By Peter OBIORA InvestAdvocate

Lagos (INVESTADVOCATE) – Jim Obazee, Executive Secretary/ Chief Executive Officer (EC/CEO) of Financial Reporting Council Thursday said that Nigerian Banks divesting from Non-Banking Subsidiaries will block regulatory loopholes.

Obazee said this at the Inauguration of the new Executive Members of the Capital Market Correspondents Association of Nigeria (CAMCAN) at the Stock Exchange House in Lagos Nigeria.

In a lecture he delivered at the occasion; titled “International Financial Reporting Standards (IFRS) Implementation: Implications for the Nigerian Capital market” said the loopholes was due to close knitting.

“Nigerian societies tend to be close-knit, with businesses structured on family ties.  This is natural – in an environment where law does not yet fully replace personal trust, greater value is placed on family trust” he said.

According to him, the various businesses in conglomerates do business with each other that are not at arm’s length. “The disadvantage here is that the business of conglomerates is geared to serving the conglomerate not its customers. The challenge here is how to understand the nature of the relationships and cross exposures of conglomerates and their family ties” he said.

Obazee further affirmed that Large Long-Established Domestic Companies offering traditional products dominate the Nigerian business environment. “What is a concern is that these Companies may have become set in their ways, with inefficient management and distribution structures and unwillingness to innovate. Some of these Dinosaur Companies are listed in the Stock Exchange with information asymmetry issues” the FRC CEO said.

He said for regulators, it was believed that it will lead to greater collaboration, consistency and enhanced reporting.

Given Banks decision to adopt the holding company (“holdco”) structure, in line with the CBN directive, most Banks have implemented this policy in conformity with the provisions of CBN’s Regulations on the Scope of Banking Activities and Ancillary Matters No. 3. 2010.

The CBN, in a statement on the revised banking model had said, “The new banking model repealed the universal banking regime and required banks to divest from all non-banking businesses. All the existing universal banks are required to prepare and submit to the CBN their plans on compliance with the new banking regime not later than 90 days from October 4, 2010.”

A 90 day deadline for the Banks to submit their plans was given; the deadline for the divestment is 18 months from October 4, 2010. Some Banks have so far complied.

The CBN issued a May 14, 2012 deadline for Deposit Money Banks to divest from Non-Banking operations.

Obazee said the principles-based nature of IFRS triggers the need for enhanced explanations that can provide readers with sufficient information to effectively understanding the Company’s Financial Statements. “In addition to this, there are numerous detailed rules pertaining to specific disclosures requirements in all the existing standards. These are likely to increase as new standards are issued, old ones reviewed and convergence with US GAAP progresses” he said.

Also, he affirmed that this will be particularly sharp in the year of transition from Nigerian GAAP to IFRS (depending on the phase under consideration) as the disclosures will need to discuss the various transition adjustments between the two different accounting standards particularly for the opening statement of financial position.

The CEO of FRC said the IFRS on operating segment makes it mandatory for reporting entities to disclose those competition sensitive information that were hitherto the exclusive preserve of management. “Information on revenue, cost and profit margins, use of assets for business and product lines would now be available for all users of the Financial Statements” he said.

“Under IFRS, key financial figures, such as profitability and growth, shall be higher. Also, firms shall exhibit higher leverage measures following the high IFRS financial reporting quality, which can reduce the potential uncertainty and risk that is attributed to a firm and subsequently enhance the credibility and the borrowing bargain power of entities.

Following the fair value orientation of IFRS, IFRS adoption is likely to introduce volatility in income statement and balance sheet figures. Despite the higher volatility, adopters’ interest cover ratio will not be adversely affected, implying that IFRS adoption would not lead to debt covenant violation or financial distress” Obazee affirmed.