e-sRC

CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The objective of accounting is to report an entity’s economic activities in a manner that can serve
the needs of diverse users and assist them in taking useful and informed decisions. The impact of
such financial information can only be beneficial to the stakeholders if it is reliable and relevant.
This implies that financial reports can only be regarded as useful if it represents the economic
substance of an organization in terms of its relevance, reliability and comparability (IASB
Conceptual Framework, 2014:2).
Intangible asset is changing the face of business in developed economies than in the developing
economies. This is largely associated with the transformative phase of business towards the area
of innovation, information and telecommunications technology, which the developing world is
yet to fully integrate. This era of innovative and information technology in business is what
Abubakar and Abubakar (2015) and Abubakar (2014) referred to as the “new economy”. This
phase is characterised by continuous innovation and customer-centric businesses caused by
competitive global markets and information technology. These have compelled firms to invest in
two aspect of intangibles, which are innovation and adaptive capabilities (computer software,
intellectual properties, human resources and Research and Development (R & D), as well as,
customer attraction (advertising, marketing, distribution and promotional activities) which are
needed in order to strengthen the firm’s strategic position in the open market and ensure their
future viability (Lev & Daum, 2004).
Intangibles like computer software are becoming more relevant than ever before especially as
they aid the computerisation of inventory management and production process in the
manufacturing sector. Another intangible asset relating to manufacturing firms is intellectual
properties. The growth in the information age was borne out of the interplay of intellectual
properties which Greenhalgh and Rogers (2007) opined as a policy tool for encouraging
innovation. One other intangible asset relating to manufacturing firms is the purchased goodwill.
The changing economic environment of the 1980s aligned to a large merger wave, thereby
increasing the amount of goodwill on company’s audited financial statements. Therefore, there is
growing need by firms to evaluate their investment in intangible assets in order to gauge their
effect on the market value.
With the growth in intangible assets and their effect on the market value, intangible assets is
beginning to receive a renewed vigor amongst scholars and practitioners. Investigation by Barnes
(2010), asserts that intangible assets are likely to be more important in some industries than in
others. They further opined that the amount of intangibles is growing bigger in manufacturing
sectors than in services sector. This was corroborated by the latest economic report by
Renaissance Capital (Oladunjoye, 2016). The report reveals that the Nigerian manufacturing
sector is now the major driver of economic growth in Nigeria. According to the report, with
Nigeria’s rebased Gross Domestic Product (GDP), the manufacturing sector is currently growing
faster than the telecommunications, oil & gas and agricultural sectors. The report further states
that recent figures by the Manufacturers Association of Nigeria showed that there was an
increase in manufacturing capacity utilisation from 46.3 percent recorded in the first half of 2013
to 52.7 percent in the second half of the same year.
In spite of the economic recession, the Purchasing Manager’s Index (PMI) reading for the month
of July 2017 has shown that Nigeria’s manufacturing sector expanded from a headline index of
55.9 in June 2017, to 56.3 index points in July 2017 as reported by the FBN Quest (Mbah,2017).
According to this report, the improvements in the sector follows better access to imported raw
materials as the CBN’s stepped up its foreign exchange interventions over the past months which
boosted foreign exchange liquidity and strengthened the naira significantly. This invariably may
increase the volume of trading of the stocks in the manufacturing sector thereby influencing the
share price of these firms. Consequently, the study of the effect of intangible assets on the market
value of these firms is certainly paramount.
Finally, with the issuance of the Statement of Accounting Standard on intangible assets (SAS 17)
by the Nigerian Accounting Standard Board (NASB) in February 2010 (NASB, 2010) and the
subsequent adoption of the International Financial Reporting Standard (IFRS) in 2012, the
disclosure of intangible assets in the statement of financial position took a renewed attention in
the manufacturing sector of the Nigerian economy. This implies that intangible assets now
possess one of the criteria (value relevance) for assets recognition in the financial statements
1.2 Statement of the Problem
In Nigeria, capitalised intangible assets is growing in value (Oladunjoye, 2016), hence
constituting one of the major part of non-current assets of manufacturing firms. Few literature
(Nnado & Ozouli, 2016; Abubakar & Abubakar, 2015) examines the value relevance of such
aspect of intangibles in the market valuation of companies in Nigeria. These studies have shown
that there is a relationship between intangible asset and firm value. However none of them have
fully exposed how the categories of intangibles such as computer software, intellectual property
and goodwill can serve as a signaling device to changes in share price. This study will thus
examine the effect that comprehensive disclosure of intangible assets will have on the share price
of manufacturing firms in Nigeria.
Most studies on value relevance tow the position that interprets value relevance as the
association between financial statement information and firm value (Chang et al, 2008). These
interpretations are in line with the Ohlson model (1995) which has been employed in many
studies to explore the associations between market value of equities and main financial
information disclosed variables (Mohammed & Lode, 2015). Consequently, the inclusion of
intangible assets in the modified Ohlson Model which this study claims to adopt, is justifiable.
The new economy era with its paraphernalia of innovations and ideas has transformed the
conventional way of doing business by strengthening firms’ competitive position (Canibano,
Coversi & Sanches, 2000). The value created by intangibles may become paramount in assessing
the quality of firms’ financial statements. However, current accounting standards especially in
the developing economies mainly focus on tangible assets due to their physical substance, while
not sufficiently reflecting the impact of intangible assets on firm value. This could be attributed
to the inherent uncertainties regarding the future economic benefit and economic life of
intangible assets and difficulties in their valuation (Barth et al., 2001). However, with the study
of the impact of intangible assets in market valuation, greater attention will be given to financial
reporting of intangible assets.
Qualitative accounting information reduces information asymmetries and hence, facilitates
capital allocation in the stock market. The information era coupled with the growth in innovation
and technology made manufacturing firms to increase their operations in intangible assets such
as software assets and intellectual properties (Nakamura, 1999). The implication is that reporting
these assets will improve the information quality and investors’ perception on their market price.
However, many firms still prefer to expense their intangible assets rather than capitalise them
even when some of the intangibles have met the recognition criteria set out in the IAS 38
(Abubakar and Abubakar, 2015). Refusal to capitalize intangibles is likely to shrink the earnings
of firms in the short term which may reduce a rational investor’s perception of the firms’ value.
Thus, the objective of financial reporting in providing relevant information to investors and other
users become deficient. Therefore, this study exposes the need for comprehensive recognition of
intangible assets in the statement of financial position.
Academicians, regulators and practitioners have argued in favour of the inclusion of some of
these intangibles in the statement of financial position as their non-inclusion may lead to the
deterioration of the quality of accounting information as evident in the increasing gap between
book values and market values of firms (Abubakar, 2014; Lev & Daum, 2004). Furthermore,
related studies in Nigeria (Omoye, 2013; Dogara, 2013; Abubakar, 2014; and Abubakar &
Abubakar, 2015) concentrated on determinants of intangible assets disclosure and the effect of
expensed intangibles (branding cost) on market value. Researchers in Nigeria have failed to
study the distinct elements of the intangible assets (computer software, intellectual properties and
goodwill) which this study intends to investigate.
1.3 Research Questions
The following research questions are raised to guide the study:
(i) What is the effect of computer software assets on market value of listed manufacturing
firms in Nigeria?
(ii) What is the effect of intellectual properties on the market value of listed manufacturing
firms in Nigeria?
(iii) What is the effect of goodwill on market value of listed manufacturing firms in Nigeria?