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EFFECT OF FIRM CHARACTERISTICS ON COMPLIANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARD 7 BY LISTED MANUFACTURING FIRMS IN NIGERIA
1.1 Background to the Study
The dynamic nature of the world financial market has facilitated the use of different financial instruments that include: cash, share, loan debentures,accounts receivable or accounts payable, financial derivatives and commodity derivatives, which include forward contracts, futures, swaps and options (which give the buyer an option to choose whether or not to exercise his rights under the contract). Accounting for financial instruments has recently attracted attention, because of enormous growth in its market and equally the exchange of traded derivatives which enjoyed a high volume of sales, especially for options contract and financial futures. Large financial institutions that engage in the financial instruments transactions have led to a rapid growth of the market and making it to be at the fore front in the global financial dealings (Kirk, 2005).
As the result of harmonization of financial reporting and in deed with the aid of globalization, cross-border transactions and trade become easy. But financial instruments expose firms to financial, economic, and operational risks. Changes in Market conditions or the financial position of the parties to the financial instruments or transactions expose firms to financial and economic risks. These risks are credit risk, interest rate risk, foreign exchange risk, market risk and liquidity risk (Hassan, Sale & Rahman, 2007)
Before the adoption of International Financial Reporting Standard (IFRS) in Nigeria, the financial reporting and accounting practices were guided by the Statement of Accounting Standard (SAS) issued by erstwhile Nigerian Accounting Standard Board (NASB) (Bagudo, Abdul Manaf & Ishak, 2016).SAS 2 was about information to be disclosed in financial
statements, and it described the basis for presentation of a general purpose financial statements, in order to ensure comparability both with the company‟s financial statements of previous period and with the financial statements of other companies. But there is no specific Standard in respect of disclosure requirements of financial instruments under NASB, companies were therefore free to disclose as little or as much as they want, and in practice, they used a wide range of disclosure methods and strategies. Moreover, most companies recorded derivatives at historical cost, which often does not convey a true and fair picture of the risks and rewards faced, due to the complex nature of financial instruments and the role they played.The financial statements of a company will therefore be rendered meaningless by the non-disclosure of a financial instruments that could have a material impact on the Statement of Financial Position or Statement of Comprehensive Income, in some cases turning profits into losses and net asset positions into net liability positions.
Regulatory bodies throughout the world, and the International Accounting Standards Board (IASB) in particular have sought to introduce accounting standard to deal with Financial Instruments disclosure in an attempt to mandate the provision of a minimum level of Financial Instruments related information in companies‟ financial statements. Because investigations had shown that companies were tempted not to publish information about the extent of usage of Financial Instruments on a voluntary disclosure basis (Yasean, Theresa, Suzanne & David, 2016).
To ensure that, financial instruments disclosure provides to the users of financial information with the relevant and reliable information they need to make a sound decision, IFRS 7 was originally issued in August 2005 and applies to accounting period on or before 1 January, 2007 by the International Accounting Standard Board (IASB). The fundamental objectives of
IFRS 7 requirements are to enhance users understanding of the significance of financial instruments in an entity‟s financial position and performance, and equally to enhance understanding the extent of the risk arising from such financial instruments to which the entity is exposed to, during the period and at the reporting date. Therefore, accounting framework has been shaped by IFRS to provide relevant and faithful recognition, measurement, presentation and disclosure requirement relating to transactions and events that are being reflected in the financial statements (Ailmen & Akande, 2012).
The demand for more information on risks has assumed monumental dimensions with the promulgation and subsequent enhancement of the standard. IFRS 7 is applicable to financial and non-financial entities, either an investment funds, private equity funds, real estate funds or investment managers. The extent of disclosure required depends on the extent of the fund use under financial instruments and its exposure to risk. The disclosure requirements are both quantitative and qualitative. The quantitative disclosures are about the figures in the Statement of Financial Position and Income Statement. Qualitative Disclosure on the other hand deals with risk disclosures, this is what takes the disclosures to a new level. The risk disclosures arising from financial instruments under IFRS 7 are given through the eyes of management (management judgment) and should reflect the way management perceives, measures and manages the risks involve.
