CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The dynamic nature of the world
financial market has facilitated the use of different financial instruments
that include: cash, share, loan debentures, accounts receivable or accounts
payable, financial derivatives and commodity derivatives, which include forward
contracts, futures, swaps and options (which give the buyer an option to choose
whether or not to exercise his rights under the contract). Accounting for
financial instruments has recently attracted attention, because of enormous
growth in its market and equally the exchange of traded derivatives which
enjoyed a high volume of sales, especially for options contract and financial
futures. Large financial institutions that engage in the financial instruments
transactions have led to a rapid growth of the market and making it to be at
the fore front in the global financial dealings (Kirk, 2005). As the result of
harmonization of financial reporting and in deed with the aid of globalization,
cross-border transactions and trade become easy. But financial instruments
expose firms to financial, economic, and operational risks. Changes in Market
conditions or the financial position of the parties to the financial
instruments or transactions expose firms to financial and economic risks. These
risks are credit risk, interest rate risk, foreign exchange risk, market risk
and liquidity risk (Hassan, Sale & Rahman, 2007) Before the adoption of
International Financial Reporting Standard (IFRS) in Nigeria, the financial
reporting and accounting practices were guided by the Statement of Accounting
Standard (SAS) issued by erstwhile Nigerian Accounting Standard Board (NASB)
(Bagudo, Abdul Manaf & Ishak, 2016).SAS 2 was about information to be
disclosed in financial 2 statements, and it described the basis for
presentation of a general purpose financial statements, in order to ensure
comparability both with the company‟s financial statements of previous period
and with the financial statements of other companies. But there is no specific
Standard in respect of disclosure requirements of financial instruments under
NASB, companies were therefore free to disclose as little or as much as they
want, and in practice, they used a wide range of disclosure methods and
strategies. Moreover, most companies recorded derivatives at historical cost,
which often does not convey a true and fair picture of the risks and rewards
faced, due to the complex nature of financial instruments and the role they
played.The financial statements of a company will therefore be rendered
meaningless by the non-disclosure of a financial instruments that could have a
material impact on the Statement of Financial Position or Statement of
Comprehensive Income, in some cases turning profits into losses and net asset
positions into net liability positions. Regulatory bodies throughout the world,
and the International Accounting Standards Board (IASB) in particular have sought
to introduce accounting standard to deal with Financial Instruments disclosure
in an attempt to mandate the provision of a minimum level of Financial
Instruments related information in companies‟ financial statements. Because
investigations had shown that companies were tempted not to publish information
about the extent of usage of Financial Instruments on a voluntary disclosure
basis (Yasean, Theresa, Suzanne & David, 2016). To ensure that, financial
instruments disclosure provides to the users of financial information with the
relevant and reliable information they need to make a sound decision, IFRS 7
was originally issued in August 2005 and applies to accounting period on or
before 1 January, 2007 by the International Accounting Standard Board (IASB).
