ASSESSMENT OF COMPLIANCE WITH IFRS AMONG SELECTED NIGERIAN INSURANCE FIRM
Compliance is a state of being in accordance with established guidelines or specifications, it also encompass efforts to ensure that organizations are abiding by both industry regulations and government legislation. Compliance with international financial reporting Standard (IFRS) is a universal phenomenon on insurance Firms listed on the Nigeria Stock Exchange (NSE).Insurance companies has been using IFRS since January 2012. Many countries and regions around the world have different financial reporting and accounting practices, which stem from varying legal, cultural, economic, social and political contexts. Dissimilar financial reporting and accounting practices make it very difficult for users of accounting and financial reports to consolidate such information and make comparisons of firms that are listed in different countries.
International Financial Reporting Standards are set of accounting standards, guidelines, treatments, rules, regulations, policies and procedures established by the International Accounting Standards Board (IASB) for the preparation of financial statement. International Financial Reporting Standards (IFRS) as a basis of preparing financial statements and therefore a means of narrowing the areas of differences in accounting practice as well as improving the comparability, quality and transparency of financial information across nations (UNCTAD, 2008).
However, International harmonization of accounting standards is all about having a unified set of accounting standards worldwide. Since early 1970s, various attempts have been made and are still being made to eliminate or reduce many of the major differences in accounting standards through the process of harmonization. Different national standards prescribe different formats and classification of items in financial statements for reporting purposes. There was a lack of common definitions for key elements and terminologies of financial statements such as assets, liabilities, gains and losses etc. Also there was no agreement on a standard definition of key accounting ratios such as return on capital employed (ROCE) due to the differences in the definition of capital employed. This often let to inconsistencies and distortion of financial information. 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. Different countries, on the other hand, use different approaches in adopting IFRS each according to its need ability.
Consequently, the Nigerian Federal Council approved 1st January 2012 as the effective date for convergence of accounting standards in Nigeria with International Financial Reporting Standards (IFRS). The necessary law to enact the changes in the Financial Reporting Council of Nigeria Act 2011, had previously been passed by the Nigerian legislature and also been signed into law by the Nigerian president.
The Nigerian government took this stand to involve all stakeholders before it decided to adopt the IFRS on a gradual basis. All companies listed on the Nigerian Stock Exchange (NSE) and significant public entities are expected to have complied with IFRS by 1st January, 2012 (Ikpefan & Akande 2012). In March 2004, the International Accounting Standards Board (IASB) which was funded through national levies as well as voluntary contributions from around the world, including large international companies, regulators, standard setters and international accounting firms. The Board (IASB) issued IFRS 4 Insurance Contracts, the scope of IFRS 4 was amended in August 2005 to clarify that most financial guarantee contracts would apply the financial instruments requirements. In December 2005, the IASB published revised guidance on implementing IFRS 4. Other IFRSs have made minor consequential amendments to IFRS 4, including IFRS 7 Financial Instruments: Disclosures (amendments in March 2009). The IFRS 4 applies to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for specified contracts covered by other IFRSs.
Nigeria shares almost all its political and economic settings with its former colonial heritage. Before the introduction of the modern form of insurance, some form of social insurance had existed in the Nigerian society. The British system still dominates aspects of the country’s socio-economic settings. For instance, the legal practices in Nigeria still reflect its colonial heritage. Economic institutions such banks and insurance companies, in practice copy the British style of conducting their businesses. The origins of modern insurance are intertwined with the advent of British trading companies in the region and the subsequent increased inter-regional trade. Increased trade and commerce led to increased activities in shipping and banking, and it soon became necessary for some of the foreign firms to handle some of their risks locally (Osoka, 1992).
By 1976, the number of indigenous companies had far surpassed that of the foreign companies. As at September 2005, there were one hundred and four (104) insurance companies and four (4) reinsurance companies in existence before recapitalization. Regulation of Nigeria insurance industry has become substantially intensified in the last two (2) decades. While previous Insurance Act 2003 only required new capital of less than N 500 million (about $ 4 million); the 2005 recapitalization directive required a minimum of N 2 billion (about $ 15 million) for life insurance and N 3 billion (about $ 23 million) for non-life business. The 2005 recapitalization changed the landscape considerably as many companies were forced to merge in compliance with the follow-up directive of NAICOM that the requirements were only to be met through mergers and acquisitions (Ezekiel, 2005).
