IMPACT OF IFRS ADOPTION ON THE QUALITY OF FINANCIAL STATEMENTS OF OIL & GAS EXPLORATION AND PRODUCTION COMPANIES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

For all parties involved in financial reporting (such as accountants, auditors, corporate management, investors, lenders, financial analysts, and regulators) understanding the possible effects of IFRS on the accounting process is essential (Lawal, Oseni, Babajide, Lawal-Adedoyin, & Bonetipin, 2020). Nonetheless, accounting has been referred to as the business language on multiple occasions. This is due to the fact that accounting is concerned with recording, categorizing, condensing, and interpreting economic and other pertinent data about reporting entities so that those who are intended to use it can do so with knowledge. Financial statements are used to inform stakeholders of all stripes about an organization's overall health and current situation (Edirin & Edesiri 2016).

The expectation that the International Financial Reporting Standard (IFRS) will enhance the quality, universality and applicability of financial statements is the foundation for its adoption. Because it establishes both specific and universal accounting standards, the International Financial Reporting Standard is a single set of global accounting standards "based on principles"(Ayopo et al, 2015, Ayopo et al 2016a, Ayopo et al. 2016b; Adetiloye et al, 2016; Aboud & Roberts, 2018). The International Accounting Standards Committee (IASC), which oversees the standards for the International Accounting Standards (IAS), organized the standards' establishment in 1973. The primary goals of the IASC are to guarantee that financial statements can be compared with those of other foreign companies and to regulate, if not completely eliminate, the differences in domestic accounting regulations. Financial statements from companies listed on international stock exchanges can be compared, enabling creditors, shareholders, and investors to make decisions. In April 2001, IASB took the place of IASC, and IASB accepted and proceeded to create all IASs. Even though IAS is no longer being developed, the current standards remain in force until they are adopted or modified by IASB, and the creation of new standards now known as IFRS (DeFond, Gao, Li and Xia (2019).

The IFRS is a single set of high-quality, transparent and comprehensive financial reporting standards and interpretations, developed and maintained by the International Accounting Standards Board (IASB) so that corporations around the globe could employ them to produce their financial statements (Zeff, 2012). The aim of IFRS is to provide investors and other users of financial statements with the ability to compare the financial performance of publicly listed companies on a like-for-like basis with their international peers (IASB, 2015).

In response to the increased globalization of capital markets, there is a greater call for transparency, improved disclosure, and quality accounting practices worldwide (Assenso-Okofo, 2011). As capital becomes highly competitive global commodity, the ability to compete for this commodity requires countries, especially emerging economies, to strengthen their institutions and invigorate the reporting standards that govern their accounting and disclosure practices (Apergis, 2015). Having an international standard is especially important for large companies that have subsidiaries in different countries. Adopting a single set of world-wide standards will simplify accounting procedures by allowing a company to use one reporting language throughout (Apergis, 2015). A single set of accounting standards will also provide investors, financial analysts, auditors and other stakeholders with a cohesive view of finances for effective decision making (Assenso-Okofo, 2011).

One of the main pillars of economic development in Nigeria is the oil and gas industry, which provides the bulk of revenue and foreign exchange contributing to the country’s economy by promoting investment, growth, and development (Umoren & Enang 2015). As relating to any organization in any economy like Nigeria, the quality of accounting and financial data about the organization's performance is necessary before any significant investment can be made in such organization.  When making decisions based on a firm's risk and value assessment, stakeholders who are not part of the management team rely on the information provided by the management in the financial statements. The usefulness and applicability of the information in the financial statement determines its capacity to assist users in making decisions in an efficient and fulfilling manner (Vishnani & Shab 2008).

International accounting systems offer an interesting framework for examining the economic effects of financial reporting because there is significant variation in accounting quality and economic efficiency across nations. For those who use financial statements, comparing pre-transition Nigerian Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standard (IFRS) and identifying the distinctions between the two regimes is crucial (Muhammed, 2014). A shift to IFRS has been found to lead to improvement in quality and cross-national/global comparability in financial statements, spur international business growth, encourage internal investment and increase capital flows into the nation, and provide investors with better information about investment opportunities than financial statements prepared under different set of national accounting standards. Bridging standards as it happened in pre-adoption of IFRS was not a perfect solution to disparity in financial statements’ quality and comparability as this was highly susceptible to human judgement and errors.  Having and adopting same accounting principles in the preparation and presentation of financial statements provide level playing grounds and eliminate doubts in quality and comparability across nations. Thus Global informed, untainted, sound and informed decision making process based on financial statement prepared around the world is enhanced.  Furthermore, IFRS is based on principles rather than rules.

