The international financial reporting standards (IFRS) have encouraged national accounting standards setters to converge. As a result, many countries have changed theirs to the IFRS. This convergence has lots of advantages to a country. In Nigeria, the use of IFRS began in 2012 when the financial reporting council of Nigeria (FRCN) urged public traded companies to adopt IFRS in reporting financial reports. You can read more about it in the historical development of accounting article.
FRCN published a set of road maps to achieve this. From 1st January 2012 entities listed in the Nigerian Exchange Group were the first to adopt IFRS. The nest was an unlisted public company on 1st January 2013. Finally, small and medium scale enterprises were mandated to comply with it in 2014.
Meaning of IFRS Convergence
IFRS Convergence means the adoption and compliance of the international financial reporting standards in countries where it was previously not used. Complying with these standards brought a lot of benefits not only to countries adopting it but also to the United States stock exchange markets. Many US-listed companies can now sell their shares globally because their financial statements can be understood by other countries.
Five Significance of IFRS Convergence in Nigeria
Compatibility with similar entities in Africa and beyond
The use of a single set of accounting standards in Nigeria and other African countries aid compatibility. How? The same principles, rules, and methods are applied by different entities in the same sector across the continent. Therefore, there will be no need for any adjustment or reconciliation of any entity’s financial reports before comparing their performance and position. Therefore, reducing the timeframe to make informed decisions.
Reconciliation of US Standards
Before now, US companies were expected to reconcile their financial statements with that of IFRS. Why? The United States uses GAAP rule base accounting standards published by FASB. Therefore, the US security and Exchange Commission (SEC) requires the reconciliation of US GAAP to IFRS to enable users to interpret these statements using 20k reports. However, with the adoption by the SEC, US companies are no longer reconciling those statements. Therefore, making it easy for US companies and investors to understand financial reports from other countries like Nigeria.
Encourages Foreign investment
When the previous SAS (statement of accounting standards) was used in Nigeria, foreign investors did invest in Nigeria. However, they need to understand SAS for them to interpret financial reports in Nigeria. However, with IFRS Convergence, this is no longer necessary. No wonder, there are more foreign direct investments in Nigeria than it was before the convergence.
Facilitates Stock Market Growth
FRCN urged public entities listed in the Nigerian Exchange Group (NGX) to adopt IFRS standards starting 1st January 2012. The adoption enabled foreign investors to buy shares of these companies. One reason for this is that foreign investors in the US and Europe could understand the financial statements of publicly-traded companies in the NGX. However, accountants, managers, and directors in Nigeria have to learn the new accounting standards to ease compliance.
Easier Consolidation of Accounts
IFRS Convergence aids the consolidation of financial statements of a parent company with subsidiaries and branches in different parts of the world. Before convergence, a parent company based in Nigeria will need to adjust the financial statements of its foreign branches to suit the local accounting standard. It is only after this financial statement can be prepared. Also, parent entities with foreign subsidiaries will do the same task. However, with the adoption internationally, financial reports are prepared with ease.
The convergence of IFRS by national accounting standard setters has resulted in harmony among entities worldwide. It has aid compatibility and international funding. In addition, it has reduced the costs of setting new accounting standards by those countries.