Therefore, Insurance can be seen as a systematic statutory agreement of transfer of risk between the insurance company and the insured guided by the specified rules for the purpose of protection against economic loses through the stipulated payment of consideration called premium. The payment is normally made by the policy holder to the insurance company. It is clearly shown that, an insurance contract is a contract “under which one party accepts significant insurance risk from another party (policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder.”For example, insurers often offer what are substantially investment products in which mortality or other insurance risk is minimal or non-existent.
Despite its significance, the primary objective of the insurance is to provide economic protection from certain risks that may occur during a specified period. The industry continued to play a significant role both in the private and public sectors of the national economy. IFRS 4 Insurance Contracts only provided minimum accounting criteria, which in most cases allowed companies to continue using existing GAAP and required some specific disclosures. However, IFRS 4 did define an insurance contract and some contracts entered into by an insurance business may not meet the definition of an insurance contract and instead may have to be accounted for as a financial instrument under IAS 39.
IFRS 4 does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement. Furthermore, it does not address accounting by policyholders. According to IASB (2010), the two primary qualitative characteristics of information in financial statements were relevance and faithful representation. Relevance and faithful representation were the fundamental qualities, while comparability and understandability were enhancing qualities.
Accounting information has the quality of relevance when it made a difference in a business decision; it provided information that has predictive value and has confirmatory value. Information in financial statements is relevant when it is capable of making a difference to a financial statement user’s decisions. Relevant information has confirmatory or predictive value. Relevance and faithful representations makes financial statements useful to the reader. There are also some enhancing qualitative characteristics, which are complementary to the fundamental characteristics: comparability, verifiability, timeliness and understandability. Usefulness of financial reporting underlies the IASB’s conceptual framework. In fact, IASB (2010) stated that the main objective of financial reporting is to provide information that is useful to investors, creditors and others in making investment, credit and similar resource allocation decisions. The IASB further stated that these new standards should require high quality, transparent and comparable information in financial statements and other financial reporting to help investors, other participants in the world’s capital markets and users of financial information to make economic decisions.
This study will assess the level of compliance with the requirements of IFRS 4 (insurance contract) by Insurance Companies listed on the Nigerian Stock Exchange (NSE), so that the level of preparedness of Nigerian insurance companies towards convergence and application of international financial reporting system can be determined.
Nigerians have a negative attitude towards insurance companies, this accounted largely for the low patronage and performance stemming from the poor attitude of insurers in the non claims payment. This tradition of defaulting in claims translated to some form of bad publicity for the industry and consequently confidence in the industry eroded significantly (Hakeem & Tajuddeen, 2010). The industry has refused to change with the times, as policy documents still carry clauses that breeds distrust with customers (Abidemi, 2010).There exist also inadequacy of in depth knowledge on the side of insurance practitioners for the preparation of financial statement on the basis of IFRS requirements. This could be hidden factors which made it difficult to determine the level of compliance with IFRS 4 by the listed insurance companies in Nigeria (Keneth, 2012)
Studies have been conducted within and outside Nigeria on the issue of International Financial Reporting Standards. Based on review of related literatures, it clearly revealed that; there is limited study on compliance with IFRSs, Though most of researchers were more concerned on adoption of IFRS Framework, a very few of such studies could be found on compliance with IFRS in general and it is difficult to obtained the study specifically on compliance with IFRS 4 in the Nigerian insurance companies despite the fact that the companies contribute a lot to the economic development especially on reduction of uncertainties, protection and management of economic risk.
Similarly, Izedonmi (2001), Al-shammari, Brown and Tarca (2003), Kantutu (2008), chua, cheong and Guild (2012), Ben (2013) Sani and Umar (2014) among others have worked empirically on compliance with statement of accounting standards by companies. Izedonmi (2002) suggested that quoted banks do comply with the requirements of the standards. Kantudu (2008) showed that a gap existed between what insurance companies did and what is required of them by SAS 16, that is, compliance with the requirements of SAS 16 by listed insurance companies is good (i.e. 76.9%). These studies were conducted when the statement of accounting standard was used as framework for the preparation of financial statement in Nigeria; these have contributed immensely to the previous researchers and as well this study.
