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Asset Recognition and Fair Value Consideration: International Accounting Standard in Nigerian

Asset Recognition and Fair Value Consideration: Evaluating the International Accounting Standard in The Context of The Nigerian Environment

ABSTRACT

This study evaluates the International Accounting Standard (IAS) provisions on asset recognition and fair value consideration in Nigerian environment taking auditing firms and incorporated firms in Ebonyi State as a case. Specifically the study sought to determine the influence of cultural background of directors/ auditors on asset recognition and fair value consideration in Nigeria, to ascertain the effect of the final value (carrying value) given to assets in the companies in Nigeria, to ascertain the effect of technical competencies of directors/auditors on asset recognition and fair value consideration in the Nigerian environment and to assess the auditor’s responsibilities on asset recognition and fair value consideration in Nigeria. A cross-sectional survey design was adopted. Data were collected through primary source. The populations of the study were drawn from two groups which comprises directors and auditors (called directors group) managers and accountants (called the managers group) of the selected audit firms and incorporated firms audited by the audit firms in Ebonyi State. Selection of samples was done through stratified random sampling technique in which 82 and 68 of each of the sample were selected. Two sets of questionnaires were prepared for the two sample groups. Data were analyzed using percentages, mean and standard deviation and t-test statistic for testing the hypotheses at 0.05 level of significance. Results obtained showed that both the two groups of respondents agreed that cultural background of the directors/auditors affects asset recognition and fair value consideration in Nigeria and that corruption affects final value (carrying value) given to assets in companies in Nigeria. It was also found that technical competencies of directors/auditors affects asset recognition and fair value consideration in the Nigerian environment and that auditors have some responsibilities and that these responsibilities affects asset recognition and fair consideration in Nigeria. The implication of these results are important in that they suggest that cultural background, corruption, technical competencies and auditors responsibilities affects how directors/auditors perceive asset recognition and fair value consideration and as a results differences in cultural background across countries could lead to differences in asset recognition and fair value consideration. Based on results obtained, this study recommended that national accounting standard board should set up an international financial reporting standard task force and fair value accounting should be limited for assets and liabilities for which there is active markets. Moreso, auditors and other financial personnels should be exposed adequately to training on technical size of fair value accounting until they are competent enough to audit financial statement based on fair value accounting and be provided with necessary experts report.

CHAPTER ONE

INTRODUCTION

1.1.      Background of the Study

            The concept of fair value dates back to 1975 when the Financial Accounting Standard Board (FASB) issued Statements of Financial Accounting Standard No 12: “Accounting for certain Marketable Securities”. Since then, it has continued to make waves in the accounting profession. Following the coming together of several accounting professional bodies, the issue of fair value accounting was again debated. The debate continued until 2001 when International Accounting Standard Board (IASB) was formed. The standard provides for mandatory disclosure of procedures for recognizing financial assets and fair value consideration. Specifically, International Financial Reporting Standard 13 (IFRS 13) deals on fair value presentation.

Fair value is viewed by the Financial Accounting Standards Board (FASB) as the price at which an asset or liability could be exchanged in a current transaction between knowledgeable, unrelated willing parties (Landsman, 2006). The International Accounting Standard Board (IASB) defines fair value as the amount for which an asset can be exchanged or liabilities settled between knowledgeable willing party in an arm lengths transactions. In Ryan (2008), Fair value accounting is regarded as an approach to financial reporting in which firms are allowed to use an ongoing bases to measure and report certain assets and liabilities. Using fair value accounting, firms are expected to report losses and gains when the values of their assets decreases and liabilities increases. Those losses reduce companies’ reported net income. Recent market experience of the global Economic melt down has compounded the difficulties associated with financial instrument valuation in condition of sufficient or insufficient market information. There is need for auditors to understand the rules and principles of accounting as it relates to fair value as well as disclosure requirements so as to be able to adequately apply them, anywhere, world over, hence are required by these standards/provisions to make their examinations based on the provisions of the global standards. 

