Indonesian Journal of Business Finance and Accounting, 1 (1) (2018) XX–XX

Indonesian Journal of
Business Finance and Accounting
Journal homepage: http://thomson.id/index.php/ijbfa

The Impact of International Financial Reporting Standards on Finan-

cial Performance
Adedoyin Isola Lawal1, Yinka D. Olufemi2, IfeOluwa Adewuyi3, Opeyemi Oye Olubukoye4
1
Department of Accounting and Finance, Landmark University, Nigeria
2
Department of Accounting and Finance, Landmark University, Nigeria
3
Department of Accounting and Finance, Landmark University, Nigeria
4
Department of Sociology, Landmark University, Nigeria

Submission Info Abstract

Received 24 XX 201X Globalization, capital market crash and the Enron’s case led the
Revised 25 XX 201X accounting profession to insist on the need for a single set of high
Accepted 2 XX 201X quality reporting standards. International Financial Reporting
Standards (IFRS) were first adopted in 2005 by EU countries
while Nigeria agreed to adopt in 2012. The question is: How does
Keywords IFRS adoption improve the monetary relevance of accounting
information? Several studies have explored the monetary rele-
IFRS vance of IFRS adoption; however, they are based on foreign
financial performance
Nigeria
countries while Nigerian researches do not contain empirical ev-
earnings idence as they are mostly theoretical. This study therefore seeks
book value per share to investigate the effect of IFRS adoption on financial perfor-
mance. The study used correlation research design and data on
Earnings per Share (EPS), Change in Earnings per Share (CEPS),
Book Value per Share (BVPS) and net profit margin. Getting
bearing from the finding of this study, it is realized that the gen-
eral notion of improved value relevance with the adoption of
IFRS has been confirmed. Book values and change in earnings
proved value irrelevant.
© 2018 Thomson Journals. All rights reserved.
1
2 1. Introduction
3
4 IFRS are set of guidelines and rules set by the International Accounting Standard Board
5 (IASB) that companies and organizations can follow when compiling financial statements
6 (Psaroulis, 2011). Since financial information is a medium of communicating financial
7 transactions, it became necessary in different countries that “Accounting standards be
8 harmonized to form a single set of accounting standard, to improve the rate at which
9 investment and credit decisions are taken and aid international comparability of compa-
10 nies” performance both within and outside the reporting countries (Herbert, Tsegba,
11 Ohanele, & Anyahara, 2013); (Asmeri, Alvionita, & Gunardi, 2017); (Honggowati,
12 Rahmawati, Aryani, & Probohudono, 2017); (Khoiruman & Haryanto, 2017).

Corresponding author. Email address: [email protected].

ISSN 2598-6309, eISSN 2598-6295/© 2018 Thomson Journals. All rights reserved.
DOI: XX
 2 Lawal et al./Indonesian Journal of Business Finance and Accounting 1(1) (2018) XX–XX

