THE IMPACT OF IFRS ON EARNINGS MANAGEMENT

THE IMPACT OF IFRS ON EARNINGS MANAGEMENT

Abstract

Accounting manipulations in the banking industry has brought about the debate on the need for better accounting standards that are internationally comparable and can ensure transparency in financial reporting so as to reflect the true picture of the performances of banks and thus reform global economies. This study examines the effect of mandatory IFRS adoption that started in Nigeria in year 2012, on the value relevance of financial reports and pro-cyclicality of 14 selected deposit money banks in Nigeria. The study formulates three hypotheses and applies correlational design, using panel data set to analyze the relationship between value relevance and IFRS, and the relationship between pro-cyclicality and IFRS. The study utilized secondary data extracted from the financial statements of the banks and the World Bank database over the period 2006 through 2016. The result of the fixed effect GLS provides evidence that both the value relevance of earnings and book value improved after IFRS was mandatorily adopted by the selected DMBs, and the result of the random effect GLS for pro-cyclicality provides evidence that the lending behavior of the selected banks did not become more pro-cyclical after IFRS adoption. The study concludes that adequate information do actually boost investors‟ confidence in the financial reporting of DMBs after mandatory adoption of IFRS. Based on the findings, the study recommends among others that there is need for the managers of Deposit Money Banks in Nigeria to further implement monetary policies that aims at enhancing investors‟ confidence in their reported earnings and book value.

 

CHAPTER ONE

INTRODUCTION

1.1      Background to the Study

International Financial Reporting Standards (IFRS) has been the focus of many financial accounting studies in recent times. The global convergence to the use of a common set of international accounting standards in business entities to improve financial disclosure has redirected researches towards analyzing the value relevance of financial reports and the change of the standard for the recognition and measurement of loan loss provision which has received considerable attention and debate worldwide, especially in developed economies.

Financial reporting is the record of the business economic activities which aims at making available accounting information to investors, analyst and stakeholders for investment decisions.  Prior to 2012, Nigerian banks used Nigerian Generally Accepted Accounting Principles (GAAP) in preparing their financial reports. Value relevance of financial reporting is fundamental as accounting information shows the financial health of the business entity that affects their investment efficiency. The key objective of empirical research on value relevance is to examine the statistical relationship between financial report variables and market variables. Investors, analyst and other users of financial statements rely on a variety of information including earnings, products and data in the economy.

However, fraudulent accounting manipulation threatens the credibility and reliability of financial reporting which affect investors‟ confidence in accounting numbers. Global financial crisis like that of Enron Corporation in 2001, the largest corporate failures in history that led to the dissolution of Author Anderson audit and accountancy partnerships in the world have put accounting practices and the profession under inspection, as these scandals has made the reliability and effectiveness of accounting standards questionable. Such trend of major accounting scandals also showed its ugly face in Nigeria with the falsification of the financial reports in 2006 by Cadbury Nigeria Plc and in the banking sector, the liquidation of 26 banks in 1997 despite the efforts of the Central Bank of Nigeria (CBN) in enhancing the financial disclosure of Deposit Money Banks (DMBs) by issuing prudential guidelines for supervision and specific directives. It is based on this premise thatthe World Bank (2006) opines that Nigerian banks financial reporting is very poor and some banks are known to falsify their accounts. In addition to the foregoing, Ashamu and Abiola (2012), state that the 2007 economic crisis on the banking industry of Nigeria has caused depression of the country‟s capital market, decreased the quality of some part of the credit given by banks for trading in the capital market. All of the aforementioned events as well as the post consolidation banking crisis of 2009 in Nigeria further increased investment riskiness in the minds of stakeholders and has increased the call for improving financial disclosures.

