Loan Loss Provisions, Earnings Smoothing and Capital Management Under IFRS: The Case of Deposit Money Banks in Nigeria

Clement Chiahemba Ajekwe

doi:10.11648/j.ajmse.20170204.12

Abstract

The paper examines the impact of IFRS adoption on the use of loan loss provisions (LLPs) to manage earnings and capital by listed deposit money banks in Nigeria. The study employed an ex-post facto research design and a sample of fourteen (14) Deposit Money Banks listed on the Nigerian Stock Exchange. Data was obtained from 2009 to 2014 to capture the pre- and post- IFRS adoption periods. Using paired sample t-test, we find quantitative evidence to the effect that there are significant increase in the means of loan loss provisioning, and capital management by Deposit Money Banks in Nigeria in the post IFRS adoption period compared to the pre-IFRS adoption period. However, the levels of earnings smoothing are significantly lower in the post IFRS period. The implication of this finding is that adoption of IFRS improved earnings quality in the sense of reduced earnings smoothing.

Highlights

Loans and advances constitute the largest part of a bank’s assets; being in the region of 10 -15 times larger than bank equity [1]
This paper examines the impact of International Financial Reporting Standards (IFRS) adoption on the use of loan loss provisions (LLPs) to manage earnings and regulatory capital of listed deposit money banks in Nigeria
This paper finds evidence to the effect that there are significant increases in the means of loan loss provisioning, and capital management by deposit money banks in Nigeria in the post IFRS adoption period compared to the pre-IFRS adoption period

Summary

Introduction

Loans and advances constitute the largest part of a bank’s assets; being in the region of 10 -15 times larger than bank equity [1]. If serious capital depletion issues are to be avoided, provisions must be made for those loans that would be bad, non-performing or slow-moving. In Nigeria, loan loss provisioning is a major study area in accounting because of the huge losses, serious capital depletion and bank failures in the 1990s and late 2000s as a result of default of large loans given earlier by banks. Loan loss provisioning refers to deductions made from the net interest income of banks to provide for anticipated bad or non-performing loans. This practice is allowed by the applicable accounting standards and bank regulators. Extant empirical literature document evidence suggesting that loan loss provisioning (LLP) is exploited by bank managers to smooth earnings ([2], [3], [4], [5] among others) and to manage regulatory capital ([6], [1], [7], [8], [9] among others)

Methods

Results

Conclusion