13 Even though the IFRS has just been recently mandated, it has its root from 1973
14 when professional bodies from Australia, Canada, France, Germany, Japan, Mexico,
15 Netherlands, UK and USA agreed to form an International Accounting Standard Com-
16 mittee (IASC) in order to bridge the gap between national GAAPs of different countries
17 since multinational companies, globalization, international trades, parent and subsidiary
18 companies, cross country investment were becoming prominent. As a result the Interna-
19 tional Accounting Standard (IAS) was developed as a uniform global accounting standard
20 which helps in reducing discrepancies in international accounting principles and reporting
21 standards. For over 2 decades IAS has been in charge of harmonization of accounting
22 practices because Initial efforts focused on harmonization which entailed reducing differ-
23 ences among the accounting principles used in major capital markets around the world.
24 By the 1990s, the notion of harmonization was replaced by the concept of convergence;
25 the development of a single set of high quality International Accounting Standards.
26 In 2001, the IASC was taken over by International Accounting Standard Board
27 (IASB) with an objective to develop global standards and related interpretations that are
28 now collectively known as IFRS. The board adopted the existing IAS and referred to them
29 as IFRS including the new standards. This reorganization became very necessary since
30 accounting is the language of business, then business enterprises cannot continue to speak
31 in different languages to each other while exchanging financial numbers from their inter-
32 national business (Rahmawati, Rispantyo, & Djamaluddin, 2017); (Jones, Wynn, Hillier, &
33 Comfort, 2017), (Adedoyin I. Lawal et al., 2017).
34 With advent of globalization, the world capital market has witnessed rapid expan-
35 sion, diversification and integration which have brought about a shift away from local
36 reporting standards to global standards. In 2005 EU commission issued a legislation to
37 require the use of IASB standards for all listed firms thereby making IFRS mandatory. In
38 response to this, over a Hundred and Fifteen countries have adopted IFRS of which Ni-
39 geria is not an exception.
40 Generally, there are many literatures which focus on relationship of accounting fig-
41 ures and stock valuation. In general, the studies regarding this issue can be classified into
42 event studies and regression studies. Event studies focus on the investors reaction on
43 events and regression studies which focus on accounting figure and their explanatory
44 power on the market measure of value (Barth, 1994); (Adedoyin Isola Lawal, Nwanji,
45 Asaleye, & Ahmed, 2016); (Babajide, Lawal, & Somoye, 2016b); (Burgstahler & Dichev,
46 1997); (Filip & Raffournier, 2010); (Harris & Muller, 1999).
47 Regression study is spitted into returns and price model. The price model investi-
48 gates the impact of accounting information on the market valuation of, rather than return
49 on, equity stock; furthermore, a price model examines the impact of not only earnings but
50 also book value of equity on stock performance. Traditionally, earnings and book values
51 are considered to contribute to value relevance (Babajide, Lawal, & Somoye, 2016a);
52 (Burgstahler & Dichev, 1997). While the return model assumes that earnings have infor-
53 mational linked to future cash flow. In this model stock market returns is regressed on
54 components of earnings or earnings changes components.
55 (Olibe, 2016b) examines and interprets security market response around IFRS-
56 based earnings announcements of UK cross listed firms in the US equity markets so as to
57 know how market operators reacts to IFRS earnings disclosures on a daily basis, the study
58 observed that there exist evidence of significant price and trading of responses on day t =
59 0 and +1. This implies that IFRS earnings news helps to facilitate the price and trading
60 adjustment process. The study further reveals that the immediate price reaction over the
 Lawal et al./Indonesian Journal of Business Finance and Accounting 1(1) (2018) XX–XX 3