            The kind of information available to management for estimation of asset values differs widely and this affect estimation in relation to fair value. It may be assumed that the degree of estimating accounting values may also be affected by differences in cultural background, corruption, level of technical competence and auditors responsibilities. It is on this ground that Hornby (2004) observed that cultural background of a people reflects to their arts, customs, habits, beliefs, values, behaviours and material objects that constitute their way of life. The way of life of an individual may be influenced by series of external factors such as corruption, competence or responsibilities bestowed on the individual. Kimbro (2011) describes corruption to exist on an organized system when someone in a position carry out his functions to the detriment of the firm corporate objective by the abuse of power. This corrupt practices can take the form of accounts falsifications and manipulation by the financial personnels, (directors, auditors and accountants inclusive). The nature of work bestowed on them requires a high level of ethics and that account prepared by them must be fraud free, ensure proper accountability, transparency that follow the laid down accounting principles, policies and standards (Ezeani, Ogbonna, Ezemoyih and Okonye, 2012).

In the preparation of the financial statement, it may be assumed that Nigerian directors, auditors or accountants requires basic technical competence and specific accounting knowledge upon which to effectively and efficiently discharge the responsibilities expected from them. Technical competence is the ability of the financial personnels to make use of accounting standard on asset recognition and fair value consideration. It is on this note that Aguolu (2002) posits that auditors is expected to have a perfect understanding of the activities of the organization and be conversant with both current accounting theory and practice. The possession of natural skill and competence may enable the auditors to determine the best value that should be attached to the asset where there is absence of market price. It follows therefore that accounting estimate is an estimation of monetary value where there is no precise means of measurement. Measurement and recognition of financial assets are contained in International Financial Reporting Standards (IFRS) 9. Measurement and disclosure of fair value are significant in financial reporting framework. Therefore, fair value can be measured through historical cost, current cost and realizable value.

            However, for more than 50 years fair values have played significant role in the United State generally accepted accounting principles (GAAP). Ryan (2008) stated that accounting statement that required the use of fair value accounting have considerably increased in number and significant in recent years. The Financial Accounting Standards Board (FASB) in September, 2008 issued an important and controversial new standard known as Statement of Financial Accounting Standards No. 157, fair value measurements (FAS 157). The standard significantly provides more comprehensive guide to assist companies in fair value estimation. The practical applicability of this guidance has been tested by the extreme market conditions during the ongoing credit crunch (Ryan, 2008).

            In the conduct of an audit of an organization, audit evidence are presented to the auditor together with other information supporting the assertions, classes of transactions and balances. The evidence and information contained in the primary documents were been checked by the auditors, in terms of the initiation, authorization, postings, amongst others. The auditor does not readily believe what he or she has been presented with. They have to undergo series of measurement and recognition processes in order to ascertain the actual position of the financial assets. The series of measurement and recognition done would help the auditor in identifying and correcting the various errors and misstatements in the financial statements. This will enable the auditor to make informed opinion on the account examine by him.

            For asset recognition, the auditor uses verification principles to substantiate the evidence provided. Verification principles include checking the existence of the asset, confirmation of authorization, confirmation of title, confirmation of costs or value, physical inspection of the asset, presentation and disclosure. The verification procedures of assets found in a financial statements depends largely on the original transactions being accurately recorded and adequate distinctions made between capital expenditure and revenue. It also depends on proper authorization procedures of the entity. Asset in view of IASB (2001) is defined as probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Recognition of assets in annual reports and accounts involves making a decision about trade off between reliability and relevance. The decision normally is based on proof and verifiability of the asset. In the absence of market price of an assets, there may be problem with asset recognition and measurement. Incurring of cost may be a significant evidence of acquisition or enhancement of future economic benefits (Siegel and Borgia, 2007).