Whereas, Banks provide financing in economies across the globe as part of their operational activities by giving credit to customers hence, helping in the allocation of resources and Thus act as catalyst to economic growth. However, banks are faced with credit risk arising from default from customers in paying interest on loan as well as the principal. Due to this, credit risk management is crucial to banks because loan defaults could affect their solvency and lead to liquidation. Consequently, Banks are therefore required by law to make Loan Loss provisions (LLP) to cover for loan defaults. The Statement of Accounting Standard (SAS), specifically SAS 10 under Nigerian GAAP, provides that Nigerian deposit money banks recognize and measure reported LLP using expected loss approach, using historical cost accounting. This approach is forward looking and gives bank managers the discretion to make loan loss provisions based on the expectation that borrowers will default.

It is however argued that the expected loss models allow bank managers to use their discretion to manipulate banks LLP, by increasing their LLPs in good years when profits are high so as to cover up for bad years when profits are low, making stakeholders believe the banks are doing well compared to their competitors. Olusanya (2010), in Ndubuisi (2016) intercontinental bank plc,Oceanic bank plc and Afribank Plc in 2006, were accused of manipulating their financial reports on LLP. Their LLPs in audited reports were different from those reported by the CBN. That of intercontinental bank reads

36billion as against 278.2billion reported by the CBN which may suggest that local GAAP is not transparent enough to provide in details information only known to managers.

More so, The fact thatNigeria‟s economy is also becoming more sophisticated and the wide use of International Financial Reporting Standard (IFRS) by other countries across the globe and noteworthy is the fact that, as stated by Ocansey and Enahoro (2014) foreign donors require that financial reports be prepared in conformity with International Financial Reporting Standard (IFRS) before receiving grants which further trigger the need for unified accounting that conformsto international standards in order to reform the global economy.

It is therefore not surprising when Nigeria mandatorily adopted IFRS by the International Accounting Standard Board (IASB) in the year 2012, whose process started in year 2010, joining other countries around the globe to benefit from the use of a single set of international accounting standards. The adoption of IFRS by Nigeria is expected to reduce the problems associated with the use of Nigerian GAAP by mitigating the trend of fraud and enhancing the reliability of accounting in banks.

IFRS advocate the incurred loan loss model for LLP provided under IAS 39, using fair value accounting for all derivative instruments. Fair value accounting is argued to be an improvement of the historical cost accounting. IAS 39 is a backward looking standard that sets restrictions on the discretionary LLP by managers and only allows the recognition of loan losses when there is objective evidence that they actually occur and considers only identifiable losses at balance sheet date. Ernst and young (2006) emphasized the LLP (impairment) rules provided by IAS 39, stating that the amount to be set aside as provisions for loan loss depends on the state of the economy and are not to be made except when they actually occur.

However, the incurred loss model under IAS 39 is argued to be pro-cyclical. Banks are supposed to increase their LLPs in an expansion so as to cover for loan defaults and reduce LLP in a recession, but because during an economic expansion the Loan portfolio of banks increases as the competition between banks for lending customers‟ increases, businesses flourish with high profits,and the Gross Domestic Product (GDP) of the country is high, banks therefore expects that very few loans will default, thus monitoring efforts and LLPs are reduced.

Conversely, in a recession banks prefers to increase LLPs and reduce lending to customers as business losses are high and GDP of the country is low. Nonetheless, lending risk builds upduring the expansion period but only becomes evident in a recession when the quality of their loan portfolio reduces. Increasing LLPs in a recession and reducing loans to credit worthy customers for investments that may have been otherwise productive leads to credit crisis that worsens and delays a recovery from the recession that affect the financial stability of the entire economy. This means that the restriction set by IFRS on discretionary loan loss provision leading to delay in recognizing LLP makes banks vulnerable to pro-cyclical behavior, by increasing LLP in a recession which directly affects a banks profit and retained earnings that are part of their capital, thus weakens their capital and if their LLPs are not enough to cover loan losses, they are forced to diminish their capital.