The fundamental objectives of 3 IFRS 7 requirements are to enhance users
understanding of the significance of financial instruments in an entity‟s
financial position and performance, and equally to enhance understanding the
extent of the risk arising from such financial instruments to which the entity
is exposed to, during the period and at the reporting date. Therefore,
accounting framework has been shaped by IFRS to provide relevant and faithful
recognition, measurement, presentation and disclosure requirement relating to
transactions and events that are being reflected in the financial statements
(Ailmen & Akande, 2012). The demand for more information on risks has
assumed monumental dimensions with the promulgation and subsequent enhancement
of the standard. IFRS 7 is applicable to financial and non-financial entities,
either an investment funds, private equity funds, real estate funds or
investment managers. The extent of disclosure required depends on the extent of
the fund use under financial instruments and its exposure to risk. The
disclosure requirements are both quantitative and qualitative. The quantitative
disclosures are about the figures in the Statement of Financial Position and
Income Statement. Qualitative Disclosure on the other hand deals with risk
disclosures, this is what takes the disclosures to a new level. The risk
disclosures arising from financial instruments under IFRS 7 are given through
the eyes of management (management judgment) and should reflect the way
management perceives, measures and manages the risks involve. Nigeria has not
been left out in this historic revolution and harmonization of financial
reporting. In September, 2010 the IFRS implementation roadmap was officially
announced and the process of adopting IFRS was scheduled in three phases:
publicly listed and significant public interest entities that comprises:
Banking &Insurance sub-sector, petroleum sub-sector, telecommunications
andmanufacturing firms as pioneer implementers (Ayuba, 4 2012; Bala, 2013;
Edogbanya & Kamardin, 2014). They were mandated to prepare their financial
statements based on IFRS on or before 1st January 2012, that is full IFRS
compliant financial statements are required for accounting period to 31
December 2012, while other public interest entities are required to adopt IFRS
for statutory purposes on or before 1st January 2013. The third phase requires
Small and Medium Sized Entities (SMEs) to adopt IFRS on or before 1st January
2014 (Ailmen & Akande, 2012). Though, this was the initial time line, there
was a subsequent deviation from the road map, but the global convergence of
IFRS and its adoption in Nigeria has witnessed a remarkable development in the
annals of financial reporting and accounting profession at large. (Andrew,
2015). Nigeria‟s adoption of IFRS for all listed companies generated a lot of
issues because the adoption was sudden and without consultation with the
relevant key stakeholders such as the practitioners, the regulatory agencies
and the academics (Edogbanya & Kamardin, 2014). More so, because of the
complexity of the standard and its disclosure requirements, compliance with the
standard after adoption were found to be low by some studies. Zango, kamardin
& Ishaq (2015) reported a compliance level of 55% and 55.5% in 2012 and
2013 respectively on financial instruments disclosure by listed deposit money
banks in Nigeria. Looking at the nature of financial instruments disclosure of
IFRS 7 and by reason of the fact that, similar standard has not been issued
previously in the Nigerian SAS, it is imperative to conduct a research to
examine the level of compliance by listed manufacturing firms in Nigeria with
that disclosure requirements.
1.2 Statement of the Problem
Information disclosure can be seen as a
strategic tool that facilitate company’s ability to raise capital either
through issue of shares or debt, on long term or short term basis, at the
lowest cost possible (Healy & Palepu, 1993). IFRS 7 requires the disclosure
of information about significance of financial instruments to an entity’s
financial position and performance and extent of risks arising from those
financial instruments, both in quality and quantity. The 7 standard has added
certain new disclosures about financial instruments to those already required
by International Accounting Standard 32 (IAS 32), it also replaces the
disclosures previously required by IAS 30, and then put all those financial
instruments disclosures altogether into a new standard, that is IFRS 7. In Nigerian
context however, with the announcement of the federal government intention to
adopt IFRS with effect from 1st January, 2012, listed entities were mandated to
comply with the disclosure requirements of the standard. Evidence from
empirical studies on the relationship between firm characteristics and
compliance with IFRS 7 financial instruments disclosure requirements is quite
mixed, and the findings have varied, and makes it inconclusive.
Results/findings from empirical studies in the relationship between
profitability and financial instruments disclosure varies,some studies reported
a positive relationship (Andrew, 2015), and some studies reported a negative
relationship (Atanasovski, 2015). Tsegba, Semberfan and Tyokoso, (2017)
evaluate firm characteristics and IFRS compliance.
The study used profitability in
determining IFRS compliance by listed financial service companies, because of
the peculiar nature of the sector, the study cannot be generalized on other
subsectors. A research in that respect is important. Financial instruments
disclosure and liquidity on the other hand have shown a mixed findings, some
studies have found liquidity to be negatively related to IFRS disclosure, and
other studies on the other hand found a statistical positive relationship
between liquidity and IFRS compliance disclosure (Daske, Hail, Leuz, &
Verdi, 2013; Andrew, 2015). But in the Nigerian context, and to the author‟s
best knowledge, no empirical studies that included Liquidity in assessing its
relationship with the financial instruments disclosure of IFRS 7. 8 Therefore,
considering how liquidity is important in determining the extent of a firm‟s
ability to settle obligations as at when due, a study that will include such
variable is imperative in Nigeria.
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