1.1 BACKGROUND TO THE STUDY
Business organizations have always existed since time immemorial. A business organization can be referred to as a firm or an enterprise which is legally recognized and established to provide goods or render services to its customers in exchange for a reasonable consideration/return which in most cases are monetary/ financial returns i.e. money. There are various types of business organizations and they exist in numerous forms. A business organization may differ from another based on certain parameters which includes; Ownership/Membership, Capital requirements, Liability status, Legal status, Basic objectives, Publicity requirements, Legal requirements etc. The different types of business organizations available are as follows:
|(i)||Sole Proprietorship||(v) Companies limited by guarantee|
|(ii)||Partnership||(vi) Unlimited Liability companies|
|(iii)||Private Limited Liability companies||(vii) Joint stock companies etc|
- Public Limited Liability companies
All these business organizations are required to keep a track record of all activities that takes place in the organization from time to time, both financial and/or otherwise. It is mandatory and important for all these business organizations to keep financial records of their day to day business activities and all these should be posted to the appropriate books of account. All these daily postings are summed up at the end of the month or year after the necessary adjustments had been taken care of and then used in the preparation of a company’s financial statements. Section 331 and 332 of the companies and Allied Matters Act (CAMA) CAP C20 LFN 2004 provides that “all business organizations must keep accounting records in relation to cash received and expended, assets and liabilities,
business transactions, stock at the end of the year etc” which are used to prepare a company’s financial statements. A company’s financial statement comprises of the balance sheet/ statement of equity, profit and loss account/income statement, cash flow statement, value Added statement, five (5) years financial summary, Directors’ report, Auditors’ report, Notes on the account etc.
According to Section 354 of CAMA CAP C20 LFN 2004, all companies incorporated under the Act are expected to publish their audited financial statements in at least two (2) national dailies. Section 335 of CAMA also provides that these financial statements must be prepared in accordance with certain relevant standards.
In Nigeria, all companies are expected to prepare their financial statements in compliance with the accounting standards laid down in the Statement of Accounting Standards (SAS) issued by the Nigerian Accounting Standard Board (NASB). The NASB is saddled with the following responsibilities:
- Developing and publishing accounting standards to be observed in the preparation and presentation of financial statements.
- Promoting and enforcing compliance with accounting standards developed or reviewed by the board.
- Providing and imposing penalties and sanctions for non-compliance with the tenets and provisions.
Also, other accounting standards that are followed in the preparation of a company’s financial statements are the International Accounting Standards (IAS) issued by the International Accounting Standard Committee (IASC). The objectives of IASC/ IASB are as follow:
- To develop in the public interest a single set of high quality, understandable and enforceable global accounting standards that requires high quality, transparent and comparable information in the financial statements of organizations.
- To work generally for the improvement and harmonization of regulations, accounting standards and all the procedures necessary to present reliable, dependable and relevant financial statements.
- To promote the use and rigorous application of those standards.
- To ensure the convergence of both national (local) and international accounting standards to high quality solution and pragmatic comparability.
Other accounting standards complied with in preparing companies’ financial statements are the standards set out in the Statement of Standard Accounting Practices (SSAP).
In a bid to ensure homogeneity and harmonization in the preparation of financial statements and to reduce discrepancies and improve comparability of financial statements, the IASB introduced a new set of standards known as the International Financial Reporting Standards (IFRS). IFRS are principles-based standards, interpretations and the framework adopted by the IASB. IFRS are the accounting rules issued by the IASB and were developed in public interest as a single set of high quality, transparent, comparable and enforceable global accounting standards.
They are internationally recognized principles of financial disclosure expected to guide business organizations in the preparation of their financial statements. They are to be adhered to in all countries of the world ranging from the countries in North America to South America up to Europe down to Africa cutting across Asia as well as Australia. IFRS are sets of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are sometimes confused with IAS which are the older standards that IFRS replaced (IAS were issued between 1973 and 2001). IFRS are the revised version of IAS.
IFRS comprises of the following:
- International Financial Reporting Standards (IFRS)- standards issued after 2001
- International Accounting standards– standards issued before 2001
- Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC)– issued under the auspices of IASB after 2001
- Standing Interpretations Committee (SIC) – interpretations issued under the auspices of IASC before 2001
- Conceptual framework for the preparation and presentation of financial statements (2010)
IFRS have been adopted and have become the mandatory financial reporting standards in 70 economies including: Australia; The European Union; Hong Kong, China; Malaysia; New Zealand; Singapore; South Africa etc. They have also been adopted by International organizations such as the World Bank, the World Trade Organization, and the International Organization of Securities Commission (IOSCO). Nigeria is recently taking steps to align all corporate reports to the IFRS as a means of enhancing full disclosure and strengthening stakeholders’ confidence. The Securities and Exchange Commission (SEC) has directed all companies that are listed on the Nigerian Stock Exchange (NSE) to adopt the IFRS by January 2012.
IFRS standards are generally applicable to revenue-earning legal entities (regardless of whether or not they are state owned). These newly introduced standards are put in place for various reasons and have a lot of benefits both to the business organizations and the stakeholders in these business organizations as well as the economy at large. One of the benefits of IFRS is what this research study is focusing on i.e. its role in ensuring full disclosure of relevant information by business organizations. The IFRS has a big role to play in ensuring that the information available in the financial statements of companies are relevant enough so as to ensure accurate decision making by the management of business organizations and the stakeholders in these organizations.