            Asset recognition by an auditor involves verification to ascertain cost, authority to purchase, ownership, value, existence and benefit of the asset to the business. Therefore, the auditors, Directors, accountants and managers of audit firms and incorporated firms audited by those audit firms are pertinent in generating information for the study. So many scholars have posited over the years on factors that could undermine fair value measurement and asset recognition in Nigeria (Doupnik and Riccio 2006; Ezeani et al, 2012; Kim and Yhoon, 2012, Okafor and Ogiedu, 2012; Chan Lam, Smieliavskas and Ye, 2010). Some of these scholars emphasized cultural difference (Doupink and Riccio, 2006), corruption and manipulations (Ezeani et al, 2012), level of technical competence (Kim and Yhoon, 2012), and auditors responsibilities (Chan et al, 2010). None of these researchers have evaluated the influence of these factors on asset recognition and fair value consideration in relation to International Accounting Standard in the Nigerian environment. Hence, the present study sought to evaluate the International Accounting Standard on asset recognition and fair value consideration in Nigeria

1.2       Statement of the Problem

            The auditor’s verification of a company’s title to any of its assets is normally done by inspecting the documents of title or by obtaining certificate as at the balance sheet date from third parties who hold such documents. But where the value of the asset is not known to the Directors of the company, it becomes the responsibility of the auditor to guide them in giving value to the asset with the use of the prevailing market value, known as fair value. Unavailability of a market price or the rate at which an asset can exchanged creates measurement and recognition problems but where such market partly exists, Directors/Auditors determine the best value that should be attached to these assets. Unfortunately, some key issues that have been argued over the years are the reliability of these values owing to the high rate of corruptions in the Nigerian business environment, varying cultural orientations, technical competence and responsibilities bestowed on Directors and auditors by the various status in Nigeria. For instance, scholars such as Schultz and Lpoez (2001); Hodge (2003); Holtfreter (2004); Doupnik and Riccio (2006); Tsakuma (2002); Albrecht (2009); Albrecht (2010); Chan et al  (2010); Marinika (2011); Sera, Alireza and Mohammed  (2011); Ezeani et al (2012); Kim and Yhoon (2012); Ahmed (2012); and Okafor and Ogiedu (2012) have argued that such factors could undermine fair value measurement and asset recognition in Nigeria. How and the extent to which these variables constitute a problem especially in Ebonyi State, Nigeria has not been unfolded, hence need for this study.

1.3       Objective of the Study

            The broad objective of the study was to evaluate the International Accounting Standard (IAS) provisions on asset recognition and fair value consideration in the Nigerian environment taking Ebonyi State as a case. The study is sought to achieving the following specific objectives.

  1. To determine the influence of cultural background of Directors/auditors on asset recognition and fair value consideration in Nigeria.

ii.         To ascertain the influence of corruption on final value (carrying value) given to assets in the companies in Nigeria.

iii.       To ascertain the influence of technical competence of Directors/auditors on asset recognition and fair value consideration in the Nigerian environment.

iv.        To assess the auditor’s responsibilities on asset recognition and fair value consideration in Nigeria.

1.4 Research Questions

            The study was guided by four research questions derived from the specific objectives of the study.

1.         What is the influence of cultural background of Directors/auditors on asset recognition and fair value consideration in Nigeria?

2.         What is the influence of corruption on final value (carrying value) given to assets in the companies in Nigeria?

3.         How do technical competence of Directors/auditors influence asset recognition and fair value consideration in the Nigerian environment?

4.         What are the responsibilities of auditors on asset recognition and fair value consideration in Nigeria?

1.5.      Statement of Hypotheses

H01:     There is no significant difference in the mean responses of directors group and managers group on the influence of cultural background of Directors/auditors on asset recognition and fair value consideration in Nigeria.

H02:     There is no significant difference in the mean responses of Directors group and managers group on the influence of corruption on final value (carrying value) given to assets in the companies in Nigeria.

H03:     There is no significant difference in the mean responses of Directors group and managers group on how technical competence of Directors/auditors influence asset recognition and fair value consideration in the Nigerian environment.

H04:     There is no significant difference in the mean assessment of Directors group and managers group on the responsibilities of auditors on asset recognition and fair value consideration in Nigeria.

