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IFRS IN NIGERIA AND TAX IMPLICATIONS FOR LISTED COMPANIES
ABSTRACT
This research discusses ifrs in nigeria and tax implications for listed companies. The results of the study indicate that IFRS adoption in Nigeria will have the potential to be beneficial to a wide range of stakeholders. The benefits notwithstanding, there are however, a number of challenges to be faced in the process of adoption of the new standard including the ethical environment in Nigeria. The study recommends among others that a rigorous IFRS capacity building programme should be embarked upon by all regulatory bodies, firms and training institutions in order to provide the needed manpower for IFRS implementation, monitoring and compliance
BACKGROUND OF THE STUDY
The introduction of an acceptable global high – quality financial reporting standards was initiated in 1973 when the international accounting standard committee (IASC) was formed by 16 professional bodies from different countries (such as United States of America, United Kingdom, France, Canada, Germany, Australia, Japan, Netherlands and Mexico) all over the world (Garuba and Donwa, 2011). This body was properly recognized in 2001 into the International Accounting Standards Board (IASB), and as well has developed accounting standards and related interpretations jointly referred to as the International Financial Reporting Standards (IFRS) (Ezeani and Oladele, 2012).
The dominance of IFRS further improved in September 2002, when the United States Financial Accounting Standard Board (FASB) and IASC under took to work closely based on their agreement to develop high quality compatible accounting standards that could be adopted for both domestic and cross border financial reporting. These bodies so far achieved their objectives and are far advanced in the IFRS – US Generally Accepted Accounting Principles (GAAP), convergence. Although, many developing countries who do not want to be left behind took a cue from the world major economics to either adapt, adopt or converge the IFRS. Different countries on the other hand use different approaches in adopting IFRS based on their need and ability to adopt (Azobi, 2010).
As part of plans to meet international standards, the Federal Government has disclosed that new accounting system, the international financial reporting standard (IFRS) will (Umoru and Ismail, 2010) take off in Nigeria on 1st January, 2012. In Nigeria, the government has taken its stand to involve all stake holders including institutions before it finally decided to adopt the IFRS on a gradual basis. According to Ezeokoli (2001) as cited by Ejike (2012), financial reporting has involved the full set of relationship between the company’s board, its management, its shareholders, and other stakeholders, including institutions (Universities) and the community in which it is located.
The first move towards accounting standards convergence was the proposal to create the Accountants International Study Group (AISG) by the professional accountancy bodies in Canada, the United Kingdom and the United States in 1966. This was formed in order to develop comparative studies of accounting and auditing practices in the three nations. The AISG was eventually created in 1967. It published 20 studies until it was disbanded in 1977. Sir Henry Benson put forward the proposal for the setting up of the International Accounting Standard Committee (IASC) at the 40th World Congress of Accountants in Sydney in 1972. After discussions and signature of approval by the three AISG countries and representatives of the professional accountancy bodies in Australia, France, Germany, Japan, Mexico and the Netherlands, the IASC was established in 1973. Sir Henry Benson was the first elected Chairman while Paul Rosenfield was the first secretary of the IASC. By the beginning of the 21st century in only one of the nine original IASC countries (Germany) did even a relatively small number of listed companies used IASs to report to domestic Investors.
The primary goal of IASC formation was to develop a single set of high quality International Accounting Standards (IASs) to replace national standards. Between 1973 and 2001, the IASC issued 41 standards or IASs before it was replaced by the International Accounting Standards Board (IASB). All listed companies in France, Germany, the Netherlands and the UK and other 21 countries were mandated by the European commission to adopt IASs or the International Financial Reporting Standards (IFRS) from 2005.The Australian government and standard setter had put up an adoption policy of IAS by 2005.The US roadmap for adoption is 2014-2016. Canada and Japan are also considering convergence with IFRS.
A Memorandum of Understanding (MOU) was agreed between the United States Financial Accounting Standard Board (FASB) and the International Accounting Standard Board (IASB), towards the convergence of US GAAP and the IFRS in 2002. In the Norwalk Agreement, both the FASB and IASB pledged their joint commitment towards the development of high quality, compatible accounting standards for both domestic and cross border financial reporting. It is argued that changes made in the US GAAP can be expected to influence the international environment (Tarca, 2004). Gannon & Ashwal (2004) argue that the convergence efforts of the FASB and the IASB already have changed U.S. GAAP and more effects are expected as the efforts to narrow the differences between the IFRS and US GAAP continue.