Regulators therefore claim that this model for LLP has increase the crisis during economic recession. Gerhardt andFarkas (2006) state that regulators argue that even though fees and risk are incorporated in interest rates charged to borrowers, the recognition of losses is postponed until the borrower actually defaults. As a result, higher earnings are reported during economic expansion and lower earnings in period of economic recession.  Furthermore, The World Bank (2010) opine that during the global financial crisis, IAS 39, as currently implemented have shown overstatement of interest on income inperiods before the occurrence of the loss event and provisions that were insufficient to absorb actual losses that emerged during the crisis, leading to pro-cyclical bank earnings.In addition to this, Larson and street (2004) argue that IFRS under IAS 39 have a complex nature making it complicated and difficult to apply in the recognition and measurement of financial instruments.

In relation to the foregoing, IFRS has been extensively criticized for its pro-cyclical effect on the loan loss provisioning behavior of banks influenced by the state of the economy which affects financial stability and worsens economic situation. This has called for a counter cyclical provisioning accounting standard that would be forward looking. IASB and Financial Accounting Standard Board would replace IAS 39 completely with IFRS 9 effective from January 1, 2018. IFRS 9 is an expected loan loss provision model which guides banks to estimate expected credit losses by considering past events, current economic conditions and reasonable forecasts (IAS Plus, 2013a)

The regulatory change in accounting standards especially LLP, as presently measured under IAS 39 has raised a lot of questions about the impacts of IFRS on the credibility and relevance of financial statements. It is therefore desirable to carry out a study in this area so as to establish whether or not the supposed relationship between IFRS and value relevance as well as that of pro-cyclicality holds true for the Nigerian banking industry.

1.2     Statement of the Problem

Prior empirical studies in Nigeria did not focus on the pro-cyclical effects of banks LLP as a result of adopting IFRS. Rather, they focus on the effect of IFRS on earnings management, timely loss recognition and value relevance. Dearth of studies in this area on the pro-cyclical behavior of banks shows that there is a gapin literature to be filled. Therefore, this study tries to fill the gap by including pro-cyclicality. The problem that has also prompted carrying out the study is the unanswered question of whether or not the value relevance of financial reportshas improved with the adoption of IFRS by Banks, claimed to be to pro-cyclicality, using Nigerian data.

1.3 Research Questions

Based on the problems of the study the research questions are as follows:

1. To what extent is the effect of IFRS moderated value relevance of earnings on share price of DMBs in Nigeria?
2. What is the effect of IFRS moderated value relevance of book value on share price of DMBs in Nigeria?
3. Do IFRS moderated pro-cyclicality have effect on the loan loss provision of DMBs?

 

1.4      Objectives of the Study

The main aim of the study is to evaluate the effect of compulsory change of accounting standards in Nigeria on the value relevance of banks financial reports and the pro-cyclical effect of the change in the recognition and measurement of the main operating accrual item of banks as currently implemented under IAS 39 by Deposit Money Banks in Nigeria. In view of this, the study will have the following specific objectives

1. To investigate the effect of IFRS moderated value relevance of earnings on share price of DMBs in Nigeria.
2. To examine theeffect of IFRS moderated value relevance of book value on share price of DMBs in Nigeria.
3. To assess the effect of IFRS moderated pro-cyclicality on the loan loss provision of DMBs.

1.5     Research Hypotheses

In line with the objectives of the study, the research hypotheses have been written in null form. The research hypotheses are thus;

HO₁:  Mandatory IFRS adoption does not have a significant effect on the value relevance of banks earnings.

HO₂: Mandatory IFRS adoption does not have a significant effect on the value relevance of banks book value.

HO₃:  Mandatory IFRS adoption does not have a significant influence on banks procyclical behavior on discretionary loan loss provision.

1.6       Scope of the Study

The study is limited to the effect of Mandatory IFRS on the value relevance of financial reports and pro-cyclicality of deposit Money Banks in Nigeria. The dependent variables are value relevance (of earnings and book value) and Pro-cyclicality. Value relevance is represented by share price per share (SHP), pro-cyclicality is represented by loan loss provision (LLP), and the independent variable International Financial Reporting Standard is represented by a dummy variable, IFRS.