Amoako (2010) found that the average compliance level was found to be high for year 2008 recorded 94.7% while 2009 recorded 98.2%. Bova and Pereira (2012) investigated the economic determinants and consequences of IFRS compliance in Kenya where the capital market is open and enforcement of IFRS is lax. Yakasai (2014) assessed the level of compliance with IFRS 7 by listed Banks in Nigeria, which identified the extent to which listed banks in Nigeria comply with the IFRS. These studies examined the compliance with IFRS 7. Consequently, this showed the existence of a vacuum for the study on other IFRS specifically IFRS 4 (insurance contract).
Onafalujo (2011), Kenneth (2012), Ikpefan and Akande (2012) and Isenmila and Adeyemo, (2013) highlight the initial inconsistencies of IFRS with local laws in different countries. Agustine and Eguasa (2014) studied the adoption and Implication of international Financial Reporting Standards, the study used major publications and documentary materials emanating from the governments, professional and academic accountants, regulatory accounting bodies and conference proceedings. Okpala, (2012) investigated the effect of IFRS adoption on Foreign Direct Investment in Nigeria Economy. Jeanjean and Stolowy (2008) examined whether the adopting firms in Australia have managed their earnings between 2002 and 2006. All were concerned with the adoption of IFRS not compliance with IFRS and or IFRS 4 for insurance contract, this stresses the need for the study to be conducted on the assessment of compliance with IFRS 4. This study is significant in the sense that, of all the researches mentioned had contributions a lot to address the issue of IFRS in Nigeria and world at large. Onafalujo, Eke and Akinlabi (2011) Due to the time frame and other prevailing changes, the specific study on compliance with IFRS 4 by listed insurance companies in Nigeria is recommended. There is urgent need to study on compliance with international reporting standard because the some of the firm were found to comply with standard based on the assertion of political cost theory, in order not to put shareholders, potential investors, regulatory bodies, and general to mention a few, into dilemma (Ben, 2013).This will also enlighten not only corporate bodies but also individual stakeholders on the advantages derivable from complying with accounting standards to intensify the relevance of the IFRS 4 to the insurance industry to achieve uniformity in financial reporting that meets the requirements and finally to reduce the incidence of breach of the IASB guidance and NASB Act 2003 and enhance compliance with accounting standards.
Therefore, the study will fill the gap in literature by assessing the compliance with IFRS 4 by listed insurance companies in Nigeria from 2012-2015 and will expand the frontier of knowledge in financial reporting.
It should be noted that the studies conducted so far in Nigeria were mostly restricted to the adoption of IFRS in other industries like Banking, educational institution, oil and gas industries etc .This study differed from Yakasai (2014), Masud (2013), Sani and Umar (2014), Keneth (2012), Demaki (2013) Oseni (2013), Madawaki (2012), Ben (2013) and others in terms of theoretical framework, industry, methodology, variables, and scope. They mostly used survey method and focused on adoption of IFRS. This study adopts non survey through the use of ex- post factor and combined compliance index with multiple regressions, T-test, ANOVA, OLS and GLS in the analysis of the result. Consequently, this study focuses on assessing the compliance of the requirements of IFRS 4 (insurance contract) by listed insurance companies in Nigeria.
In the light of foregoing arguments, the following research questions are intended to be addressed;
- Do listed Nigerian insurance companies significantly comply with the IFRS 4?
- What are the factors that influence the level of compliance with the requirements of IFRS 4 by listed insurance companies in Nigeria?
- Does compliance varies among listed insurance companies in Nigeria?
1.3 Objectives of the study
The main aim of this study is to assess the level of compliance with IFRS 4 by the listed Nigerian insurance companies. The specific objectives of the study are to:
- Determine the level of which listed Nigerian insurance companies comply with the provisions of IFRS 4
- Examine the factors (Size, age, profitability, leverage, and audit type) that influence the level of compliance with requirement of IFRS 4 by listed insurance companies in Nigeria
- Determine whether compliance with IFRS 4 varies among listed insurance companies in Nigeria
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