By Akwu, Onyekachi David
Examination of fair value measurement in determination of profitability of listed manufacturing firms
in Nigeria was influenced by the adoption of International Financial Reporting Standard (IFRS) in
Nigeria. IFRS are a set of accounting standards developed by the International Accounting Standards
Board (IASB) that is becoming the global standard for the preparation of public company financial
statements. The standard favours a basis of valuing assets and liabilities known as Fair Value,
different from Historical Cost promoted by Statement of Accounting Standards (SAS) and the former
International Accounting Standards (IAS). The Fair Value measurement values assets and liabilities at
their current market price as though the business is at liquidation and trying to realise its assets and
dispose its liabilities, while the Historical Cost convention values assets and liabilities at their original
costs of purchase or transfer thereby assuming a stable monetary unit disposition. The IFRS also
presents with reclassification of returnable packaging material (RPM) as long term asset, and the
depreciation of the components of a machine, instead of the whole machine. Previous research has
shown that method of valuation may significantly influence reported profit; the problem therefore is,
what effect would this newly adopted way of valuing assets and liabilities have on profitability? Thus,
the study sought to: (i) ascertain the influence of depreciation on profitability of the manufacturing
firms in Nigeria using fair value measurement and historical cost convention, (ii) examine the effect of
inventory on reported profit of manufacturing firms in Nigeria under fair value measurement and
historical cost convention, (iii) determine the relationship between volume of tax and reported profit
of manufacturing firms in Nigeria using fair value measurement and historical cost convention and
(iv) compare the mean of the two sampled populations. The ex-post facto research design was
adopted for this study. A cross sectional data from the financial reports of manufacturing companies
quoted on the 1st tier security market of the Nigerian Stock Exchange for Pre-IFRS of 2011 and Post
IFRS of 2012 periods were used. The dependent variable is profitability while the independent
variables are depreciation, inventory and taxation. The five companies studied were those that have
complied with IFRS and they include: Champion Breweries Plc, Guinness Breweries Plc,
International Breweries Plc, Nigerian Breweries Plc and 7-up Bottling Company Plc. The simple least
square regression technique, correlation coefficient, and t-statistic were analytical tool were used;
using Econometric Views (EViews) statistical software. Depreciation has positive and significant
impact on profitability using fair value measurement (R2
= 0.959; AR2
= 0.945; p-value = 0.0036) and
historical cost convention (R2
= 0.997; AR2
= 0.996; p-value =0.0001). Inventory has positive and
significant effect on profitability under fair value measurement (R2
= 0.939; AR2
= 0.918; p-value =
0.0066) and historical cost convention (R2
= 0.983; AR2
= 0.977; p-value = 0.0010). A positive and
significant relationship exist between taxation and profitability using fair value (r = 0.998) and
historical cost convention (r = 0.979). The two populations from which sample were taken have the
same mean (tcal = 0.467 < tcritical = 2.306, 0.05 significant level). Conclusively, depreciation, cost of
sales, and Taxation has significant and positive impact, effect and relationship respectively on what is
reported as profit under historical cost convention and under fair value measurement. Thus, indicating
that fair value measurement can serve as a replacement to historical cost convention. As such, fair
value should be encouraged.