The study covers a period of 11years, from 2006– 2016. This period is chosen because IFRS was fully and compulsorily adopted by the Deposit Money Banks in Nigeria in the year 2012 and in order to beable to examine the effect of mandatory IFRS on the two empirically testable dependent variables, the period is suitable.Importantly also, the 2007 to 2009 global recession is covered in the time period chosen; the result of the study willtherefore also reflect the impact of the global recession on the two dependent variables in relation with the listed Deposit Money Banks in Nigeria.

1.7      Significance of the Study

There is a rich body of literature on the impact of IFRS on value relevance but most studies did not separate banks from other entities making the results very ambiguous. The study therefore extends and contributes to the existing literature that analyzes the value relevance of earnings and book value of financial reports of banks, using Nigerian domain.

The study will be an invaluable tool for students, academics and individuals that want to know more about IFRS, value relevance and pro-cyclicality of Nigerian banks. Also to the best of the researcher‟s knowledge, the study is the first in Nigeria to extend its investigation to pro-cyclicality through loan loss provision, using listed Deposit Money Banks data. The study will therefore be significant to the general Nigerian public as it will provide quantitative evidence of the relationship of IFRS and pro-cyclicality, as well as provide answer to the factor that has given rise to further change from IAS 39 to IFRS 9.

More so, the study will be equally of benefit to shareholders, potential investors and financial analyst as it will give them an insight of the quality of financial reports and guide their judgments on investment and performance of the DMBs in Nigeria.

Lastly, the study is presently one of the top issues in the Nigerian banking industry, as their adoption of IFRS is relatively new. Therefore, the results of the study will be of significant relevance to the federal government, Federal Reporting Council of Nigeria

(FRCN), Central Bank of Nigeria, other regulating bodies of banks in Nigeria and the DMBs themselves by proffering better ways to regulate banks such that the financial stability of banks can be ensured.

THE IMPACT OF IFRS ON EARNINGS

THE IMPACT OF IFRS ON EARNINGS MANAGEMENT

Abstract

Accounting manipulations in the banking industry has brought about the debate on the need for better accounting standards that are internationally comparable and can ensure transparency in financial reporting so as to reflect the true picture of the performances of banks and thus reform global economies. This study examines the effect of mandatory IFRS adoption that started in Nigeria in year 2012, on the value relevance of financial reports and pro-cyclicality of 14 selected deposit money banks in Nigeria. The study formulates three hypotheses and applies correlational design, using panel data set to analyze the relationship between value relevance and IFRS, and the relationship between pro-cyclicality and IFRS. The study utilized secondary data extracted from the financial statements of the banks and the World Bank database over the period 2006 through 2016. The result of the fixed effect GLS provides evidence that both the value relevance of earnings and book value improved after IFRS was mandatorily adopted by the selected DMBs, and the result of the random effect GLS for pro-cyclicality provides evidence that the lending behavior of the selected banks did not become more pro-cyclical after IFRS adoption. The study concludes that adequate information do actually boost investors‟ confidence in the financial reporting of DMBs after mandatory adoption of IFRS. Based on the findings, the study recommends among others that there is need for the managers of Deposit Money Banks in Nigeria to further implement monetary policies that aims at enhancing investors‟ confidence in their reported earnings and book value.

 

CHAPTER ONE

INTRODUCTION

1.1      Background to the Study

International Financial Reporting Standards (IFRS) has been the focus of many financial accounting studies in recent times. The global convergence to the use of a common set of international accounting standards in business entities to improve financial disclosure has redirected researches towards analyzing the value relevance of financial reports and the change of the standard for the recognition and measurement of loan loss provision which has received considerable attention and debate worldwide, especially in developed economies.