Ajibade (2011) disclosed that in1973, the International Accounting Standard Committee (IASC), the professional accounting bodies of major countries comprising UK, Ireland, United States (US), Australia, Canada, France, Germany, Japan, Mexico, Netherlands agreed to develop a uniform set of accounting principles that would be applicable globally and supersede the International Accounting Standards (IAS) which allowed for different treatments of transactions and events making comparative analysis difficult. Membership of IASC expanded to 140 professional bodies including the International Federation of Accountants (IFAC) under which Nigeria belongs. Because of globalization and to address comparability issues, IASC was restructured leading to the creation of International Accounting Standard Board (IASB) that issues IFRS.
STATEMENT OF THE PROBLEM
Presently, GAAPs are significantly wearing out and becoming obsolete therefore making financial reports difficult to be compared with Nigeria in adopting IFRS, Fowokan (2011). The reasons for this include:
- Difficulties in comparing financial statements globally.
- Difficulties in consolidating financial statement of a group companies.
- High cost of preparing and presenting group financial statements.
- High cost of accessing capital in the foreign capital market
- Inability of the users of financial statements to comprehend very well, the information in multinational company’s financial reports.
- Decline in the inflow of the foreign direct investment in Nigeria.
- Unattractive and Uncompetitive capital market because of lack of quality financial information due to poor local standards in reporting financial statement.
On the international front, the World Bank, the International Monetary Fund (IMF), the G8, the G7 Finance Ministers and Central Bank Governors, International Organization of Securities Commissions (IOSCO), Basel Committee on Banking Supervision, the United Nations (UN) and the Organization for Economic Co-operation and Development (OECD) have publicly recommended the adoption of a single set of global accounting standards or the IAS. The US SEC Concept released in 2000 on the International Accounting Standards also encouraged the convergence towards a high quality global financial reporting framework internationally that will enhance the vitality of capital markets. The European Commission saw in 2002 a common set of accounting standards as a critical pillar in building a united capital market in Europe (Mc Creevy, 2006). On the national level many government and tax authorities want a global accounting standards to regulate and tax businesses that operate within their countries. In Nigeria, besides the government’s readiness, the Nigerian Accounting Standards Board (NASB) now the Financial Reporting Council (FRC), Nigerian Stock Exchange, (NSE) and Central Bank of Nigeria (CBN) were among the major agents for IFRS adoption in 2012.
JUSTIFICATION OF THE STUDY
According to Nyor, T. (2012) the challenges of implementing IFRS in Nigeria includes:
The experiences of deposit money banks in Nigeria that were mandated to adopt IFRS in 2010 show that there are a lot of difficulties in converging to IFRS. They include cost, training and education, differences between local standards (Statement of Accounting Standards; SAS) and IFRS, software problems etc.
Converging to IFRS has a huge cost outlay which include the cost of training personnel to understand the new global standards, cost of acquiring new accounting packages that are needed for the implementation, cost of discarding former accounting packages that are not compatible with IFRS. Cost is the price tag of the forgone SAS to adopt the new IFRS. In this case, it includes the cost of starting new invention (IFRS) and abandonment of the former (SASs).
Training and educating personnel and management saddled with the responsibility of preparing financial statement compliant to IFRS implementation is another problem that is not only costing the banks but also taking away huge man hours. The banks have to organize in-house training, sponsor staff to attend conferences and seminars, both for the purpose of understanding the new global standards.
Another challenge faced by banks in adopting IFRS is that of changing accounting packages that are not compatible with IFRS and acquiring new ones that can enable IFRS implementation. The challenge faced here is not only in terms of cost but training personnel to use new packages.
