EFFECT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS ADOPTION ON FINANCIAL RATIOS OF MANUFACTURING FIRM IN NIGERIA
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EFFECT OF INTERNATIONAL FINANCIAL REPORTING STANDARDS ADOPTION ON FINANCIAL RATIOS OF MANUFACTURING FIRM IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial reporting standards provide a framework that governs how financial information is recorded and presented in financial statements. The adoption of International Financial Reporting Standards (IFRS) has become a global trend aimed at enhancing comparability, reliability, and transparency of financial reports across jurisdictions (Abata, 2015; cited in
EJSIT Journal
). Nigeria, through the Financial Reporting Council of Nigeria (FRCN), adopted IFRS in 2012 for companies listed on the Nigerian Exchange Group (NXG) and other entities to align local accounting practices with globally accepted accounting principles (Odunsi & Ibikunle, 2023;
journals.out.ac.tz
).
The manufacturing sector plays a pivotal role in Nigeria’s economy by contributing to employment generation, industrial growth, and economic diversification. Financial ratios derived from company financial statements are essential tools for evaluating firms’ financial health, profitability, liquidity, efficiency, and solvency (Amaefule, Onyekpere & Kalu, 2018;
ijat.thebrpi.org
). However, the process of transitioning from local Generally Accepted Accounting Principles (GAAP) to IFRS has implications for the calculation and interpretation of key financial ratios, which in turn affects stakeholders’ decisions.
IFRS adoption is expected to improve the quality and comparability of financial information reported by firms, which should theoretically enhance the usefulness of financial ratios. Empirical studies on Nigerian manufacturing firms show mixed impacts of IFRS adoption on financial ratios and overall financial performance. Some research indicates more accurate and reliable financial ratio measures under IFRS (Odunsi & Ibikunle, 2023;
journals.out.ac.tz
), whereas other studies report negligible or even negative effects on certain performance metrics (Olola Olayeye, 2023;
ijep.dz
).
1.2 Statement of the Problem
Despite the mandatory adoption of IFRS in Nigeria, there remain concerns regarding its actual effect on the financial ratios of manufacturing firms. Some studies suggest that changes arising from IFRS adoption have not significantly altered key financial ratios such as profitability, liquidity and leverage in the Nigerian manufacturing sector (European Journal of Science, Innovation and Technology, 2025;
EJSIT Journal
). Conversely, evidence from other research indicates that IFRS compliance can improve reporting quality and financial performance indicators (Odunsi & Ibikunle, 2023;
journals.out.ac.tz
). This divergence raises critical questions about whether IFRS adoption has genuinely enhanced financial ratio outcomes or whether contextual challenges in implementation have limited its impact.
1.3 Research Objectives
The main objective of this study is to examine the effect of IFRS adoption on financial ratios of manufacturing firms in Nigeria.
Specifically, the study aims to:
Evaluate the impact of IFRS adoption on profitability ratios (e.g., Return on Assets, Return on Equity).
Assess how IFRS adoption influences liquidity ratios.
Determine the effect of IFRS adoption on leverage ratios of manufacturing firms.
1.4 Research Questions
This study seeks to answer the following questions:
What is the effect of IFRS adoption on profitability ratios of manufacturing firms in Nigeria?
How does IFRS adoption affect liquidity ratios of these firms?
What influence does IFRS adoption have on leverage ratios in the manufacturing sector?
1.5 Research Hypotheses
The study will test the following hypotheses:
H₀₁: IFRS adoption has no significant effect on the profitability ratios of manufacturing firms in Nigeria.
H₀₂: IFRS adoption does not significantly influence the liquidity ratios of manufacturing firms.
H₀₃: IFRS adoption has no significant effect on the leverage ratios of manufacturing firms.
1.6 Significance of the Study
This study contributes to academic discourse by providing empirical evidence on how IFRS adoption affects financial ratios in the Nigerian manufacturing sector. The results will benefit accountants, auditors, financial analysts, regulators, and investors by offering insights into how accounting standard reform influences key performance measures. Furthermore, the findings may support policy refinement by the Financial Reporting Council of Nigeria to enhance compliance and financial reporting quality.
1.7 Scope of the Study
The scope of this research is limited to manufacturing firms listed on the Nigerian Exchange Group (NXG). It covers the period from the pre-IFRS adoption era to the post-adoption era, allowing comparison of financial ratios before and after compliance with IFRS requirements.
1.8 Operational Definition of Terms
IFRS Adoption: The process by which firms transition their financial reporting to comply with International Financial Reporting Standards.
Financial Ratios: Quantitative measures derived from financial statements used to assess profitability, liquidity, solvency, and efficiency.
Manufacturing Firms: Companies engaged in the production of goods listed on the Nigerian Exchange Group.
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