61 3 – day announcement window on average is 41.8% for IFRS earning news whereas it is
62 about 71% for US GAAP earnings disclosure. The implication is that IFRS is sufficient
63 to support the production of information that investors are apparently willing to use (see
64 also (Perkins, 2016); (Olibe, 2016a).
65 (Ali, Akbar, & Ormrod, 2016) examined the impact of changes from UK GAAP to
66 IFRS on companies listed on the Alternative Investment Market (AIM) in the UK, using
67 Gray’s partial analysis estimates, and observed that on the average profit reported under
68 the IFRS is quiet higher than those reported under UK GAAP. The gap observed was
69 attributed to usage of assumptions of positive accounting theory which suggests that man-
70 ager of firms would adopts certain accounting methods for self interest.
71 For Bangladesh, (Nurunnabi, 2014) observed that lack of accounting requlatory
72 framework and political influences are hindering the effective implementation of IFRS.
73 For Nepal, (Poudel, Hellmann, & Perera, 2014) provides a systematic analysis of the ac-
74 counting environment as it relates to adoption of IFRS framework. The study based its
75 analysis on the work of accounting ecology framework by Grenon and Wallace (1995) and
76 interviewing and observed that the quest for adoption of IFRS in Nepal is externally im-
77 posed mainly by world powers like Asian Development Bank, International Monetary
78 Fund, World Bank, hence it become problematice to adopt IFRS. The authors further
79 explained that shortage of qualified accountants in Nepal is another key impediment for
80 the success of the implementation of the IFRS in Nepal.
81 (Perera & Chand, 2015) calibrated SME into the IFRS studies by focusing on the
82 impact of IFRS for SMEs by analyzing both the development and implementation process
83 of the standard. The study further applied the framework of decision usefulness theory
84 and the Pecking order model to examine issues related to the development and imple-
85 mentation of IFRS for SMEs. The study observed that IFRS for SMEs have been a chal-
86 lenge for non-publicly accountable entities to adopt and there are several conceptual and
87 practical issues with IFRS and SMEs (see also (Bozkurt, Islamoğ lu, & Öz, 2013);
88 (Parlakkaya, Akmese, & Akmese, 2014).
89 dos Santos et al, (2016) examined the relationship between the adoption of the IFRS
90 and the companies financing structures in a number of emerging economies using a linear
91 hierarchical regression model to analysis database of 150,265 companies from 145 econ-
92 omies for the period 2003-2014. The study observed that the impact of the adoption of
93 IFRS in financing decisions in heterogeneous among companies from different regions
94 and countries, and that the effects is clear when country controls are applied to monitor
95 the legal enforcement and investor safety, such as the quality of the board.
96 (Madah Marzuki & Abdul Wahab, 2016) used a data sample of 1760 firms from the
97 year 2004 to 2008 to examine the impact of IFRS convergence on conditional conserva-
98 tism in Malaysia. The study observed that the IFRS enhances conservatism, and that firms
99 with Bumiputras directors and family firms are more conservative post-IFRS convergence,
100 whereas the reverse is the case for firms with the richest-men connection. The study doc-
101 umented no evience of politically connected firms being conservative post-IFRS conver-
102 gence.
103 Several studies have explored the monetary relevance of IFRS adoption; however,
104 they are based on foreign countries while Nigerian researches do not contain empirical
105 evidence as they are mostly theoretical. This study therefore seeks to investigate the effect
106 of IFRS adoption on financial performance.
107
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108 2. Methods
109
110 This study employs correlational research design in examining IFRS adoption and its im-
111 pact on financial performance in the case study companies. Correlational research design
112 is used for establishing meaningful relationship between variables. Using the correlational
113 research design, the study seeks to determine the impact of IFRS financial information
114 (EPS, DEPS and BVPS) on net profit. Historical data of earning and book value collected
115 from annual report.
116 Historical data of Earnings Per Share (EPS), Net Profit Margin (NPM), change in
117 earnings and Book Value Per Share (BVPS) were collected from published annual report
118 and accounts of all the manufacturing companies in Nigeria listed on the floor the Nige-
119 rian Stock Exchange.
120 The data of EPS, NPM and BVPS were collected for the period of 7years before
121 IFRS adoption and three years after IFRS adoption due to the fact that IFRS was just fully
122 adopted in Nigeria in the year 2012. Data for ten years were collected, that is, from 2004
123 to 2014. Where 2004 to 2011 as pre- IFRS and 2012 to 2014 represents post-IFRS.
124 In order to find the value relevance of IFRS adoption in the companies, EBO model
125 is adopted. EBO model is a price model developed by Edward, Bells and Ohlson in 1995.
126 To be able to conduct the regression analyses, the following models using EBO model
127 have been formulated:
128 NPMit = β1EPSitpre + β2CEPSitpre + β3BVPSitpre + eit … (1)
129 NPMit = β1EPSitpost + β2CEPSitpost + β3BVPSitpost + eit … (2)
130 Where:
131 NPMit = net profit margin of firm i at time t.
132 EPSit = earnings per share of firm i at time t.
133 CEPSit = change in earnings of firm i at time t.
134 BVPSit = book value per share of firm i at time t.
135 eit = other variables that affect net profit.
136 The specification shows that net profit margin is the dependent variable while var-
137 ious combinations of the other variables represent the independent variables.
138 In order to test the four hypotheses postulated in this research, a functional rela-
139 tionship is suggested between EPS, CEPS BVPS and NPM.
140
141 3. Results and Discussion
142
143 The data for this research were extracted from annual reports of sample companies. The
144 data includes EPS, BVPS, CEPS and NPM. For each of the companies, data for ten years
145 were collected that is from 2004 to 2014considering 2004 to 2011 as pre- IFRS while 2012
146 to 2014 represents post-IFRS.
147 The result in Table 1 shows that all the variables are positively skewed apart from
148 EPS and NMP. Furthermore, the excess kurtosis in all the variables apart from ΔEPS is
149 significantly different from zero. Thus, indicating that the variables are not normal except
150 ΔEPS. Some of the results are consistent with the Jarque-Bera tests with asymptotic sig-
151 nificant probabilities of 0.85, 0.64, 0.69, and 0.70 for BVPS, DEPS, EPS, and NMP re-
152 spectively.
153
154
 Lawal et al./Indonesian Journal of Business Finance and Accounting 1(1) (2018) XX–XX 5

