International Financial Reporting Standards and Earnings Management Behaviour of Listed Deposit Money Banks in Nigeria

Abstract

This paper investigates the effect of International Financial Reporting Standards adoption on earnings management behavior of listed deposit money banks in Nigeria. The study examines how the change in the recognition and measurement of banks’ loan loss provision, affects earnings management behaviour. A sample of 15 deposit money banks listed on the floor of the Nigerian Stock Exchange (NSE) was used. Financial data in respect of the periods before and after adoption of the IFRSs (i.e., 2004 to 2008 and 2009 to 2013) were used. The banks under investigation experience a significant growth of their loan portfolio, on average, 16.65 % (median 14.77 %) during IFRS period as compared to 10.12 % (8.79 %) before IFRS adoption. Non-performing loans (NPLit-1) remain relatively stable over the whole time period, and represent, on average, 3.44 % (median 2.21 %) of loans before and 3.19 % (median 1.99 %) after IFRS adoption. Regulatory capital ratios (RegCap_it) remain basically similar in both time periods. Earnings before taxes and loan loss provisions (EBTLLP_it) increase slightly; however, this increase is statistically not significant. Besides the impressive loan growth the most significant change between the two time periods relates to our dependent variable the level of loan loss provisions (LLPit). LLPit decreases significantly from a mean of 0.72 % (median 0.54 %) to 0.49 % (median 0.32 %) after IFRS adoption. Taken the descriptive statistics together, the study concludes that the restriction to incurred losses under IFRS significantly reduces the ability of banks to engage in earnings management.

Keywords: IFRS, IAS, financial reports, loan loss provisions, earnings management, non-performing loans, loss recognition, bank regulation, earnings before taxes and loan loss provisions.