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COMPARATIVE VALUE RELEVANCE OF ACCOUNTING INFORMATION FOR CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS IN LISTED FINANCIAL SERVICE FIRMS IN NIGERIA
1.1 Background to the study
Accounting is the measurement, processing and communication of financial information about economic entities. It is a systematic process of providing information about the wealth and the effects of economic events. It reveals profit or loss for a given period, and the value and nature of a firm‘s assets, liabilities and owners‘ equity. In order for accounting information to be useful, it must possess certain qualities – relevance, reliability, comparability and consistency; and meet certain standards (e.g. International Financial Reporting Standard - IFRS). Accounting means different things to different stakeholders and the conceptions held by every user may influence the impact of accounting information on their behaviour. Accounting information is meaningfulif it is relevant. The primary decision-specific qualities that make accounting information useful are relevance and reliability (Barth, Beaver & Landsman,2012).
Value relevance is the ability of the information contained in the financial statement to capture and summarize firm value; explain and reflect stock market measures. Accounting information is measured based on how accounting numbers translate to share price. Investors are guided on the pricing of shares to make investment decisions (Vishnani & Shah, 2008).An indication of relevant accounting information is market reaction at the time of announcement of information observed through the movements in stock prices (Naimah, 2012). The reaction of the stock market to accounting information is dependent on the efficiency of such market. An efficient market is one in which stock prices behaviour reflect publicly available information - this done on a sophisticated manner.
As accounting numbers are available in the financial statements, the share price measurement are based on two perspectives; information perspectives and measurement perspective; information perspective measures the usefulness of accounting to individuals without much emphasis on the structural precision of the relation between accounting data and firm value and measurement perspective; share price movement is based on the degree of volume or price change following the release of the information – this is rooted from theoretical framework of equity valuation model (Ohlson, 1995). The Ohlson model expressed firm value as a function of book value and earnings. The Ohlson model assumes that there is no information asymmetry between managers and investors.
The most important criterion in choosing an accounting measurement method is the decision usefulness of accounting information for users. According to the decision-usefulness theory, the best accounting standards is the one that provides the most helpful financial information to users in their decision process. Equity shareholders require adequate, complete, relevant, comparable, verifiable, timely and understandable information that has high level of information content. Information content is the information about risk conveyed by accounting income numbers. Accounting numbers that is relatedto decision making of investors include; Earnings per share (EPS), Book value per share (BVPS), dividend per share (DPS), cash flowand so on as used in various researches.(Jabbari, Sadeghi & Askari, 2013; Du, 2008; Vijitha & Nimalathasan, 2014)
EPS is the profit attributable to each unit of outstanding ordinary share in a company. EPS is arguably the most important significant single measure of an entity‘s performance that is required to be published in financial statements (Ijeoma, 2015). The objective of presenting the
EPS is to enable the user to assess a company‘s current performance and compare this with that of previous years at a glance.
Book value of the equity represents past performance and current earnings as indicative of future performance. Book value is the total assets minus the total liabilities of a company; the stockholder‘s equity or net assets. Therefore, the book value of equity per share is the book value of common equity per total number of shares outstanding. BVPS is a factor that investors use to determine whether a stock price is undervalued or otherwise. If the BVPS of a firm increase, its investors may view the stock as more valuable, and the stock prices may increase and vice versa. The BVPS is usually different from the market price; it is therefore an indication of what the shareholders will receive had the company been wound up on the date the accounts were published (Musa, 2015).
DPS is the dividend (amount to be divided) declared (or profit ―paid out‖) during a period attributable to each equity share. Companies pay dividends for varying reasons; to rewards investors for risking their money as they are the residual claimant in case of bankruptcy, attract new investors – who will invest in the company at higher share prices. Furthermore, the payment of dividends signals to the investors about the confidence of the managers in the firm‘s future profitability. Also, this reduces the information asymmetry as shareholders have a hint of the financial health of the company through the dividend payment. Investors may consider the EPS figure to be a superior indicator of performance to the DPS figure. This is because the amount of an entity declared as dividend may not necessarily reflect the performance of the entity.
Nonetheless, DPS remains an important investment yardstick for investor – for example in the computation of dividend yield and dividend cover.
Cash flow is the excess of cash revenues over cash outlays in a given period of time (not including non-cash expenses). Cash flows measures are expected to provide value relevant information about the firm‘s growth opportunity or lack of it (Karunarathne & Rajapakse, 2010). It shows the firm‘s ability to cover cash needs internally. Although, there have been controversies about whether cash flow is a good value driver like earnings or dividend.
