual reports of listed Nigerian DMBs banks, as from 2006 to 2013.

Significance of the study

This study contributes to knowledge as IFRS is very recent especially to Nigeria, by increasing awareness about IFRS its concept and challenges and its impact on accounting information. The study will also be significant to managers of firms in Nigeria as it is very imperative to know how the newly introduced IFRS affect earnings, change in earnings and book value of share capital and the anticipated report takes manager into the future reaction of investors and shareholders.

The academia would find this study interesting as it would aid comparisms of the effect of IFRS with that of developed countries that had adopted IFRS before now. It will also provoke empirical researches on IFRS in Nigeria either to confirm or refute the research.

Investors and analyst would find the result of this research to be of great interest to them as their curiosity on how their investment would be affected with adoption of IFRS would be answered and based on it they could also know if IFRS accounting information enhances informed investment decision.

The findings of this research should be important to those involved in   standard setting and monitoring as well as accounting conceptual framework since standard setters are more likely to be interested in studies that suggests that investors could use an accounting number or potential accounting numbers. According to Barth et al (2000), one reason value relevance studies are of interest to the FASB is that such studies can provide insight into relevance and reliability of financial statement amounts, the two primary criteria the FASB uses for choosing among accounting alternatives. Under Statement of Financial Accounting Concepts (SFAC) No. 5, an accounting amount is relevant if it is capable of making a difference to financial statement users‟ decisions; an accounting amount is reliable if it represents what it purports to represent and as such an accounting amount will be value relevant, that is, have a significant relation with share prices, only if the amount reflects information relevant to investors in valuing the firm and is reliable enough to be reflected in share prices.

Finally, the study is timely as it contributes to sparse empirical literature on the impact of IFRS adoption and also to equip readers in the field of accounting on the prospects and challenges of IFRS adoption. More so, considering globalized economy and cross country investment and trades, this research may provide directions for accounting and finance professionals on the differences, effects and benefit of IFRS and how to manage major changes.




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