Financial reporting is the record of the business economic activities which aims at making available accounting information to investors, analyst and stakeholders for investment decisions.  Prior to 2012, Nigerian banks used Nigerian Generally Accepted Accounting Principles (GAAP) in preparing their financial reports. Value relevance of financial reporting is fundamental as accounting information shows the financial health of the business entity that affects their investment efficiency. The key objective of empirical research on value relevance is to examine the statistical relationship between financial report variables and market variables. Investors, analyst and other users of financial statements rely on a variety of information including earnings, products and data in the economy.

However, fraudulent accounting manipulation threatens the credibility and reliability of financial reporting which affect investors‟ confidence in accounting numbers. Global financial crisis like that of Enron Corporation in 2001, the largest corporate failures in history that led to the dissolution of Author Anderson audit and accountancy partnerships in the world have put accounting practices and the profession under inspection, as these scandals has made the reliability and effectiveness of accounting standards questionable. Such trend of major accounting scandals also showed its ugly face in Nigeria with the falsification of the financial reports in 2006 by Cadbury Nigeria Plc and in the banking sector, the liquidation of 26 banks in 1997 despite the efforts of the Central Bank of Nigeria (CBN) in enhancing the financial disclosure of Deposit Money Banks (DMBs) by issuing prudential guidelines for supervision and specific directives. It is based on this premise thatthe World Bank (2006) opines that Nigerian banks financial reporting is very poor and some banks are known to falsify their accounts. In addition to the foregoing, Ashamu and Abiola (2012), state that the 2007 economic crisis on the banking industry of Nigeria has caused depression of the country‟s capital market, decreased the quality of some part of the credit given by banks for trading in the capital market. All of the aforementioned events as well as the post consolidation banking crisis of 2009 in Nigeria further increased investment riskiness in the minds of stakeholders and has increased the call for improving financial disclosures.

Whereas, Banks provide financing in economies across the globe as part of their operational activities by giving credit to customers hence, helping in the allocation of resources and Thus act as catalyst to economic growth. However, banks are faced with credit risk arising from default from customers in paying interest on loan as well as the principal. Due to this, credit risk management is crucial to banks because loan defaults could affect their solvency and lead to liquidation. Consequently, Banks are therefore required by law to make Loan Loss provisions (LLP) to cover for loan defaults. The Statement of Accounting Standard (SAS), specifically SAS 10 under Nigerian GAAP, provides that Nigerian deposit money banks recognize and measure reported LLP using expected loss approach, using historical cost accounting. This approach is forward looking and gives bank managers the discretion to make loan loss provisions based on the expectation that borrowers will default.

It is however argued that the expected loss models allow bank managers to use their discretion to manipulate banks LLP, by increasing their LLPs in good years when profits are high so as to cover up for bad years when profits are low, making stakeholders believe the banks are doing well compared to their competitors. Olusanya (2010), in Ndubuisi (2016) intercontinental bank plc,Oceanic bank plc and Afribank Plc in 2006, were accused of manipulating their financial reports on LLP. Their LLPs in audited reports were different from those reported by the CBN. That of intercontinental bank reads

36billion as against 278.2billion reported by the CBN which may suggest that local GAAP is not transparent enough to provide in details information only known to managers.

More so, The fact thatNigeria‟s economy is also becoming more sophisticated and the wide use of International Financial Reporting Standard (IFRS) by other countries across the globe and noteworthy is the fact that, as stated by Ocansey and Enahoro (2014) foreign donors require that financial reports be prepared in conformity with International Financial Reporting Standard (IFRS) before receiving grants which further trigger the need for unified accounting that conformsto international standards in order to reform the global economy.

It is therefore not surprising when Nigeria mandatorily adopted IFRS by the International Accounting Standard Board (IASB) in the year 2012, whose process started in year 2010, joining other countries around the globe to benefit from the use of a single set of international accounting standards. The adoption of IFRS by Nigeria is expected to reduce the problems associated with the use of Nigerian GAAP by mitigating the trend of fraud and enhancing the reliability of accounting in banks.