Differences exist between local standards (SAS) and IFRS, which constitute another challenge that is being faced in the process of converging to IFRS by Nigerian banks. IFRS is less prescriptive than SAS. An example is SAS 10- Accounting by Banks. Some standards in IFRS differ considerably from the local GAAP. Besides, IFRS has more accounting policy choices and may be inconsistent with local legislations of Companies and Allied Matters Act (CAMA) 1990 and Banks and Other Financial Institutions Act (BOFIA) 1991. In addition, IFRS demands more disclosure requirements than SAS and also differ in application and interpretation. Implementation of IFRS has increased the need within the organization to gather analyze and report more data for compliance.
LITERATURE REVIEW
Basically, a country’s accounting and disclosure system is part of its financial system and more generally its institutional infrastructure. This is geared towards the informational and contracting needs of the key parties in the economy and its role in corporate governance and the capital market. Since the accounting system is complementary to other elements in the institutional framework, a fit between them is likely what result in different accounting system and infrastructural regimes across countries (Obazee, 2007). The institutional framework impacts on the form and content of financial reporting (Zeff, 1972) and the use of international standard (Nobes &Parker,1998, Zarzeski,1996).Stock exchange requirements form part of the institutional framework which impacts on the use of international standards; others are company’s choice of foreign exchange and level of disclosure. Cross-border listing makes reporting with IFRS very necessary for companies listed in stock exchanges under IFRS jurisdictions.
The adoption of IFRS is more than just an accounting exercise. This is because accounting and reporting represents approximately a quarter of conversion efforts. Other areas include system changes for capturing and reporting data, re – appraising the tax cycle (planning, provision, compliance and controversy), aligning of internal and external reporting and ensuring changes in internal audit plans. It is also important to note that the impact of IFRS accounting policies decisions of a parent on the subsidiary, data capture for accounting and management reporting, availability of technical resources, acquisitions and dispositions, executive compensation calculations and the basis of incentive pay, debt covenants and potential impact of IFRS – reported results, etc were considered before arriving at the roadmap. It is hereby recommended that IFRS be adopted in Nigeria. The Roadmap for the adoption the adoption is outline thus;
It is believed that it will be in best interest of the nation to adopt IFRS. A phased transition over a period of Three years is recommended. This is anchored on the understanding that the nation will follow the milestones and timelines as enunciated above and explained hereunder. It is pertinent to state here that the transition within this earliest possible period of effective and meaningful adoption may be derailed if any of the milestones and timelines is ignored. The phases are as follows:
It is believed that it will be in best interest of the nation to adopt IFRS. A phased transition over a period of Three years is recommended. This is anchored on the understanding that the nation will follow the milestones and timelines as enunciated above and explained hereunder. It is pertinent to state here that the transition within this earliest possible period of effective and meaningful adoption may be derailed if any of the milestones and timelines is ignored. The phases are as follows:
Phase 1: Publicly Listed Entities and Significant Public Interest Entities
This means government business entities, all entities that have their equities or debt instruments listed and traded in the public markets (a domestic or foreign Stock Exchange or an over-the- counter markets). Examples of entities meeting these criteria include: Nigerian National Petroleum Corporation (NNPC), banks and insurance companies. Transition date for SPEs begins 2010, with a reporting date of 2012. Transition begins by raising awareness to educate both the users and preparers of IFRS financial statements, followed by planning, training and analyzing the impact of IFRS adoption on people, systems and processes and on business of firms. By the year 2011, SPEs will then identify the key reporting data and prepare IFRS opening Statement of Financial Position (SFP).By the year 2012 SPEs are required prepares quarterly report using IFRS rules, follow audit procedures and investor relations to educate analysts, investors and manage external stakeholders. By the year 2013, SPEs would identify the loopholes in the existing system and processes by ensuring compliance and monitoring.
Phase 2: Other Public Interest Entities
This refers to those entities, other than listed entities (unquoted, private companies) which are of significant public interest because of their nature of business, size, number of employees or their corporate status which requires wide range of stakeholders. Examples of entities meeting these criteria are large not-for-profit entities such as Charities and Pension funds. Transition date for PIEs begins by the year 2011 with a reporting date of 2013. By which period opening SFP and comparative figures are expected to be prepared. By 2013, PIEs are required to prepare quarterly reports using IFRS, audit procedures, and investor communications.