155 Table 1 Descriptive Analysis for Pre-IFRS

156
BVPS ΔEPS EPS NMP
Mean 30.44872 1.992857 13.89286 0.143436
Std. Dev. 17.30418 2.092269 4.724901 0.024459
Skewness 0.406411 -0.861190 0.525101 -0.729220
Kurtosis 2.335805 2.799394 1.792707 2.431337
Jarque-Bera 0.321368 0.876994 0.746807 0.714707
Probability 0.851561 0.645005 0.688387 0.699525
157
158 Table 2 Correlation for Pre-IFRS
159
NPM EPS DEPS BVPS
NPM 1.000000 0.737555 0.344674 0.865510
EPS 0.737555 1.000000 0.536223 0.943572
DEPS 0.344674 0.536223 1.000000 0.306981
BVPS 0.865510 0.943572 0.306981 1.000000
160
161 1% increase in NPM will lead to 74% increase in EPS, 1% increase in NPM will
162 lead to 34% increase in DPS, 1% increase in NPM will lead to 86% increase in BVPS. 1%
163 increase in EPS will lead to 73% increase in NPM, 1% increase in EPS will lead to 54%
164 increase in DEPS, 1% increase in EPS will lead to 94% increase in BVPS. 1% increase in
165 DEPS will lead to 34% increase in NPM, 1% increase in DEPS will lead to 53% increase
166 in EPS, 1% increase in DEPS will lead to 30% increase in BVPS. 1% increase in BVPS
167 will lead to 87% increase in NPM, 1% increase in BVPS will lead to 94% increase in EPS,
168 1% increase in BVPS will lead to 30% increase in DEPS.
169 The ADF test equation on the table above shows that all the variables are stationary
170 at first difference when using the unit root test
171 OLS Model According to the specified model which is
172 NPM=β0+β1EPS+β2ΔEPS+β3BVPS
173
174 Table 3 Unit Root Test: Augmented Dickey-Fuller Test for Pre-IFRS
175
Variable ADF Test Statistics Maximum Order of Integration Remarks
Critical Value 5%
NPM -5.315544 -2.082319 1(1) Stationary
EPS -4.199784 -2.082319 1(1) Stationary
DEPS -3.548645 -2.043968 1(1) Stationary
BVPS 5.265335 -2.043968 1(1) Stationary
176
177 NPM= 0.077667+0.016485EPS+3.91E-05DEPS-0.004753
178 According to the analysis it is shown that there is a positive relationship between
179 the independent variable and the dependent variable except for BVPS which has a nega-
180 tive relationship with the net profit. however EPS has a positive relationship with the net
181 profit which is 16.5% that is EPS added to the net profit of the company.
182
183
184
185
186
187
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188 Table 4 Regression Analysis for Pre-IFRS

