This article was first published in the March 2012 International edition of Accounting and Business magazine.
Many entities in Nigeria have started the process of converting to International Financial Reporting Standards (IFRS) following the announcement of IFRS adoption by the Nigerian Accounting Standards Board (NASB) in September 2010. The process of converting to IFRS has proved challenging in many other territories around the world, and Nigeria is no different. But while many of the transition issues are universal, Nigeria faces challenges that are unique to its environment.
An area of significant difference between IFRS and Nigerian GAAP is the scope of consolidation. Although the definition of control under Nigerian GAAP is comparable to IFRS, the percentage voting power is regarded as the most significant factor in determining whether an entity has control. Other indicators, such as board representation, are often not considered to carry as much weight. In addition, there is no guidance in Nigerian GAAP on special-purpose entities (SPEs); in practice, these are not consolidated unless ownership interest exceeds 50%.
The Companies and Allied Matters Act (the Nigerian company law) also provides an exemption from consolidation where the subsidiary and holding company’s businesses are so different that they ‘cannot reasonably be treated as a single undertaking’.
Accounting for associate undertakings in accordance with Nigerian GAAP is similar to IFRS. Significant influence is also presumed to exist under Nigerian GAAP when an entity holds a greater than 20% interest in the voting rights of the entity. However, other indicators are often not regarded as evidence of significant influence, so a number of investments that would be associates under IFRS are accounted for at cost.
Fair value accounting
More assets and liabilities are stated at fair value under IFRS than under Nigerian GAAP. Accounting for certain financial instruments at fair value in accordance with IAS 39, or IFRS 9 if adopted early, is expected to have a significant impact. No Nigerian GAAP equivalent exists for accounting for financial instruments; however, certain types of financial asset are covered by the definition of investments.
The scope of the definition of investments under Nigerian GAAP is broad, as it covers all assets ‘acquired by an enterprise for the purpose of capital appreciation or income generation without any activities in the form of production, trade or provision of services’. This definition incorporates financial assets such as equity and debt investments but also includes investment property. Equity investments are often carried at cost, and long-term debt investments are measured on a basis comparable to amortised cost under Nigerian GAAP.
Accounting for certain assets and liabilities at fair value is an area of significant difference, and implementation is difficult. The lack of observable market prices and market inputs required for valuation techniques complicates the determination of fair value. In addition, market prices in Nigeria are typically wide-ranging.
Many more disclosures are required under IFRS than under Nigerian GAAP. Companies are often uncomfortable with the level of transparency this generates, particularly as it relates to segment reporting and related-party disclosures. The guidance in Nigerian GAAP for segment reporting was derived from the old IAS 14 and requires entities to disclose segment information for business as well as geographical segments.
The Companies and Allied Matters Act requires entities to disclose loans, including balances at reporting date, and other transactions favouring directors and officers. Nigerian GAAP offers no other definition of related parties or requirements to disclose transactions with related parties.
The only other similar obligation to disclose ‘insider-related credits’ is imposed on entities regulated by the Central Bank of Nigeria (CBN). The CBN defines insider-related credits as ‘transactions involving shareholders, employees, directors and their related interests’. The term ‘director’ includes a director’s wife, husband, father, mother, brother, sister, son and daughter and their spouses. The CBN’s disclosure requirements do not apply to credits extended to employees under their employment scheme of service, or to shareholders whose shareholding and related interests are less than 5% of the bank’s paid-up capital at the end of the reporting period.
The identification of related parties for IFRS reporting purposes is proving difficult for many entities in Nigeria, particularly related entities that are controlled or jointly controlled by key management personnel and their close family members. For the purposes of IFRS reporting, key management personnel is defined as ‘those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity’. Extracting information about related-party transactions is also complex, as processes to identify these transactions did not previously exist.
Other areas of difference
Another significant area of difference is share-based payments. Nigerian GAAP does not provide any guidance on accounting for these transactions.
Measurement of property, plant and equipment (PPE) may also result in differences when an entity moves to IFRS. There is no guidance on the use of residual values in determining the depreciable amount under Nigerian GAAP, and componentisation of assets is not required.
IFRS – a moving target
One of the big challenges for Nigerian entities in preparing IFRS financial statements is the availability of data. Providing the information required for IFRS reporting purposes is difficult, if not near-impossible at times. IFRS is a moving target, and significant changes are expected in the next few years. While coming to terms with the new data requirements and considering system changes, entities will also need to be aware of such changes.
Berna Buys is from PwC’s Capital Markets Group in South Africa, and Tony Oputa is from the firm’s Conversion Advisory Group in Nigeria
- Nigerian GAAP comprises Nigerian Accounting Standards (NAS) and the Nigerian Companies and Allied Matters Act.
- NAS consists of 30 Statements on Accounting Standards (SAS) broadly based on old IAS standards and containing some industry-specific guidance. Local practice for transactions not explicitly covered by SAS varies.
- Statements must be prepared under IFRS for financial years beginning on or after 1 January 2012 (all listed entities and significant public interest entities, or PIEs); on or after 1 January 2013 (all other PIEs); or on or after 1 January 2014 (all other entities).
- Application of IFRS will require more judgment than Nigerian GAAP, which in many instances is more rules-based. This has raised concern that there may be divergence in practice when applying a principles-based accounting framework.
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