Evaluate the Impact of Globalization on IFRS Adoption

Introduction

Globalization, the increasing interconnectedness of economies and cultures worldwide, has

profoundly influenced various aspects of business, including financial reporting. International
Financial Reporting Standards (IFRS) have emerged as a significant tool to harmonize global
accounting practices and facilitate cross-border transactions. This paper aims to evaluate the
impact of globalization on IFRS adoption, exploring both the driving forces and challenges
associated with this process.

International Financial Reporting Standards (IFRS) consist of accounting standards globally

employed to foster international accounting congruence and symmetry, comparability and
consistency in the way financial transactions are treated and reported. The International Financial
Reporting Standards (IFRSs) are a set of global accounting standards developed for the preparation
and presentation of the financial statements of companies. Hussain (2022) opined in conformity
that harmonized accounting standards are free of logical conflict, and as such, improve financial
information comparability across nations.
Dimitriou (2020) also affirmed the purpose of introducing a new accounting standard such as IFRS
as a means of improving the transparency and comparability of firms which will have a direct
impact on the capital market through a change in cost of capital and market liquidity. The assertion
of Habib et al. (2019) in their empirical research evidence further lends support to the fact that
uniform accounting standards will increase market liquidity, decrease transaction costs for
investors, lower costs of capital, and facilitate international capital formation such flow in the long
run enables reduced costs which will in turn, lead to increased cross-listings and cross-border
investments. Ouda and Jorge, (2021) revealed that several researchers have confirmed that the
adoption of IFRS at the country level has increased direct foreign investment, a high level of global
market integration and improved quality accounting indicators.
The Nigerian Accounting Standards Board (NASB) was responsible for developing and issuing
standards known as Statements of Accounting Standards (SAS) and in the new dispensation, the
body was renamed Financial Reporting Council of Nigeria (FRCN) as the regulatory body
overseeing the adoption and implementation of the IFRS (Kenneth, 2012). The said IFRS replaced
Nigerian GAAP which was commonly and generally adopted in the year 2012 before the
implementation of IFRS, financial statements were being prepared and reported through the
guidance of the Nigerian Statement of Accounting Standards (SAS) as produced by the Nigerian
Accounting Standards Board (NASB), an accounting regulatory body that has supreme authority
to issue the Statements of Accounting Standards (SAS) as local accounting standards in preparing
the financial statements in the past by companies so that compliance with the standards is promoted
and enforced. However, SAS is now outdated and replaced by International Accounting Standards
and the relevant regulatory body is the International Accounting Standards Board.
In the same vein, Ezejiofor (2018) asserted that the internationalization of trading activities
reported cases of corporate failure of some blue-chip companies and the quest by companies to
raise funds internationally beyond their shore has called for its full adoption.
The imperativeness of standardizing the financial reports of entities in Nigeria and all other
countries of the world became so pronounced and as a result, yielding to the beckoning of the best
practice in the world appears mandatory so that comparability of financial statements of seemingly
the same entities is on array across the world as submitted by Polukhov (2023).
The universality of operating accounting standards in the world was thought to impact the
presentation of financial statements so that meaningful inference is deduced for decision-making.
A good financial reporting practice supported by quality accounting standards is a pre-condition
for good decisions Abhayawansa and Adams (2022). In addition, Caglio et al. (2020) opined that
market illiquidity reduced with mandatory disclosures suggesting that it was a more credible
information source for the user.
Switching from the old standard, just as it was in practice in Nigerian GAAP (Generally Accepted
Accounting Standards) to International Financial Reporting Standards (IFRS) was an attempt to
close the loopholes that were identified and these loopholes were seen to have been negatively
affecting the financial statements against what is expected. The need for IFRS became apparent as
a result of the collapse of many seemingly giant and multinational businesses which started going
into extinction but were never shown in their financial statements because the statements did not
depict the fact that the companies were going into extinction (Amaefule et al., 2018). To this end,
the objective of this study is to evaluate the effect of IFRS adoption on the return on equity of the
listed manufacturing companies in Nigeria.

