Bank Earnings Smoothing During Mandatory IFRS Adoption in Nigeria

Abstract

We examine the extent of bank earnings smoothing during mandatory IFRS adoption in Nigeria, to determine whether mandatory IFRS adoption increased or decreased income smoothing among Nigerian banks. We find that the mandatory adoption of International Financial Reporting Standards (IFRS) is associated with lower earnings smoothing among Nigerian banks, which implies that Nigerian banks do not use loan loss provisions to smooth reported earnings during the mandatory IFRS adoption period. We find evidence for earnings smoothing via LLP during voluntary IFRS adoption. Earnings smoothing is not significantly associated with listed and non-listed Nigerian banks during voluntary and mandatory IFRS adoption. Overall, the findings indicate that mandatory IFRS adoption improves the informativeness and reliability of loan loss provisions estimate by discouraging Nigerian banks from influencing loan loss provisions for earnings smoothing purposes during the mandatory IFRS adoption. The findings of this paper are relevant to the debate on whether IFRS reporting improves the quality of financial reporting among firms in Nigeria. The implication of the study is that IFRS has higher accounting quality than local GAAP in Nigeria as it improves the quality and informativeness of accounting numbers (LLPs and earnings) reported by Nigerian banks during the period examined.

Keywords: Loan Loss Provisions, Discretionary Accruals, Income Smoothing, Earnings Management, Nigeria, Banks, IFRS

JEL Classification: G21, G28