Proponents of IFRS as an international standard maintain that the cost of implementing IFRS could be offset by the potential for compliance to improve credit ratings (Paisey, 2008). In 2005 many companies in the EU where required to issue their financial statements based on the IFRS for the first time. Dunne et al. (2008) argued that move to IFRS for many listed companies in Europe and elsewhere has been the biggest change to corporate financial reporting of recent times. The process has not been without problems but the ultimate aim of the policy shift is increased comparability and international harmonisation of financial reporting.

In Nigeria, the Federal Executive Council (FEC) On 28 July 2010, approved January 1, 2012 as the effective date for the convergence of Nigerian Statement of Accounting Standards (SAS) or Nigerian GAAP (NG-GAAP) with the IFRS. The adoption of IFRS in Nigeria is aimed at promoting confidence in corporate reporting and governance in Nigeria(Adoption Roadmap Committee, 2010). The adoption is part of the Nigerian Governments ‘policy reforms aimed at propelling the country among the top twenty nations in the world with a projected GDP of about $900billion by the year 2020 (Vision 20:2020). According to the IFRS adoption roadmap (Adoption Roadmap, 2010), the transition from GAAP to IFRS is proposed in three phases over a three -year period. In phase one, all public listed entities and significant public interest entities are expected to transit to IFRS by January 1, 2012. By thispronouncement, any entity that starts preparation for transiting would need to convert its closing balances at December 2010 to IFRS-based figures which then becomes the opening balances as at January 1, 2011 for IFRS-based financial statements as at December 31, 2011. This provides opening balances for January 1, 2012 which is the first IFRS full financial statement as at December 31, 2012 (with 2011 as comparative year). This implies that all listed companies and significant public interest entities in Nigeria were statutorily required to issue IFRS based financial statements for the year ended December 31, 2012. In phase two of the transition timetable, all other public interest entities were expected to mandatorily adopt IFRS, for statutory purposes, by January 1, 2013. This implies that all other public interest entities in Nigeria were statutorily required to issue IFRS based financial statements for the year ended December 31, 2013. While in phase three, IFRS for SMEs shall mandatorily be adopted as at January 1, 2014. This means that all Small and Medium-sized Entities in Nigeria were statutorily required to issue IFRS based financial statements for the year ended December 31, 2014.

In spite of several benefits of the adoption of a generally accepted practice globally, the adoption of IFRS in the preparation of financial statements in Nigerian firms has been questioned by some stakeholders saying there are disadvantages and challenges of IFRS adoption in Nigeria being a developing country. They believe that it will be difficult to adopt IFRS in the preparation of financial statements in Nigeria being a developing nation. Specifically:

1. Most firms in Nigeria are still lacking in the comparability quality of financial report even though they have adopted IFRS.

2. Relevance principle is still found missing in many Nigerian companies and

3. Lack of clarity is still key factors affecting business entities in Nigeria despite adoption of

IFRS.

There is considerable divergence between the Nigerian Statement of Accounting Standards (SAS) and the International Financial Reporting Standards (IFRS) as noted by the Nigerian Accounting Standards Board (NASB, 2010). Given increased globalization and the increasing role Nigerian Companies play in the global market, the Nigerian Federal Executive Council deemed the best way to support the Nigerian economy and improve the international competitiveness of Nigerian businesses especially the Oil and Gas sector, was to align the SAS with the IFRS. Accordingly, Nigerian reporting entities were required to adopt these globally accepted, high-quality accounting standards by fully converging the Nigerian National Accounting Standards with the IFRS.

As a developing nation, Nigeria may not have enough facilities to tackle the above problems and thus believe that there is no need for IFRS since they apply the GAAP in the preparation presentation of their financial statements.While the local oil and gas E&P companies may be caught in this dilemma same cannot be said of the IOCs. But this belief by and large has been found lacking since the adoption of IFRS in Nigeria. Quality of financial statement and reporting was found to have improved generally across firms in different sectors.

While many studies have been carried out specifically to manufacturing, banking and quoted companies, dearth of research exists specifically in relation to the oil and gas E&P companies. It is based on this background that the present study seeks to determine the impact of IFRS Adoption on the Quality of Financial Statements of Oil & Gas Exploration And Production Companies in Nigeria.