1.6       Significance of the Study

            The importance of asset recognition and fair value consideration provided by the International Accounting Standards in context of the Nigerian environment cannot be over-emphasized. Bearing this situation in mind, the study will be significant to different groups of people: firms, government and supervisory agencies, shareholders, future researchers, directors/auditors, academics and others as shown below:

            The study shows that human resource is considered the most important resource in every entity because it represents the resource that controls and directs the other resources. Therefore it brings to the attention of firm owner that the competence of financial personnels is important for credible financial reporting. It also stresses that high technical competence of the directors/auditors in asset valuation is of great importance for firm’s performance; hence, there is the need for firms to improve the quality of their performance by employing qualified accounting and financial personnels. Firms also have to learn not to attach much interest on paper qualification but on necessary skills and knowledge that will help their employees to plan and perform audit procedures that is related to firm’s asset values.

            The government and supervisory agencies will benefit from the outcome of the study by utilizing the result in determining the level of firm’s assets valuation and disclosures. The study exposed the duties and responsibilities of the directors/auditors in the recognition of company’s asset and financial reporting in accordance with generally accepted accounting and auditing standards.  

            This study assist in decision making processes on the level of asset recognition, disclosures and the relevance of financial accounts prepared by firms in Nigeria. Shareholders (providers of fund), investors with other financial statements users depend heavily on financial statements more especially for assets that has no available requisite markets, that set prices before taking decisions. The shareholders will benefit from the study; it will delineate the responsibility of the auditor from the management of the company especially in matters that will assist in risk reduction.

            Future researchers will find this work of great relevance since not much research has been carried out in this area especially in Nigerian environment. The study has provided empirical evidence that culture, corruption, technical competence of financial personnels and auditors responsibilities has significant effect on fair value consideration of assets in Nigeria. The fair value requirements under international accounting standard are discussed and evidence of value relevance of fair value is also highlighted. These will serve as a reference material to assist future researchers in their own study.

            The study shows that the duties and responsibilities of directors/auditors will enable the management to coordinate operations of the entire organization/firm with a view to achieving their overall objectives and aspirations. It is clear that accounts falsifications and manipulations have accounted for essence of ethics in business, leads to company’s bankrupancy, loss of investments and savings. Directors/auditors will see the responsibilities of each group in terms of asset recognition and fair value consideration.

1.7       Scope of the Study

            The study focused on 20 selected audit firms and incorporated firms audited by those audit firms in Ebonyi State. Specifically, the study focused on the Directors, auditors, accountants and managers of those firms in Ebonyi State as listed on page 80 to 81. The study also covered the influence of cultural background of directors/auditors, corruption, technical competence and auditors responsibilities on asset recognition and fair value consideration as perceived by the respondents.

1.8.      Limitations of the Study

            The major limitation of this study is inadequate of substantial empirical evidences on asset recognition and fair value consideration among firms and incorporated firms in Ebonyi State, Nigeria. The implication of this is that most of the arguments used in the study were scholars who studied in similar areas in the developed countries whose country-specific factors such as enforcement of laws and cultural differences exist.

            This study also focused mainly on auditing firms and incorporated firms with offices in Ebonyi State and so the results should be carefully interpreted. Again the study excluded financial firms (banks, insurance and other financial firms) as their valuation techniques are not always in the same line with firms under study. Therefore findings did not indicate the information on asset recognition and fair value consideration of financial firms.

            Another limitation of the study is on the uncorporative attitude of respondents. The researcher had difficulty in getting all the copies of the questionnaire filled, returned or granted interview particularly on such matters concerning business organizations for reasons best known to them. Logistics problems were seriously encountered in effort to visit the areas the researcher needed to source useful information. The cost implications, time constraints and the usual bureaucratic bottlenecks were very serious limitations on this type of studies. However, the researcher was able to achieve the goal of the research through resilience and determinations. Despite the effort of the researcher, some of the respondents did not return their questionnaire.

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