189
Dependent Variable: NPM
Method: Least Squares
Date: 04/23/16 Time: 01:46
Sample: 2005 2011
Included observations: 7
Variable Coefficient Std. Error t-Statistic Prob.
C 0.077667 0.068824 1.128484 0.3412
EPS 0.016485 0.011738 1.404429 0.2548
DEPS 3.91E-05 0.009224 0.004241 0.9969
BVPS -0.004753 0.002843 -1.672058 0.1931
R-squared 0.654746 Mean dependent var 0.162051
Adjusted R-squared 0.309491 S.D. dependent var 0.033724
S.E. of regression 0.028024 Akaike info criterion -4.015967
Sum squared resid 0.002356 Schwarz criterion -4.046876
Log likelihood 18.05589 Hannan-Quinn criter. -4.397990
F-statistic 1.896415 Durbin-Watson stat 1.653054
Prob(F-statistic) 0.306164
190
191 Table 5 Descriptive Analysis for Post-IFRS
192
BVPS ΔEPS EPS NMP
Mean 49.25057 2.079000 18.00500 0.150755
Std. Dev. 33.64000 2.176748 7.672505 0.023985
Skewness 0.418401 -0.245727 0.221793 -0.919167
Kurtosis 1.706406 2.435030 1.469490 3.099438
Jarque-Bera 0.989009 0.233633 1.058012 1.412234
Probability 0.609873 0.889749 0.589190 0.493557
193
194 The result in table 5 shows that all the variables are positively skewed apart from
195 ΔEPS and NMP. Furthermore the excess kurtosis in all the variables apart from ΔEPS
196 are significantly diff from zero. Thus indicating that the variables are not normal except
197 ΔEPS. Some of the results are consistent with the Jarque-Bera tests with asymptotic sig-
198 nificant probabilities of 0.60, 0.89, 0.59, 0.49 for BVPS, DEPS, EPS, NMP respectively.
199
200 Table 6 Correlation for Post-IFRS
201
NPM EPS DEPS BVPS
NPM 1.000000 0.721751 0.409916 0.735838
EPS 0.721751 1.000000 0.237221 0.980088
DEPS 0.409916 0.237221 1.000000 0.121670
BVPS 0.735838 0.980088 0.121670 1.000000
202
203 1% INCREASE IN NPM WILL LEAD TO 72% INCREASE IN EPS, 1%
204 INCREASE IN NPM WILL LEAD TO 40% INCREASE IN DEPS, 1% increase in
205 NPM will lead to 73% increase in BVPS.
206 1% increase in EPS will lead to 72% increase in NPM, 1% increase in EPS will lead
207 to 23% increase in DEPS, 1% increase in EPS will lead to 98% increase in BVPS.
208 1% increase in DEPS will lead to 40% increase in NPM, 1% increase in DEPS will
209 lead to 24% increase in EPS, 1% increase in DEPS will lead to 12% increase in BVPS.
 Lawal et al./Indonesian Journal of Business Finance and Accounting 1(1) (2018) XX–XX 7

210 1% increase in BVPS will lead to 73% increase in NPM, 1% increase in BVPS will
211 lead to 98% increase in EPS, 1% increase in BVPS will lead to 12% increase in DEPS.
212
213 Table 7 Unit Root Test for Post-IFRS
214
Variable ADF Test Statistics Maximum Order of Integration Remarks
Critical Value 5%
NPM -36.31511 -2.349470 1(1) Stationary
EPS 0.910118 -2,349470 1(1) Stationary
ΔEPS -11.21957 -2.349470 1(1) Stationary
BVPS 0.071850 -2.349470 1(1) Stationary
215
216 The Augmented dickey fuller unit root test shows that all variables in the table are
217 stationary at first difference.
218
219 Table 8 Regression for Post-IFRS
220
Dependent Variable: NPM
Method: Least Squares
Date: 04/25/16 Time: 16:04
Sample: 2005 2014
Included observations: 10
Variable Coefficient Std. Error t-Statistic Prob.
C 0.148195 0.029345 5.050110 0.0023
EPS -0.004670 0.004379 -1.066539 0.3272
DEPS 0.005554 0.003088 1.798884 0.1221
BVPS 0.001525 0.000977 1.560005 0.1698
R-squared 0.702121 Mean dependent var 0.150755
Adjusted R-squared 0.553182 S.D. dependent var 0.023985
S.E. of regression 0.016032 Akaike info criterion -5.139233
Sum squared resid 0.001542 Schwarz criterion -5.018199
Log likelihood 29.69617 Hannan-Quinn criter. -5.272007
F-statistic 4.714141 Durbin-Watson stat 1.690366
Prob(F-statistic) 0.050918

