THE IMPACT OF IFRS ON REVENUE RECOGNITION ISSUE

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THE IMPACT OF IFRS ON REVENUE RECOGNITION ISSUE.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

As the majority of the world accepts IFRS, Nigeria is one of the last countries to adopt IFRS. Not conforming to these new rules could result in the Nigeria losing its place as a major economic player in the global economy (Obazee, 2009). The IASB has prepared a less complex version of IFRS called IFRS for SMEs. This set of standards is less complex, easier to apply and are designed to be less stringent than national GAAPs and full IFRS which can be adopted by small and medium scale companies. IFRS have significant impact on company’s loan covenants due to differences in the recognition of revenue and financial reporting. There is need for the government of Nigeria to educate managers of companies on how IFRS will impact their client relationships. When entering new agreements or restructuring the old ones, it will be important to reflect the new standards or place wording into pre-existing loan agreements that stipulate compliance with standards as they are written today (Juan, 2005). According to Callao et al (2009), IFRS also allows for variances in the way revenue is recognized across industries. IFRS applies a more broad approach to recognizing revenue which may be beneficial for certain situations. This can help companies across Nigeria assess which reporting methods benefit the company now and what will be required of the firm in the future. In certain cases reporting under IFRS now can be beneficial. Lease Accounting is also one area where IFRS has significant differences and stands to impact a wide range of organizations. This will impact all organizations that lease everything from real estate to office equipment. One of the major changes will be the requirement to recognize all lease obligations on the firm’s balance sheet. If the companies do any kind of leasing,IFRS can work with the firm and their accounting team to get up to speed on the new requirements and help put in place the technology and processes to comply with the IFRS principles for leases (Ball, 2005). IFRS rules will not only have effect on company’s financial statements, it will also have an impact on tax accounting methods. It will be important for company’s tax team to understand the differences in reporting methods to ensure proper treatment for tax reporting (Ball, 2005). IFRS also makes mergers and acquisitions/business valuations easy form organizations across the world. Business valuations done using IFRS financial statements will likely change the valuation of a company (Oyedele, 2010). One major change will be the way the value and report of intangible assets is done. When a firm is entering a merger and acquisition transaction,they will need to understand the impact that IFRS may have on the agreement in the future or use IFRS to prepare the contract today. This could be advantageous for both parties and this can help firms decide as the seller or the buyer how to use IFRS to their advantage and create deal structures compliant with IFRS.

1.2 Statement of problem

Listed companies have a lot of benefits to derive from conversion to IFRS, most importantly resolution of revenue recognition issues. Companies do have the ability to overcome revenue recognition issues and do not operate in isolation. Therefore, in the present global environment, compliance with foreign reporting requirements will help streamline their financial reporting. This will help minimize reporting costs as a result of common reporting systems and consistency in statutory reporting. Revenue recognition will enable comparison/benchmarking with foreign competitors possible and this may offer companies an edge over competitors in the eyes of users.However, it is important to note that since the adoption of IFRS will transcend national boundaries/cross border, acquisitions and joint venture will be made possible and there will also be easy access to foreign capital and companies can trade their shares and securities on stock exchanges world-wide. For instance, present and emerging stock exchanges would require financial statements prepared under IFRS. Globally, investors would be able to make rationale and informed decisions and all do influence revenue recognition. All these informed the rationale behind this study on the impact of IFRS on revenue recognition issue on selected companies in Rivers State.

1.3 Purpose of the study

The purpose of this study is to examine the Impact of IFRS on Revenue Recognition Issue (A Case Study of Selected Companies in Rivers State). The following are the objectives of this study:

1. To examine the impact of IFRS on revenue recognition issue of selected companies in Rivers State.

2. To determine the benefits of adoption of IFRS on the selected companies in River State.

3. To identify the challenges facing the adoption of IFRS by the selected companies in River State.

1.4 Research question

1. What is the impact of IFRS on revenue recognition issue of selected companies in Rivers State?

2. What are the benefits of adoption of IFRS on the selected companies in River State?

3. What are the challenges facing the adoption of IFRS by the selected companies in River State?

1.5 Research hypotheses

HO: There is no significant relationship between the adoption of IFRS and revenue recognition issue in the selected companies in Rivers State.

HA: There is significant relationship between the adoption of IFRS and revenue recognition issue in the selected companies in Rivers State.

1.6 Significance of the study

The following are the significance of this study:

1. The findings from this study will educate managers of businesses in Nigeria on the benefits accruable from the adoption of IFRS with emphasis on its impact on revenue recognition issue of companies.

2. This research will be a contribution to the body of literature in the area of the effect of personality trait on student’s academic performance, thereby constituting the empirical literature for future research in the subject area.

1.7 Scope of the study

This study will cover some selected companies in River State, Nigeria. It will also cover the impact of the adoption of IFRS on the revenue recognition issues of the selected companies.

1.8 Limitation of the study

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 Definition of Terms

IFRS: International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB).

Revenue: are inflows of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.”

REFERENCES

Ball, Ray (2005): “International Financial Reporting Standards (IFRS): Pros and Cons for investors”, Accounting and Business Research, Forthcoming.

Callao Susana, Ferrer Cristina, Jarne Jose I. and Lainez, Jose A. (2009): “The impact of IFRS on the European: Is it related to the Accounting Tradition of the Countries”? Journal of Applied Accounting Research, 10 (1), pp 33-55

Juan Jose Fermin Del Valle (2005): “International Convergence and Implementation of International Financial Reporting Standard”, Vill Annual Assembly of the Association of Supervisors of Banks of the Americas, Oaxaca, September 9, pp. 3-10.

Obazee, Jim Osayande (2009): “Enhancing Enforcement of Accounting Standards in Nigeria and Efforts at Aligning with International Standards”, “Seminar for Lecturers of Accounting and Related By Nigerian Accounting Standards Board, pp 74-79.

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