IFRS advocate the incurred loan loss model for LLP provided under IAS 39, using fair value accounting for all derivative instruments. Fair value accounting is argued to be an improvement of the historical cost accounting. IAS 39 is a backward looking standard that sets restrictions on the discretionary LLP by managers and only allows the recognition of loan losses when there is objective evidence that they actually occur and considers only identifiable losses at balance sheet date. Ernst and young (2006) emphasized the LLP (impairment) rules provided by IAS 39, stating that the amount to be set aside as provisions for loan loss depends on the state of the economy and are not to be made except when they actually occur.

However, the incurred loss model under IAS 39 is argued to be pro-cyclical. Banks are supposed to increase their LLPs in an expansion so as to cover for loan defaults and reduce LLP in a recession, but because during an economic expansion the Loan portfolio of banks increases as the competition between banks for lending customers‟ increases, businesses flourish with high profits,and the Gross Domestic Product (GDP) of the country is high, banks therefore expects that very few loans will default, thus monitoring efforts and LLPs are reduced.

Conversely, in a recession banks prefers to increase LLPs and reduce lending to customers as business losses are high and GDP of the country is low. Nonetheless, lending risk builds upduring the expansion period but only becomes evident in a recession when the quality of their loan portfolio reduces. Increasing LLPs in a recession and reducing loans to credit worthy customers for investments that may have been otherwise productive leads to credit crisis that worsens and delays a recovery from the recession that affect the financial stability of the entire economy. This means that the restriction set by IFRS on discretionary loan loss provision leading to delay in recognizing LLP makes banks vulnerable to pro-cyclical behavior, by increasing LLP in a recession which directly affects a banks profit and retained earnings that are part of their capital, thus weakens their capital and if their LLPs are not enough to cover loan losses, they are forced to diminish their capital.

Regulators therefore claim that this model for LLP has increase the crisis during economic recession. Gerhardt andFarkas (2006) state that regulators argue that even though fees and risk are incorporated in interest rates charged to borrowers, the recognition of losses is postponed until the borrower actually defaults. As a result, higher earnings are reported during economic expansion and lower earnings in period of economic recession.  Furthermore, The World Bank (2010) opine that during the global financial crisis, IAS 39, as currently implemented have shown overstatement of interest on income inperiods before the occurrence of the loss event and provisions that were insufficient to absorb actual losses that emerged during the crisis, leading to pro-cyclical bank earnings.In addition to this, Larson and street (2004) argue that IFRS under IAS 39 have a complex nature making it complicated and difficult to apply in the recognition and measurement of financial instruments.

In relation to the foregoing, IFRS has been extensively criticized for its pro-cyclical effect on the loan loss provisioning behavior of banks influenced by the state of the economy which affects financial stability and worsens economic situation. This has called for a counter cyclical provisioning accounting standard that would be forward looking. IASB and Financial Accounting Standard Board would replace IAS 39 completely with IFRS 9 effective from January 1, 2018. IFRS 9 is an expected loan loss provision model which guides banks to estimate expected credit losses by considering past events, current economic conditions and reasonable forecasts (IAS Plus, 2013a)

The regulatory change in accounting standards especially LLP, as presently measured under IAS 39 has raised a lot of questions about the impacts of IFRS on the credibility and relevance of financial statements. It is therefore desirable to carry out a study in this area so as to establish whether or not the supposed relationship between IFRS and value relevance as well as that of pro-cyclicality holds true for the Nigerian banking industry.

1.2     Statement of the Problem

Prior empirical studies in Nigeria did not focus on the pro-cyclical effects of banks LLP as a result of adopting IFRS. Rather, they focus on the effect of IFRS on earnings management, timely loss recognition and value relevance. Dearth of studies in this area on the pro-cyclical behavior of banks shows that there is a gapin literature to be filled. Therefore, this study tries to fill the gap by including pro-cyclicality. The problem that has also prompted carrying out the study is the unanswered question of whether or not the value relevance of financial reportshas improved with the adoption of IFRS by Banks, claimed to be to pro-cyclicality, using Nigerian data.