Phase 3: Small and Medium-sized Entities (SMEs)
Small and Medium-sized Entities (SMEs) refers to entities that may not have public accountability and their debt or equity instruments are not traded in a public market: they are not in the process of issuing such instruments for trading in a public market, they do not hold assets in fiduciary capacity for a broad group of outsiders as one of their primary businesses, the amount of their annual turnover is not more than N500 million or such amount as may be fixed by the Corporate Affairs Commission their total assets value is not more than N200 million or such amount as may be fixed by the Corporate Affairs Commission, no Board members are foreigners, no members are a government or a government corporation or agency or its nominee, the directors among them hold not less than 51 percent of its equity share capital.
Entities that do not meet the IFRS for SME’s criteria shall report using Small and Medium-sized Entities Guidelines on Accounting (SMEGA) Level 3 issued by the United Nations Conference on Trade and Development (UNCTAD). Transition date for SMEs begins by 2012 with a reporting date of 2014. SMEs commence transition to IFRS by 2012, preparing opening SFP and comparative figures and investor communications by 2013, adopting IFRS reporting standards, and ensuring compliance and monitoring by 2014.
BENEFITS OF IFRS ADOPTION
It is advocated that adoption of IFRS will lead to: greater transparency and understandability, lower cost of capital to companies and higher share prices (due to greater confidence of investors and transparent information), reduced national standard-setting costs, ease of regulation of securities markets, easier comparability of financial data across borders and assessory investment opportunities, increased credibility of domestic markets to foreign capital providers and potentials foreign merger partners, and to potential lenders of financial statements from companies in less-developed countries. It will also facilitate easier international mobility of professional staffs across national boundaries. For the multinational companies, it will help them to fulfill the disclosure requirement for stock exchanges around the world (Armstrong, Barth, Jagolizer & Riedl , 2007., Covrig, Defond & Hung 2007, Daske et al 2008). Other benefits include: the lower susceptibility to political pressures than national standards, continuation of local implementation guidance for local circumstances and the tendency for accounting standards to be raised to the highest possible quality level throughout the world. (Choi, et al, 1999; Alfredson et al,2004). The net market effect of convergence is a function of two effects. The first is the direct informational effect – whether convergence increases or decreases accounting quality. The second is the expertise acquisition effect or whether investors become experts in foreign accounting, which depends on how costly it is to develop the expertise. Therefore, ex ante net market effect of convergence is uncertain.
Armstrong et al (2007) found that investors expected net benefits to IFRS adoption in Europe associated with increases in information quality, decreases in information asymmetry, more rigorous enforcement of the standards, and convergence. They find:
- An incrementally positive reaction for firms with lower quality pre-adoption information, which is more pronounced in banks, and with higher pre-adoption information asymmetry, consistent with investors expecting net information quality benefits from IFRS adoption.
- An incrementally negative reaction for firms domiciled in code law countries, consistent with investors’ concerns over enforcement of IFRS in those countries and
- A positive reaction to IFRS adoption events for firms with high quality pre-adoption information, consistent with investors expecting net convergence benefits from IFRS adoption.
Gordon (2008) listed the benefits from adaptation of IFRS over the world to include: better financial information for shareholders and regulators, enhanced comparability, improved transparency of results, increased ability to secure cross-border listing, better management of global operations and decreased cost of capital
CONCLUSION
This paper examined the adoption and implementation of International Financial Reporting Standard (IFRS) in Nigeria. The imminent problems associated with conversion from one system to another were discussed. The paper being a review one used secondary data to highlight how Nigeria firms can reap benefits from the adoption of the standards which are now used globally.
The study reveals that Nigerians agree to adopt IFRS but in a gradual manner, in view of the anticipated problems that the adoption may create. Consequently, the study concludes that Nigerian companies should converge to IFRS in view of the fact that it will enhance better accountability and transparency and improve quality of reporting. However, owing to the fact that IFRS being a principle based standards, allows companies to utilize only the methods they wish, thus allowing the financial statements to show only desired results and leading to revenue or profit manipulation and hiding of financial problems in the company, the study recommends that Nigeria should borrow the wisdom of the Germans by making IFRS mandatory only for group accounts of listed companies leaving Nigerian GAAP to still be mandatory for individual company’s accounts of listed companies. Also, IFRS should be optional for group accounts of non-listed companies but prohibited for individual company’s account.
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