Nigeria has not been left out in this historic revolution and harmonization of financial reporting. In September, 2010 the IFRS implementation roadmap was officially announced and the process of adopting IFRS was scheduled in three phases: publicly listed and significant public interest entities that comprises: Banking &Insurance sub-sector, petroleum sub-sector, telecommunications andmanufacturing firms as pioneer implementers (Ayuba,
2012; Bala, 2013; Edogbanya & Kamardin, 2014). They were mandated to prepare their financial statements based on IFRS on or before 1st January 2012, that is full IFRS compliant financial statements are required for accounting period to 31 December 2012, while other public interest entities are required to adopt IFRS for statutory purposes on or before 1st January 2013. The third phase requires Small and Medium Sized Entities (SMEs) to adopt IFRS on or before 1st January 2014 (Ailmen & Akande, 2012). Though, this was the initial time line, there was a subsequent deviation from the road map, but the global convergence of IFRS and its adoption in Nigeria has witnessed a remarkable development in the annals of financial reporting and accounting profession at large. (Andrew, 2015).
Nigeria‟s adoption of IFRS for all listed companies generated a lot of issues because the adoption was sudden and without consultation with the relevant key stakeholders such as the practitioners, the regulatory agencies and the academics (Edogbanya & Kamardin, 2014). More so, because of the complexity of the standard and its disclosure requirements, compliance with the standard after adoption were found to be low by some studies. Zango, kamardin & Ishaq (2015) reported a compliance level of 55% and 55.5% in 2012 and 2013 respectively on financial instruments disclosure by listed deposit money banks in Nigeria. Looking at the nature of financial instruments disclosure of IFRS 7 and by reason of the fact that, similar standard has not been issued previously in the Nigerian SAS, it is imperative to conduct a research to examine the level of compliance by listed manufacturing firms in Nigeria with that disclosure requirements.
The relationship between firm characteristics and compliance with IFRS disclosure were reviewed by previous researches (Watson, Shrives, & Marston, 2002; Eng & Mark, 2003; Ali, Ahmed, & Henry, 2004; Fakete, Matis & Lukacs, 2008; Andrew, 2015 among others). It
has shown that levels of corporate disclosures can be explained by many factors. The influential factors/characteristics used to proxy determinants of compliance in the studies are: size, industry type, listing status, gearing/leverage, profitability, ownership ispersion/concentration, auditor type, influence of audit committee and so on and so forth. Though the results and findings of those studies are mixed, they have not reached a consensus on the determinants that influence corporate compliance with IFRS disclosure requirements, but at least they provided an enabling environment where other similar researches can come up.
Profitability for instance, was found to be positively related with IFRS disclosure requirements (Andrew, 2015), but some studies fail to find any statistical relationship with IFRS disclosure requirements (Atanasovski, 2015). In the same vein, some studies have found liquidity to have an adverse relationship with IFRS disclosure, and some studies found a statistical positive relationship between liquidity and IFRS compliance disclosure (Daske, Hail, Leuz, & Verdi, 2013; Andrew, 2015)
Company size, is seen as one of the predominant variable which most of the studies on factors affecting IFRS compliance and corporate disclosure have used, but still the findings are mixed. Some studies found it to be statistically and positively related (Alsaeed, 2006; Al-Shammari, Brown, & Tarca, 2007; Fakete, Matis & Lukacs, 2008; Andrew, 2015 among others), while others have found size not to have any relationship with IFRS compliance (Street & Gray, 2002; Glaum & Street, 2003; Atanasovski, 2015).
Manufacturing activities in Nigeria have significant impact on the nation‟s economy. The sector accounts for about 10% of total GDP annually (NBS report, 2012). It could literally
assumed to have a vast potential for a spot for economic development due to abundant labour force coupled with the agrarian nature of the economy (Ojo & Ololade, 2014). Nevertheless, the sector faces ongoing challenges, including inadequate electricity supply, poor infrastructure and plant maintenance, and heavy dependency on agricultural inputs, which themselves are vulnerable to shocks. This challenges has exposed the sector to engage in the financial instruments transactions, which involve both financial Asset, financial liability and equity instruments. The nature of their transactions and exposure to various types of risks like market risk, currency risk and liquidity risk will inevitably influence their compliance level to disclosure requirements with IFRS 7 financial instruments disclosure.