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.

Bank income smoothing, institutions and corruption

“…For example, the result for Nigeria show that Nigerian banks do not use loan loss provisions to smooth income during the period analysed, and this result is consistent withOzili and Outa (2018).…”

The Joint Effect of Borrower Targeted Macroprudential Instruments and Capital Regulations on Procyclicality of Loan-Loss Provisions

“…The relation between LLP and current-period earnings realizations (PROF-ITBTP) is applied to track the discretionary income smoothing by banks (Liu & Ryan, 2006;Fonseca & González, 2008;Bouvatier & Lepetit, 2008;Bushman & Williams, 2012;Ozili & Outa, 2018;Ozili & Thankom, 2018). The higher the positive coefficient on PROFIT the more discretionary income smoothing there build up during economic booms.…”

Bank loan loss provisions research: A review of the empirical literature

“…The study also states that there are other important factors that should be considered by banks in Africa, such as credit inclusion, market risk, and operations. Ozili & Outa (2018) conducts research that addresses risks in the banking industry. the results of the study state that banks that have high financial growth have low losses, on the other hand, banks that have high financial growth can increase credit by ensuring stronger investor protection.…”

“…This study concludes that there is an impact of the financial crisis in several European countries using fuzzy-set qualitative analysis (fsQCA) there are indications of reducing earnings management and capital management practices. Some research articles state that banks use LLP as a tool to carry out long-term income management (Anandarajan, Hasan, & Lozanovivas, 2003;Laeven & Majnoni, 2003;Taktak, Zouari., & Boudriga, 2010;Taktak, 2011;Othman & Mersni, 2014;Shawtari et al, 2015;Wijayanti & Diyanty, 2017;Curcio, Simone, & Gallo, 2017;Abu-serdaneh, 2018;Isa & Rashid, 2018;Ozili & Outa, 2018) On the other hand there is research which states that bank managers do not use LLP as a tool to practice earnings management (Ahmed, Takeda & Thomas, 1999;Leventis, Dimitropoulos, & Anandarajan, 2013;Adzis, Tripe, & Dunmore, 2016)…”

“…There are several articles that focus on income smoothing and LLP in banking industry (Taktak, Zouari., & Boudriga, 2010;Taktak & Taktak, 2011;Leventis, Dimitropoulos, & Anandarajan, 2013;Beatty & Liao, 2014;Adzis, Tripe, & Dunmore, 2016;Cummings & Durrani, 2016;Wijayanti & Diyanty, 2017;Ozili & Outa, 2018;Pinto & Picoto, 2018;Isa & Rashid et al, 2018), another topic focus on signaling activities and LLP examine by (Sood, 2012;Othman & Mersni, 2014;Fitriana & Arfianto, 2015;Abuserdaneh, 2018;Ozili & Outa, 2018;Isa & Rashid, 2018).…”