An Investigation of the challenges in International Financial Reporting Standards’ adoption: evidence from Nigerian publicly accountable companies

Abstract

In search of a global accounting framework, International Financial Reporting Standards (IFRS) have been implemented by over 140 countries around the world. There are different motivations for the adoption of IFRS by national accounting standards setters. These include the perceived benefits associated with IFRS adoption. Withal the worldwide adoption, the adoption of IFRS by companies has been successful in some countries and unsuccessful in other countries. Whether or not IFRS adoption will be successful depends on the challenges companies face in the adoption. The challenges in IFRS adoption are heterogeneous and different challenges have been reported in countries that have implemented IFRS such as Australia, New Zealand, Romania, Turkey, South Africa and Kenya among others. However, the international accounting systems have continued to shift from national accounting practices to IFRS.

Following the World Bank Report on the Observance of Standards and Codes (ROSC), the Financial Reporting Council of Nigeria (FRC) implemented IFRS in 2010 for both listed and non-listed companies. The three types of IFRS (i.e. IFRS for publicly accountable companies, IFRS for SMEs and International Public Sector Accounting Standards) were implemented. In the first year of filing IFRS financial statements by publicly accountable companies, most companies required to adopt IFRS could not produce IFRS financial statements as required. This failure is attributed to the challenges in IFRS adoption. However, these challenges were not reported. Therefore, it was not clear what type of challenges Nigerian companies faced in the adoption of IFRS. There is a limited understanding of the challenges in IFRS adoption as a result of the inconsistency in previous research findings.

Therefore, this study examined the challenges Nigerian companies face in IFRS adoption by investigating different factors that inhibit the adoption of IFRS. Specifically, companies’ cultural factors, practical difficulties in IFRS application and the effects of industry were examined. A survey instrument was used to collect data from the preparers of financial statements which resulted in 519 usable questionnaires. The study applied chi-square test, t-test, and Exploratory Factor Analysis (EFA) to identify different factors associated with IFRS adoption. Further analysis was conducted to test the hypotheses using the logistic regression models.

First, it was found that companies’ cultural factors were significant in explaining the challenges in IFRS adoption. Specifically, transparency, statutory control, secrecy, flexibility, and professionalism were found to inhibit IFRS adoption. The empirical results indicated that as the transparency in financial reporting increases by using IFRS, the greater the likelihood companies will not adopt IFRS. In the practical difficulties model, the majority of the companies considered the cost of IFRS adoption prohibitive and the lack of an internal control system was also a significant factor that influenced IFRS adoption. The study also identified variations in the industry effects. Companies in the financial services industry had a greater likelihood of IFRS adoption, while companies in the agricultural industry were least likely to adopt IFRS. Other industries included in the study varied considerably in terms of the likelihood of IFRS non-adoption. Some of the findings were consistent with the challenges identified in other countries such as Australia, New Zealand, Romania, Turkey, South Africa, and Kenya, while some were specific to the case of Nigeria.

The research contributes to the Nigerian accounting practice and international accounting research. Further, the influences of companies’ cultural factors on IFRS adoption have not been empirically investigated in the international accounting literature. Therefore, the research provided empirical evidence of the influences of companies’ cultural factors on IFRS adoption in the case of Nigeria. Areas for future research have been identified for international accounting researchers.