1.2 Statement of the Problem

Divergent findings from earlier studies on the topic regarding IFRS's effect on the calibre of financial reporting in Nigeria have been reported. Many financial and non-financial benefits of adopting IFRS have been argued in recent literature. This is the reason why Daske et al. (2008) argued that IFRS impose a more comprehensive and detailed set of disclosure requirements than domestic accounting standards, while Barth et al. (2008) contended that IFRS (and their predecessor IAS) constrain managerial discretion. One could argue that IFRS will enhance accounting quality and lead to better financial reporting practices when disclosure is increased and managerial discretion regarding the treatment of accounting transactions is limited. Crucially, proponents of IFRS contend that enhanced comparability is just one of its value-adding features. Nigeria is among the many nations worldwide that have migrated to IFRS compliance. Consequently, investors can now compare and assess companies both inside and outside of industries and nations at a lower cost (Covrig, DeFond, and Hung, 2007). Nigeria was presumably convinced by the benefits of adopting IFRS to join the League of nations that did so in 2012 and now many companies have successfully adopted and implemented IFRS in their reporting.

The eventual implementation of IFRS in the preparation and presentation of the financial statements of listed companies has created a knowledge gap among accounting professionals, policy makers, preparers of financial reports, educators, investors and the general public. Themajor concern is the way in which the standards are applied in the preparation of the financial statements, the prospective changes and overall effects of the adoption of this policy on the financial statements of listed entities. While some of the IFRS provide similar guidance to their counterpart Nigerian GAAP, other standards provide a completely different and specific guidance in the recognition, measurement and classification of assets, liabilities, revenues and expenditures of the listed companies. However, some standards are of significant interest and provide guidance to extractive sector entities in the recognition, measurement and classification of their assets and liabilities.

Researches have shown that the Nigerian financial reporting practices have been impacted by this adoption for different sectors and Nigerian firms generally but it is not clear if same could be said of the oil and gas exploration and development companies. This study therefore is an attempt to provide evidence on the impact of IFRS Adoption on the Quality of Financial Statements of Oil & Gas Exploration and Production Companies in Nigeria.

1.3 Objectives of the Study

The main objective of this study is to examine the impact of IFRS adoption on the quality of financial statements of Oil & Gas Exploration and Production Companies in Nigeria. Specific objectives of the study are;

1. Determine the extent to which IFRS adoption has impacted on the comparability quality of financial report of oil and gas E&P companies in Nigeria
2. Evaluate how IFRS adoption has affected relevance principle of making decision by users of financial report of oil and gas E&P companies in Nigeria
3. Examine the impact of IFRS adoption on the clarity quality through effective communication in oil and gas E&P companies in Nigeria

1.4 Research Questions

In relation to the objectives of the study and research the following questions were answered in this study;

1. To what extent has IFRS adoption impacted on the comparability objective in Nigerian Oil and gas E&P companies?

2. In what way does adoption of IFRS affect relevance principle of making useful decision in Nigerian oil and gas E&P companies?

3. Does IFRS adoption have any effect on the clarity quality through effective communication in Nigerian oil and gas E&P companies?

1.5 Research Hypotheses

The following research hypotheses were tested in this study in relation to the objectives and research questions:

1. H01: There is no significant relationship between IFRS adoption and comparability objective of Nigerian oil and gas E&P companies

2. H02: There is no significant relationship between IFRS adoption and relevance principle of Nigerian oil and gas E&P companies

3. H03: There is no significant relationship between IFRS adoption and clarity quality requirements of Nigerian oil and gas E&P companies

1.6 Significance of the Study

This study will provide a comprehensive document that examines the impact of International Financial Reporting standards on the quality of financial statements of oil and gas E&P companies in Nigeria. It will provide a reference to justify and chronicle the benefits of the adoption of IFRS in financial statement preparation and presentation especially the enhanced comparability quality among other benefits. Users of this research will appreciate that FIRS adoption was not just to comply with regulatory directives but realize the usefulness and benefits.

This study will serve as an available knowledge to researchers to aid further research and expand the knowledge of Accountants in the quality of IFRS on Financial accounts.

1.7 Scope of the Study

        This study is limited to impact of IFRS adoption on the quality of financial statements of Oil & Gas Exploration and Production Companies in Nigeria.

1.8 Operational Definition of Terms

International Financial Reporting Standard (IFRS): International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial statements of public companies.

International Financial Reporting Standard (IFRS) Adoption:International Financial Reporting Standard (IFRS) Adoption is the process of applying the International Financial Reporting Standards (IFRS) as the basis for preparing and presenting financial statements.

Financial Statement:Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.