Some researchers claimed that the most important variable in explaining the stock return is cash flow (Malik & Ali, 2013). However, cash flow as a determinant of stock prices seems industry-specific. The nature of the operations of the financial sector firms is largely based on cash flow. They deal in cash as the inventory as they provide various services and also cash takes a dominant role in the financial statements of these companies and has the cash flow statement dedicated for it. In addition, Du (2008) found that operating cash flow outperformed earnings and dividend in the multiple valuation tests for cash based business.
All the above stated accounting information is presented in the financial statements (either consolidated or separate financial statements). According to IFRS 10, ―consolidated financial statements are the financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.
Also, according to IAS 27, separate financial statements (SFS) contains accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an
entity prepares separate financial statements. SFSs are those presented by a parent (i.e. an investor with control of a subsidiary) or an investor with joint control of, or significant influence over, an investee, in which the investments are accounted for at cost or in accordance with IFRS 9 (Financial Instruments).
Among the users of financial statements, the stockholders of a company are arguably at the height of importance to the company as they have existing investments that generate cash flows for every day operations. Also, if a company is targeting expansion, the expected value will be created by future investment either from the existing shareholders (right issue) or from new (prospective) ones. The information required by shareholders to make timely, effective and efficient decisions that may affect the market value of the firm are available in the financial statement; earnings and dividend from income statement, Book value of equity from the statement of financial position and cash flow from operations from the cash flow statement.
Investors and creditors use financial statements to make predictions, assess risk and evaluate profitability, solvency and management‘s performance. In the annual reports and accounts, the CFS and SFS are presented side by side and these two statements may create confusion and reduce the ability of users to make informed decision. For example, the information from a solvent subsidiary when combined with that of a less solvent parent and/or other subsidiaries may show an averagely solvent group there not showing the actual view of the entire scenario – this also applies when checking for the profitability, riskiness and general health of companies. Therefore, to enhance their ability todecide precisely where to obtain more quality information frombetween the CFS and SFS is key and of great essence so that at a glance all the needed information is seen from a single type of statement.
Nigeria is Africa's most populous nation and second largest economy, as well as one of the largest recipients of foreign direct investment (FDI). Nigeria's financial sector has undergone significant changes in recent years. In the past years, the banking sector went through major consolidation, which reduced the number of banks from 89 to 20 (and now 15) and considerably increased capitalization. However, the global financial crisis posed substantial challenges to Nigerian bank reform efforts. While the initial effects were contained due to low levels of exposure to complex financial instruments, the large swings in oil prices, combined with the resulting depreciation of the naira and a drop in investor confidence led to growing pressures on the sector's health. Market speculation about the quality of some bank balance sheets was evident in the breakdown of the naira interbank market as well as perceptions that some banks were using the Central Bank discount window as an ongoing source of funding. Some banks were heavily involved in margin lending for investments in equity, which subsequently crashed by 70 percent reflecting both domestic and global market developments.
Although, the Nigerian capital markets are not fully developed, the country's Stock Exchange is increasingly active. The Nigerian equity market boomed in 2007 and early 2008 with average return rates of 75 percent but then plunged in the second half of 2008 as oil prices fell and the global financial crisis spread. Reforms, focused on enhance market rules and regulations, promote collective investment schemes and improve shareholder management have however restored some confidence in the market. The investor base continues to be dominated by the financial sector which holds more than 60 percent of securities. Foreign investors are allowed on the bond market but are restricted to government securities with maturities longer than one year, but can also invest in short-term commercial papers and negotiable certificates of deposit, and are subject to a lock-in period of one year for their first investment. Retail investors, for their
part, can access government securities through the intermediary of mutual fund and sub-accounts of primary dealers.The secondary market has increased in liquidity over the years but remains largely dominated by banks and discount houses.The pension fund industry in Nigeria is expanding and 19 firms currently manage pension funds. The secondary market has increased in liquidity over the years but remains largely dominated by banks and discount houses.
There are several investors in the financial sector and itserves as the engine that keeps the Nigerian economy in motion. As at the last day of trading in 2017, it was revealed that the financial services Sector is the most capitalized sector with its market capitalization standing at N4.31trn and contributed 31.62% to Total Market Capitalization. Increase in investment in this sector will lead to improved performance of the economy – it intermediates funds between the surplus and the deficit economic units, thus stimulating and promoting investments and economic growth and development. For informed decisions in investment to occur in the sector, quality information regarding share price and other performance indicators are essential (Umoren & Enang, 2015).