Literature Review & Theoretical Review

Agency Theory

The agency dilemma, or conflict of interest, between owners (the primary) and managers (the
agents), is central to the agency theory, which was developed by Stephen Ross and Barry Mitnick
in 1973 (Mitnick, 2013). When a principal delegates power and responsibility to an agent, a
fiduciary relationship is created (Zeckhauser & Pratt, 1985). According to agency theory, a
principle-agent relationship exists when a principal entrusts an agent with certain responsibilities.
The agent's opportunism or self-interest can lead to several problems for the principal in an agency
relationship. For instance, the agent could not behave in the principal's best interest, or the agent
might only act partially in the principal's best interest. When applied to businesses and corporate
control issues, agency theory emphasizes the importance of corporate governance mechanisms like
the board of directors as a check and balance to mitigate the risks introduced by the principal-agent
dynamic. Management is the "agent" of the "owners" of a business, but there must be checks and
balances in place to prevent abuse of power, as stated by Blair and Stout (2017). The concept of a
corporation's "separation of ownership" provides a foundation for much of agency theory. The
most frequently mentioned example of an agency relationship in the context of corporate
governance has the management acting as agents for the shareholders. As good as this theory to
the study, which adjudges that the directors are responsible for managing the manufacturing
companies in the best interest of the shareholders, otherwise could be the practice where the
interest of the directors overrides that of the shareholders invariably breaching the confidence
reposed on them. As a result, the importance and relevance of IFRS could be defeated.

Compliance Theory (COT)

Compliance theory as proposed by Ronald 1993 in the context of international financial reporting
standards (IFRS) refers to the study and application of regulations and guidelines set forth by
standard-setting bodies, such as the International Accounting Standards Board (IASB), to ensure
that financial statements and reports are prepared and presented by the prescribed requirements.
The board of directors is expected to enforce necessary regulations so that the best practices in
manufacturing companies will align with the best practices in presenting standard financial reports
to the users. Many times, when the directors and relevant accounting staff are not well grounded
in the application of IFRS, its operationalization becomes difficult. The fundamental objective of
compliance theory is to establish and maintain consistency, comparability, and transparency in
financial reporting across different countries and jurisdictions. By adhering to IFRS, organizations
can enhance the credibility and reliability of their financial information, facilitating better decision-
making by users of financial statements.
Compliance with IFRS involves several key elements:
Adoption: Countries or jurisdictions may choose to adopt IFRS as their national accounting
standards. This entails the integration of IFRS principles and guidelines into local accounting
regulations, ensuring consistent application and interpretation of the standards.
Implementation: Organizations need to implement IFRS within their financial reporting
processes. This involves understanding the specific requirements of each standard, making
necessary adjustments to existing accounting policies and practices, and ensuring proper
measurement, recognition, and disclosure of financial information.

The Rise of Globalization and Its Impact on Financial Reporting

Globalization has accelerated the pace of economic integration, driven by factors such as
technological advancements, liberalization of trade and investment, and increased global
competition. As businesses expand their operations across borders, the need for consistent and
comparable financial information becomes paramount.

Traditional national accounting standards, often influenced by domestic economic and cultural
factors, have proven inadequate in addressing the complexities of a globalized business
environment. This has led to a growing demand for a unified set of accounting standards that can
be applied consistently across different jurisdictions.

The Role of IFRS in a Globalized World

IFRS, developed by the International Accounting Standards Board (IASB), provide a

comprehensive framework for financial reporting. By adopting IFRS, countries can enhance the
transparency, comparability, and reliability of financial information, thereby attracting foreign
investment, facilitating cross-border mergers and acquisitions, and reducing the cost of capital.

Key Benefits of IFRS Adoption

• Enhanced Transparency and Comparability: IFRS provides a common language for

financial reporting, making it easier for investors, creditors, and other stakeholders to
understand and compare financial information from different companies across the globe.
• Reduced Cost of Capital: By improving the quality and reliability of financial
information, IFRS can help reduce the perceived risk associated with investing in
companies that adhere to these standards. This can lead to lower borrowing costs and
increased access to capital markets.
• Facilitated Cross-Border Transactions: IFRS can streamline cross-border mergers and
acquisitions by eliminating the need for complex reconciliations between different national
accounting standards.
• Improved Corporate Governance: IFRS often require higher levels of disclosure and
transparency, which can strengthen corporate governance practices and reduce the risk of
fraud and corruption.
Driving Forces of IFRS Adoption

Several factors have contributed to the increasing adoption of IFRS worldwide:

• Globalization of Capital Markets: The integration of global capital markets has created
a demand for consistent and comparable financial information.
• Investor Demand: Investors increasingly seek high-quality, transparent financial
information to make informed investment decisions.
• Regulatory Convergence: Many countries have recognized the benefits of adopting IFRS
and have incorporated them into their domestic regulatory frameworks.
• Corporate Demand: Multinational corporations often prefer to use a single set of
accounting standards to simplify their financial reporting processes and reduce costs.

