CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
As the business world becomes closer in its financial and trade ties, many countries are moving towards International Financial Reporting Standards (IFRS), common accounting rules that define how transactions should be reported and what information should be disclosed in financial statements (IASB, 2007). This unitary set of standards has solved many problems while creating others. However, this study is examining the impact of IFRS disclosures on the organizational performance. It is important to look at the big picture and the overarching aim of IFRS. In an increasingly global market place, international comparability is critical to enable the effective allocation of scarce resources. To achieve international comparability the key nations around the world need to commit to one global set of accounting standards. While over 100 countries have already adopted IFRS, key countries like the United States, Japan and India are yet to require IFRS for listed companies (Bradshaw et al, 2012). It is important to note that companies that use the same standards to prepare their financial statements can be compared to each other more accurately. This is especially important when comparing companies located in different countries, as they might otherwise be using different rules and methodologies to prepare their statements.
This increase in comparability has helped investors better determine where their investment dollars should go thereby enhancing organizational performance as there will be more investors to invest in the company. Though, the United States has not yet adopted International Financial Reporting Standards and other countries continue to hold out as well (Bradshaw et al, 2012). This makes accounting by foreign based companies that do business in America difficult as they oen have to prepare financial statements using IFRS and another set using American Generally Accepted Accounting Principles (Bradshaw et al, 2012). IFRS disclosures use a principles-based, rather than rules-based, philosophy.
A principles-based philosophy means that the goal of each standard is to arrive at a reasonable valuation and that there are many ways to get there. This gives companies the freedom to adapt IFRS disclosures to their particular situation, which leads to more easily read and useful statements. There is a downside to the flexibility that IFRS disclosure allows organizations to utilize only the methods they wish to, allowing the financial statements to show only desired results. This can lead to revenue or profit manipulation, can be used to hide financial problems in the company and can even encourage fraud. For example, changing the method of inventory valuation can bring more income into the current year’s profit and loss statement, making the company appear more profitable than it really is. While IFRS requires that changes to the application of the rules must be justifiable, it is often possible for companies to “invent” reasons for making the changes. Stricter rules would ensure that all companies are valuing their statements the same way.
1.2 STATEMENT OF THE PROBLEM
Several researchers had examined the eect of the adoption of IFRS disclosure on organizations and the findings revealed both the advantages and the disadvantages of IFRS disclosure. Considering the fact that small company would be impacted by a country’s adoption of IFRS disclosure in the same way a larger one would. However, small businesses do not have as many resources at their disposal to implement the changes and train staff. This results in smaller companies bringing in accountants or other outside consultants to help make the changeover. These smaller companies will bear more of a financial burden than larger ones in this area. However, this study will examine the impact of IFRS disclosures on organizational performance.
1.3 OBJECTIVES OF THE STUDY
The following are the objectives of this study: 1. To examine the impact of IFRS disclosures on organizational performance 2. To examine the level of compliance with the IFRS disclosure principles by companies in Nigeria. 3. To identify the problems associated with IFRS disclosure in organizations in Nigeria.