1.3 Research Questions

Based on the problems of the study the research questions are as follows:

1. To what extent is the effect of IFRS moderated value relevance of earnings on share price of DMBs in Nigeria?
2. What is the effect of IFRS moderated value relevance of book value on share price of DMBs in Nigeria?
3. Do IFRS moderated pro-cyclicality have effect on the loan loss provision of DMBs?

 

1.4      Objectives of the Study

The main aim of the study is to evaluate the effect of compulsory change of accounting standards in Nigeria on the value relevance of banks financial reports and the pro-cyclical effect of the change in the recognition and measurement of the main operating accrual item of banks as currently implemented under IAS 39 by Deposit Money Banks in Nigeria. In view of this, the study will have the following specific objectives

1. To investigate the effect of IFRS moderated value relevance of earnings on share price of DMBs in Nigeria.
2. To examine theeffect of IFRS moderated value relevance of book value on share price of DMBs in Nigeria.
3. To assess the effect of IFRS moderated pro-cyclicality on the loan loss provision of DMBs.

1.5     Research Hypotheses

In line with the objectives of the study, the research hypotheses have been written in null form. The research hypotheses are thus;

HO₁:  Mandatory IFRS adoption does not have a significant effect on the value relevance of banks earnings.

HO₂: Mandatory IFRS adoption does not have a significant effect on the value relevance of banks book value.

HO₃:  Mandatory IFRS adoption does not have a significant influence on banks procyclical behavior on discretionary loan loss provision.

1.6       Scope of the Study

The study is limited to the effect of Mandatory IFRS on the value relevance of financial reports and pro-cyclicality of deposit Money Banks in Nigeria. The dependent variables are value relevance (of earnings and book value) and Pro-cyclicality. Value relevance is represented by share price per share (SHP), pro-cyclicality is represented by loan loss provision (LLP), and the independent variable International Financial Reporting Standard is represented by a dummy variable, IFRS.

The study covers a period of 11years, from 2006– 2016. This period is chosen because IFRS was fully and compulsorily adopted by the Deposit Money Banks in Nigeria in the year 2012 and in order to beable to examine the effect of mandatory IFRS on the two empirically testable dependent variables, the period is suitable.Importantly also, the 2007 to 2009 global recession is covered in the time period chosen; the result of the study willtherefore also reflect the impact of the global recession on the two dependent variables in relation with the listed Deposit Money Banks in Nigeria.

1.7      Significance of the Study

There is a rich body of literature on the impact of IFRS on value relevance but most studies did not separate banks from other entities making the results very ambiguous. The study therefore extends and contributes to the existing literature that analyzes the value relevance of earnings and book value of financial reports of banks, using Nigerian domain.

The study will be an invaluable tool for students, academics and individuals that want to know more about IFRS, value relevance and pro-cyclicality of Nigerian banks. Also to the best of the researcher‟s knowledge, the study is the first in Nigeria to extend its investigation to pro-cyclicality through loan loss provision, using listed Deposit Money Banks data. The study will therefore be significant to the general Nigerian public as it will provide quantitative evidence of the relationship of IFRS and pro-cyclicality, as well as provide answer to the factor that has given rise to further change from IAS 39 to IFRS 9.

More so, the study will be equally of benefit to shareholders, potential investors and financial analyst as it will give them an insight of the quality of financial reports and guide their judgments on investment and performance of the DMBs in Nigeria.

Lastly, the study is presently one of the top issues in the Nigerian banking industry, as their adoption of IFRS is relatively new. Therefore, the results of the study will be of significant relevance to the federal government, Federal Reporting Council of Nigeria

(FRCN), Central Bank of Nigeria, other regulating bodies of banks in Nigeria and the DMBs themselves by proffering better ways to regulate banks such that the financial stability of banks can be ensured.

THE IMPACT OF IFRS ON EARNINGS MANAGEMENT

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