Decoding IFRS: How Disclosure Impacts Nigerian Companies' Performance
"Navigating international financial reporting standards (IFRS) in Nigeria: A guide to disclosure practices, company performance, and investment insights"
In today's globalized economy, International Financial Reporting Standards (IFRS) are crucial for creating financial statements that are both transparent and reliable for investors. Nigeria, like many other countries, has adopted IFRS to improve the quality of financial reporting and attract international investment. But how well are Nigerian companies adhering to these standards, and what impact does it have on their financial performance?
A recent study examined the disclosure practices of companies listed on the Nigerian Stock Exchange (NSE) over six years (2012-2017). The study developed a disclosure index to assess both mandatory and voluntary IFRS disclosures, then analyzed their relationship to company performance, measured by return on capital employed (ROCE).
This article unpacks the study's findings, revealing the key factors that influence IFRS disclosure in Nigeria and what it means for investors and policymakers.
IFRS Disclosure and Financial Performance: What the Research Reveals
The study pooled data from 384 firm-year observations across 64 sampled companies listed on the Nigerian Stock Exchange (NSE). Researchers developed a disclosure index of both IFRSs mandatory and voluntary by applying content analysis and multiple regression techniques and analyze the association of disclosure and performance of the firms expressed return on capital employed (ROCE) as a performance index. The study also examined the relationship between market-based performance, company attributes, and overall disclosure.
- Share Price Matters: The study found that share price, company size, and audit firm size were significantly and positively related to the overall disclosure of firms. This suggests that companies with higher share prices and larger market capitalization tend to be more transparent in their financial reporting.
- The "Big 4" Effect: The study also found a strong positive correlation between the size of the audit firm (specifically, whether a company was audited by one of the "Big 4" firms – Ernst & Young, Deloitte, KPMG, and PwC) and the extent of IFRS disclosure. This implies that companies audited by these large, reputable firms tend to have more comprehensive disclosures.
- Leverage and Age: The study found no significant relationship between leverage, company age, and overall disclosure index
Implications for Investors and Policymakers
This research offers valuable insights for investors and policymakers in Nigeria. For investors, it underscores the importance of looking beyond the sheer volume of IFRS disclosure and considering other factors, such as company size, share price, and the reputation of the audit firm, when evaluating investment opportunities. For policymakers, the study highlights the need to promote high-quality auditing practices and ensure that companies are providing relevant and decision-useful information to investors. Continuous training and resources for companies on IFRS implementation are also crucial to improving the overall quality of financial reporting in Nigeria.