IMPACT OF International Financial Rating Standard ADOPTION ON THE PROFITABILITY IN THE INSURANCE INDUSTRY

CHAPTER ONEINTRODUCTION1.1 Background to the StudyInternational Financial Reporting  Standards (IFRS) are  standards  by  the InternationalAccounting Standard Board (IASB) to serve as a guide to companies for preparation offinancial statements that will give true financial and non-financial information (integratedfinancial   reporting)   to   investors   and   other   stakeholders   who   use   them   for   economicdecisions  (Brabec,   2014;  de   Villiers,   Venter,   &   Hsiao,   2016).   IFRS   implementationbecame globally important because of increasing international trade and globalization ofthe world’s capital market. Many countries of the world including Nigeria have adoptedthe standards for the preparation of their accounts. The standards aimed to provide acommon global rule  to business affairs  that  will increase  disclosure  and improve thequality   of   financial   information   for   both   current   and   potential  investors.   The   overallphilosophy was to make financial statements understandable, comparable, relevant, andreliable   in   the   financial   markets   around   the   world.   Specifically   noted   benefits   ofimplementation of IFRS are improved disclosure, transparency, understandability, andcomparability of financial statements for investors leading to a reduction in informationasymmetry, greater willingness of investors to invest (Cameran, Campa, & Pettinicchio,2014; Donnelly, 2016; Matari, Swidi, & Fadzil, 2014).Improved disclosure of quality information yields benefits such like reduction in the costof capital, more efficient allocation of resources, higher economic growth, higher marketefficiency, and improvement in analyst predictions (Matari et al., 2014; Santos, Ponte, &Mapurunga, 2013).

Improved   disclosure   and   quality   of   information   enhance   investors’   assessment   offinancial performance of a firm and their willingness to invest more because the morefavourable   the   result   of   the   assessment   is   the   more   investments   made.   Financialperformance refers to the improvement in the economic activities of a firm as measuredby profit or loss over a given period.Nigeria adopted IFRS in 2012 because the level and quality of disclosure prior to theadoption   of   IFRS   was   poor.  The   benefits  expected  to  derive   from  the   adoption  andimplementations include easier access to external capital and an increase in foreign directinvestment. Investors and lenders need financial information that is reliable, relevant, andcomparable   across   the   border   to   assess   the   risks   and   returns   of   their   investmentopportunities (Omobolanle, 2017). Insurance companies are peculiar in the accounting reflection of the activities undertaken,because of the complexity in their operations. The reflections in their accounting basedon supporting documents and financial statements. So, specific  to these categories ofcorporate entities are subject to legislative changes frequently. Therefore, the transition tonew standard accounting rules under IFRS will automatically necessitates changes in thefinancial   culture   of   the   insurance   companies,   and   of   course   present   to   them   someopportunities and difficulties. Insurers embarking on the IFRS journey will have theirhands   full   understanding   the   new   policies   and   keeping   pace   with   changes   requiredthroughout   the   organization,   including   in   accounting   and   financial   reporting,finance/treasury, investment management, risk and controls, performance and decisions,actuarial and claims management, and tax, among others (Delloite, 2008).