Challenges and Barriers to IFRS Adoption

Despite the numerous benefits, the adoption of IFRS is not without challenges:

• Cultural and Economic Differences: Different countries have varying cultural,

economic, and legal systems, which can influence their accounting practices and
preferences.
• Complexity of IFRS: IFRS can be complex and requires significant expertise to apply
correctly. This can increase the cost of compliance for companies, particularly small and
medium-sized enterprises (SMEs).
• Enforcement and Quality Control: Ensuring consistent and high-quality application of
IFRS requires effective enforcement mechanisms and robust quality control procedures.
• Political and Economic Considerations: Political and economic factors can influence the
pace and extent of IFRS adoption.

The Impact of Globalization on the Future of IFRS

Globalization is likely to continue to drive the adoption and evolution of IFRS. As the global
economy becomes increasingly interconnected, the demand for a single set of high-quality
accounting standards will grow. To remain relevant, IFRS will need to adapt to changing business
models, emerging technologies, and evolving global economic conditions.

The IASB will play a crucial role in shaping the future of IFRS by continuously updating and
improving the standards to address the needs of a globalizing world. Additionally, international
cooperation and collaboration among regulators, standard-setters, and other stakeholders will be
essential to ensure the effective implementation and enforcement of IFRS.

Discussion and Recommendations

Differenced Generalized Methods of Moment were used for examining the relationship that exists
between IFRS Adoption and return on equity. The study found that the adoption of International
Financial Reporting Standards (IFRS) indeed had a discernible impact on manufacturing company
performance as Plant property and equipment (PPE), impairment, shareholders' funds, borrowing
cost and leverage, serving as proxies for IFRS adoption were found influencing the performance
of manufacturing companies, underscoring the relevance of IFRS adoption in assessing
performance. However, the lag of return on equity was not significant, indicating that there is no
relevance of the previous year's return on the current year's return. These findings align with those
of Ndubuisi, Regina, and Ofoegbu (2019) and Abe, Ajayi-Owoeye, and Adegbile (2020), who
similarly reported the significant impact of IFRS adoption on manufacturing company
performance.
As a result, Manufacturing companies heavily rely on property, plant, and equipment (PPE) to
produce goods. Efficient management of these fixed assets is crucial for maximizing returns on
equity (ROE). Policies that encourage companies to invest in modernizing equipment, streamline
production processes, and regularly maintain assets can lead to improved asset utilization and
higher profitability.
Impairment of assets significantly impacts a company's financial performance. Implementing
robust impairment testing procedures ensures that assets are accurately valued on the balance
sheet, reflecting their true economic value. Policies promoting transparency in impairment
assessments and requiring regular reviews can help maintain investor confidence and prevent
overstatement of asset values.
The negative relationship between shareholders' funds and ROE suggests that an excessive reliance
on equity financing may dilute returns for shareholders. Policymakers can encourage companies
to optimize their capital structure by providing incentives for accessing debt markets at favourable
terms, promoting equity financing only when necessary, and offering tax incentives for interest
payments.
High borrowing costs can erode profitability and decrease ROE. Policymakers can implement
measures to encourage prudent debt management, such as providing guidance on debt refinancing
strategies, facilitating access to lower-cost financing options, and promoting financial literacy
among business owners to make informed borrowing decisions.
The adoption of International Financial Reporting Standards (IFRS) can enhance the
comparability, transparency, and credibility of financial statements, leading to better decision-
making by investors and stakeholders. Policymakers can promote IFRS adoption by offering
technical assistance, providing training programs, and incentivizing compliance through tax breaks
or regulatory support.
Policymakers play a crucial role in ensuring the integrity and reliability of financial reporting.
Strengthening regulatory oversight, enforcing compliance with accounting standards, and
promoting best practices in transparency and disclosure can improve the quality of financial
information available to investors, reducing information asymmetry and enhancing market
efficiency.
Access to financing is essential for business growth and expansion. Policymakers can facilitate
access to capital markets by reducing regulatory barriers, promoting the development of alternative
financing options (such as venture capital or crowd-funding), and providing credit guarantees to
mitigate lender risk. Additionally, fostering a supportive ecosystem for entrepreneurship and
innovation can attract investment capital and spur economic development

Conclusion

Globalization has been a significant driver of IFRS adoption. By providing a common language
for financial reporting, IFRS can enhance transparency, comparability, and efficiency in global
capital markets. However, challenges such as cultural differences, complexity, and enforcement
remain. To fully realize the benefits of IFRS, continued efforts are needed to address these
challenges and ensure the ongoing relevance of the standards in a rapidly changing global
environment.
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