221 NPM=β0+β1EPS+β2ΔEPS+βBVPS
222 NPM=0.418195-0.004670EPS+0.005554ΔEPS+0.001525BVPS
223 According to the model above, eps seems to have a negative effect on npm with
224 46% which means there is a negative relationship between npm and eps respectively. Deps
225 hhas a positive effect on net profit margin with 55% while bvps also has a positive rela-
226 tionship on npm with only 15% meaning there is a positive relationship between the two
227 variables.
228 According to the correlation, there is a relationship between the net profit margin
229 of the company and the earnings per share of the companies in which there Is a relation-
230 ship between international financial reporting standard on their financial position, mean-
231 ing that they have a good reporting standard to make their financial position very high on
232 the economy.
233 According to the analysis above {correlation} which states that as at the time IFRS
234 was adopted the net profit margin in terms of their monetary relevance has affect their
235 financial report in the sense that it makes it more explanatory therefore increasing invest-
236 ment. Therefore, there is a relationship between the adoption IFRS to monetary relevance
237 on their financial report, therefore we accept the null hypothesis and reject the ……
 8 Lawal et al./Indonesian Journal of Business Finance and Accounting 1(1) (2018) XX–XX

238 The analysis above explains that, monetary relevance has affected the financial po-
239 sition of the company through the use of IFRS since the net profit margin has been af-
240 fected by EPS, DEPS, BVPS which changed the financial position of the companies,
241 therefore there is a positive relationship between IFRS and the financial position of the
242 selected companies. Therefore, we accept the null hypothesis and reject the other.
243
244 4. Conclusion
245
246 The inception of IFRS is one of the greatest changes in the framework of accounting
247 internationally. The content of IFRS has been an issue of discourse and argument among
248 scholars over decades most especially on historical cost accounting and financial perfor-
249 mance Whether NGAAP financial information has any impact on changes in net profit
250 has been a major regulatory and academic subject matter in Nigeria. IFRS adoption raised
251 the need to investigate whether IFRS financial information has any impact on the net
252 profit value. This is rather a new aspect in accounting, in Nigeria.
253 So far, relevance of IFRS adoption on financial information has not been delved
254 into in the Nigerian context. Researches in Nigeria are dominated by descriptive research
255 with use of primary sources that are biased and filled with assumptions. This study is
256 interested in the empirical investigation of IFRS adoption and its impact on the financial
257 performance of the organization.
258 The literatures related to this research were reviewed particularly, the concept of
259 financial performance, financial information, IFRS, relevance and reliability, empirical re-
260 views and the clean surplus accounting theory which underpins this study. The theory
261 connects the relationship between earnings, book value and net profit with any other fac-
262 tor that affects returns. Correlational research design was employed and secondary data
263 covering of EPS, DEPS and BVPS were collected from published annual reports of my
264 case study companies the study found that pre IFRS EPS is value relevant while post IFRS
265 EPS is not value relevant. Both Pre and post IFRS CEPS are not value relevant. Also, the
266 BVPS pre and Post IFRS are not value relevant. Finally, the post IFRS aggregate has weak
267 value relevance while pre IFRS aggregate financial information has strong value relevance.
268 A high quality accounting is expected to make financial information to reflect in
269 changes in net profit i.e. explaining a reasonable part of variation in net profit. A change
270 in accounting and financial reporting should mean an improvement over the previously
271 existing standard.
272 In the light of these findings, the study concludes that pre IFRS financial infor-
273 mation is value relevant and post IFRS financial information is also value relevant. The
274 study further concludes that post IFRS financial information is more value relevant.
275 Therefore, accounting information has value relevance and IFRS adoption has impact on
276 the change in net profit. The study then specifically concludes that: 1) EPS before IFRS
277 adoption has positive impact on net profit and as such could be a basis for making market
278 decisions while EPS after IFRS adoption has positive insignificant impact. The EPS be-
279 fore IFRS is value relevant but the EPS after IFRS adoption is not value relevance. 2)
280 CEPS before and after IFRS adoption has no significant impact on net profit and as such
281 they are not value relevant. 3) BVPS before and after IFRS adoption has no significant
282 impact on net profit Thus, BVPS before and after IFRS adoption is not value relevant
283 Getting bearing from the finding of this study, it is realized that the general notion
284 of improved value relevance with the adoption of IFRS has been confirmed. Book values
 Lawal et al./Indonesian Journal of Business Finance and Accounting 1(1) (2018) XX–XX 9

285 and change in earnings proved value irrelevant. It is therefore recommended that man-
286 agement, external auditors and regulators should work together to tighten compliance in
287 the company in order to enhance the impact of IFRS. Enforcement is better than the
288 standard setting itself as rigid regulation and enforcement could bring out the benefit of
289 IFRS.
290
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