Effect of IFRS on Value Relevance of Accounting Information: Evidence from Quoted Manufacturing Firms in Nigeria

This study evaluated the extent to which value relevance of financial information in Nigerian manufacturing firms has improved after the implementation of International Financial Reporting Standards (IFRS). Specifically, the study intended to: Ascertain the extent the adoption of IFRS has significantly improved the book value per share of manufacturing companies in Nigeria; Determine the extent the adoption of IFRS has significantly improved the Earnings Per Share of manufacturing companies in Nigeria and Examine the extent the adoption of IFRS has significantly improved the cash flow of manufacturing companies in Nigeria. Ex-post facto research design was adopted for the study. A sample of 54 manufacturing companies was randomly selected from manufacturing companies quoted on the Nigerian Stock Exchange for the periods of 20082015. Data for the study were obtained from the annual reports and accounts of the sampled companies. Specifically, a modified price model for detecting value relevance of accounting data for two different periods was employed. Regression Analysis and Chow test statistical tools were used to analyze and validate the data with aid of SPSS version 20.0. The study found that the adoption of IFRS has improved the book value per share, market share price, Earnings Per Share and cash flow of manufacturing companies in Nigeria. The implication of findings is that the value relevance of accounting information of manufacturing companies is more sensitive during Post-IFRS era than the Pre-IFRS era. The findings also imply that the book value per share, market price, earnings and cash flow have become informative to equity investors in determining the value of firms following IFRS adoption. The study recommends among other things that the accounting information for book value per share should be communicated to the investing public; and such information should be of high quality to avoid negative consequences on the part of investors. KEYWORD: Value relevance, accounting information, manufacturing companies INTRODUCTION Value relevance research is being motivated by the fact that listed firms use financial statements as one of the major medium of communication with their shareholders and public at large. Markets usually depend on financial reports prepared by the Management of such firms (Khanna, 2014). Barth, Cram and Nelson, (2001) believe that for making the financial reporting to be effective, information contained in the financial reports should be relevant and reliable. Information is considered to be relevant when it influences the users’ decisions to form predictions or help in confirming or correcting the past evaluations, while, it is considered reliable if it can be depended upon to faithfully represent the transactions or events that it aims to represent without any undue error or bias (FASB, 1978). Bello (2009), believes that accounting is an information infrastructure used by economic units to achieve various economic decisions. Corporate organizations use accounting to communicate to all stakeholders about their operating performance and position at a particular time period. The value of a firm is based on what the market perceives about its performance, and accounting International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470 @ IJTSRD | Available Online @ www.ijtsrd. com | Volume – 2 | Issue – 5 | Jul-Aug 2018 Page: 2256 disclosures provide the essential information so as to form the basis of such perception. Many studies have examined the value relevance of earnings per share (EPS), book value of equity per share (BVPS), and cash flows. Such studies have reported that earnings and book values have significant information content for equity valuation of a firm (Holthousen and Watts, 2001; Choi and Jang, 2006; Kwon, 2009). A review of international reports published since 1970 examining the purpose of accounting information and content, indicates that the focus is on the needs of external users and the decision usefulness of accounting information. In the last decade, accounting literature has focused increasingly on examining the value relevance of accounting information (Adaramola & Oyerinde, 2014). The dynamic nature of the environment in which accounting operates led to the development of different methods of wealthcreation in each emerged environment through time. These environments according to Lamberg (2004) include agriculture, industrial and information era; each wealth-creation method was served with appropriate accounting model in order to produce relevant accounting information for economic decisions. Sibel, (2013) opine that accounting information contained in financial statements is expected to be useful for decision makers. In order to provide this, financial statements should meet some basic characteristics. “If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable” (CFFR, 2010). Inherent in the profession of accounting are rules and principles that give room for manipulations and designs by professional accountants. Hence, given the required skill and accounting acumen, two accountants could present two different profit figures from the same records and none would be considered to have erred in so far as he considers some underlying concepts in the preparation of his accounts. Advocates of fair value accounting see the key motivation in reporting all assets in the balance sheet at fair value because it is more current and perhaps more relevant (Cunningham & Harris, 2006). However, accounting traditionally measures most assets using historical cost because it is considered reliable. This serves as the basis of annual depreciation of the historic value of an asset as it is justified by its consistent burdening of income of accounting periods with the supposed equivalent contribution of the depreciated asset to the generation of such incomes. This tradition is faulted both in basis and methods. Depreciation methods are numerous and also produce different depreciation figures. This and several other examples dominate the principle and practices of accounting. The exploitation of the loopholes created by the accounting rules to generate undeserved and unwarranted benefits is referred to as designed accounting or creative accounting, also termed macro-manipulation, income smoothing, earnings management, earnings smoothing, financial engineering cosmetic accounting or window dressing (Belkaoui, 2004). Designed accounting is defined as “the opportunistically used discretion over accounting numbers with intention to mislead users of the information”. Financial reporting by companies is effected via the preparation and publication of financial statements. These financial statements are required to exhibit certain degree of quality in terms of their information contents. Maines and Wahlen (2006) and Belkaoui (2002) opine that accounting information contained in the financial reports should possess certain qualities as relevance, verifiability, understand ability, neutrality, timeliness, comparability, and completeness. When the financial reports disclose quality accounting information, Benston (2007) stated that the decision of the users (investors, management, government, employees, creditors, analysts) of the reports could as well be qualitative and informed. The users of the financial reports use the reports frequently in passing judgments on the viability of a company. Ghofar and Saraswati (2008) opined that investors in many cases are too dependent on the quality of accounting disclosure. Applied faithfully, the harm caused by the strict adherence to accounting rules could have been restricted to the relevance and reliability of the figures it produces in terms of time value of money. By extension however, the loopholes created by these rules have been exploited by fiendish accountants to perpetrate fraud and this has taken a toll on the profession as it has manifested in an upsurge of accounting scandals across the globe thereby having implications for the public confidence in the