1.2 STATEMENT OF THE PROBLEM
Business organizations in the country and other countries of the world prepare their financial statements in accordance with several accounting standards. The companies incorporated in Nigeria comply with the accounting standards laid down in the SAS in the preparation of their financial statements. Though there is no specified format for the preparation of financial statements, the requirements of these standards are somewhat similar but not all the same. This tends to have an effect on the extent of disclosure of relevant information by business organizations.
Many business organizations in Nigeria are always accused of partial or non-disclosure of relevant information in their financial statements, thereby causing several uproars and debates among the stakeholders. Various standard setters, auditors, preparers and users of financial statements have carried out several research studies on the causes of these partial or non-disclosure without proffering lasting solutions to them. Therefore, this study will look into proffering solutions to the problem of none or partial disclosure of relevant information in the financial statements of business organizations by examining the role of IFRS in ensuring full disclosure.
1.3 OBJECTIVES OF THE STUDY
The general objective of this research study is to consider the role played by IFRS in ensuring full disclosure of relevant information in the financial statements of business organizations. The specific objectives of the study are as follows:
- To look into the various accounting standards set out under the IFRS and their disclosure requirements
- To examine the accounts/statements that are required to be prepared by business organizations and their contents.
- To consider the factors affecting the disclosure of relevant information by business organizations.
- To examine the effect of full disclosure of relevant information on the decision making of stakeholders.
- To consider the other benefits of adopting IFRS.
1.4 SIGNIFICANCE OF THE STUDY
This research study has a lot of benefits by providing information that can significantly improve the disclosure level of business organizations. The study will look into the extent of disclosure of business organizations and enlighten the various stakeholders on the role played by IFRS in ensuring full disclosure of relevant information, thereby encouraging the adoption of IFRS.
1.5 RESEARCH QUESTIONS
The following research questions shall be answered in the course of this research study and shall serve as guide to the study.
- How does the IFRS ensure full disclosure of relevant information?
- What are the various standards under the IFRS and what are their disclosure requirements.
- What accounts/statements are required to be prepared under the IFRS and what are their contents?
- What are the factors that determine the level of disclosures by business organizations?
- How does full disclosure of relevant information impact decision making?
- What are the other benefits of IFRS?
1.6 RESEARCH HYPOTHESES
The following hypothesis has been formulated and shall be tested in this research study.
Ho- The IFRS does not ensure full disclosure of relevant information by business organizations.
Hi- The IFRS ensures full disclosure of relevant information by business organizations.
Ho- Full disclosure of relevant information does not aid the decision making of stakeholders.
Hi- Full disclosure of relevant information aids the decision making of stakeholders.
Ho- There is no need for the adoption of IFRS by companies in the preparation and presentation of their financial statements.
Hi- There is a great need for the adoption of IFRS by companies in the preparation and presentation of their financial statements.
1.7 SCOPE OF THE STUDY
This research study focused extensively on the role of IFRS in ensuring full disclosure of relevant information by business organizations. It considered the disclosure requirements of the various accounting standards set out under IFRS. It examined the level of disclosure of relevant information by business organizations taking Skye Bank Plc as a case study but was limited to Oyo, Lautech and Ogbomosho branches of the bank but the results and findings of this study will be valid enough to be used for generalization to other branches of Skye Bank Plc and even useful to other business organizations.
1.8 LIMITATIONS OF THE STUDY
This study was exposed to certain limitations such as the volume and contents of materials available on the internet, various publications and all other primary and secondary sources. It was also limited by the willingness of respondents to answer the questionnaires that were distributed to them truthfully. The study was also limited by the time available to carry out the study and also the costs incurred in conducting the research.
1.9 DEFINITION OF TERMS AND CONCEPTS
Accounting Standards: These are written policy documents issued by expert accounting bodies or by government or other regulatory bodies, governing the aspect of recognition, measurement, treatment, presentation and disclosure of accounting transactions in the financial statements.
Stakeholders: These are the group of people who have interest directly or indirectly in the operations of business organizations, such as; shareholders, debtors, creditors, management etc.
Full Disclosure: This is the appearance of all quantitative and qualitative economic information which are relating to a business organization in the annual reports.
Relevant Information: This refers to information contained in the financial statements that are timely, accurate, factual and consistent and which are also material and fundamental for decision making.
Convergence: This refers to the process of narrowing the differences between the IFRS and the accounting standards of countries that retain their own standards.
Mandatory Disclosure: This refers to the information companies are obliged/mandated to disclose in their financial statements by the accounting standards setting body or by Law.
Voluntary Disclosure: This refers to the discretionary/willing release of financial information over and above the mandatory disclosure. These are not mandated for disclosure by the Law but are based on the management’s decision to disclose them.
Prospective Application: This is applying accounting policies to transactions, other events and conditions occurring after the date as at which the policy is changed.
Retrospective Application: This is applying accounting policies to transactions, other events and conditions as if it had always applied.
International Accounting Standards (IASs): A body of accounting standards issued by the International Accounting Standard Committee (IASC) now known as IASB.
International Accounting Board (IASB): It is the international standard setting body responsible for issuing International Financial Reporting Standards.
International Financial Reporting Standards (IFRSs): It is a body of accounting and financial reporting standards promulgated by the IASB; it includes standards and interpretations adopted by the IASB.
Nigerian Accounting Standard Board (NASB): It is the Nigerian Accounting Standard setting body responsible for issuing Statement of Accounting Standards (SASs).
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