MODULE 1

LEGISLATION

OUTLINES

• Company Law relating to the preparation of financial statements

• Statutory requirements and compliance with Statements of Accounting Standards

Company Law relating to the preparation

of Financial Statements Accounting and financial reporting requirements of companies in Nigeria are regulated by a multiplicity of laws and bodies. These include

1. Companies and Allied Matters Act CAP. 20 L.F.N. 2004,

2. Securities and Exchange Commission Rules and Regulations (1999),

3. Investments and Securities Act CAP.124 L.F.N. 2004,

4. Nigerian Stock Exchanges Act (1961),

5. Banks and Other Financial Institutions Act (1991),

6. Nigerian Insurance Act (2003),

7. Nigerian Accounting Standards Board Act (2003),

8. Institute of Chartered Accountants of Nigeria Act (1965) and

9. Association of National Accountants of Nigeria Act (1993).

The main legal framework for corporate accounting practices in Nigeria is the Companies and Allied Matters Act CAP. 20 L.F.N. 2004.

CAMA 2004 as amended provide substantial requirements to be followed in financial reporting. The books of accounts to the prepared, the content and format of presentation are clearly specified by CAMA. The Companies Act (i.e. CAMA) has significant influence on financial reporting practice of companies. In fact, due to its overwhelming influence, CAMA is posited as the Generally Accepted Accounting Principles (GAAPs) within the Nigeria financial reporting environment.

Company Law relating to the preparation of Financial

Statements… cont. The following sections of the CAMA schedules detail the laws relating to the preparation of financial statements.

331. Companies to keep accounting records

(1) Every company shall cause accounting records to be kept in accordance with this section.

(2) The accounting records shall be sufficient to show and explain the transactions of the company and shall be such as to‐ (a) disclose with reasonable accuracy, at any time, the financial position of the company; and (b) enable the directors to ensure that any financial statements prepared under this Part comply with the requirements of this Act as to the form and content of the company's financial statements.

(3) The accounting records shall, in particular, contain‐ (a) entries from day to day of all sums of money received and expended by the company, and the matters in respect of which the receipt and expenditure took place; and (b) a record of the assets and liabilities of the company.

(4) If the business of the company involves dealing in goods, the accounting records shall contain‐ (a) statements of stocks held by the company at the end of each year of the company; (b) all statements of stocktakings from which any such statement of stock as is mentioned in paragraph (a) of this subsection has been or is to be prepared; and (c) except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.

Company Law relating to the preparation of Financial

Statements… cont. 334. Directors' duty to prepare annual accounts

(1) In the case of every company, the directors shall in respect of each year of the company, prepare financial statements for the year.

(2) Subject to subsection (3) of this section, the financial statements required under subsection (1) of this section shall include‐ (a) statement of the accounting policies; (b) the balance sheet as at the last day of the year; (c) a profit and loss account or, in the case of a company not trading for profit, an income and expenditure account for the year; (d) notes on the accounts; (e) the auditors' reports; (f) the directors' report; (g) a statement of the source and application of fund; (h) a value‐added statement for the year; (i) a five‐year financial summary; and (j) in the case of a holding company, the group financial statements.

(3) The financial statements of a private company need not include the matters stated in paragraphs (a), (g), (h) and (i) of subsection (2) of this section.

(4) The directors shall at their first meeting after the incorporation of the company, determine to what date in each year financial statements shall be made up, and they shall give notice of the date to the Commission within 14 days of the determination.

(5) In the case of a holding company, the directors shall ensure that, except where in their opinion there are good reasons against it, the year of each of its subsidiaries shall coincide with the year of the company.

Company Law relating to the preparation of Financial

Statements… cont. 335. Form and content of individual financial statements

(1) The financial statements of a company prepared under section 334 of this Act, shall comply with the requirements of the Second Schedule to this Act (so far as applicable) with respect to their form and content, and with the accounting standards laid down in the Statements of Accounting Standards issued from time to time by the Nigerian Accounting Standards Board to be constituted by the Minister after due consultation with such accounting bodies as he may deem fit in circumstances for this purposes: Provided that such accounting standards do not conflict with the provisions of this Act or the Second Schedule to this Act.

(2) The balance sheet shall give a true and fair view of the state of affairs of the company as at the end of the year; and the profit and loss account shall give a true and fair view of the profit or loss of the company for the year.

(3) The statement of the source and application of funds shall provide information on the generation and utilisation of funds by the company during the year.

(4) The value added statement shall report the wealth created by the company during the year and its distribution among various interest groups such as the employees, the government, creditors, proprietors and the company.

(5) The five‐year financial summary shall provide a report for a comparison over a period of five years or more of vital financial information.

(6) Subsection (2) of this section shall override‐ (a) the requirements of the Second Schedule to this Act; and (b) all other requirements of this Act as to the matters to be included in the accounts of a company or in notes to those accounts; and accordingly the provisions of subsections (7) and (8) of this section shall have effect.

Company Law relating to the preparation of Financial

Statements… cont. (7) If the balance sheet or profit and loss account drawn up in accordance with those requirements would not provide sufficient information to comply with subsection (2) of this section, any necessary additional information shall be provided in that balance sheet or profit and loss account, or in a note to the accounts.

(8) If, owing to special circumstances in the case of any company, compliance with any such requirement in relation to the balance sheet or profit and loss account would prevent compliance with subsection (2) of this section, (even if additional information were provided in accordance with subsection (4) of this section), the directors shall depart from that requirement in preparing the balance sheet or profit and loss account (so far as necessary) in order to comply with subsection (2) of this section.

(9) If the directors depart from any such requirement, particulars of the departure, the reasons for it and its effects shall be given in a note to the accounts.

(10) Subsections (1) to (9) of this section shall not apply to group accounts prepared under section 336 of this Act and subsections (1) and (2) of this section shall apply to a company's profit and loss account (or require the notes otherwise required in relation to that account) if‐ (a) the company has subsidiaries; and (b) the profit and loss account is framed as a consolidated account dealing with all or any of the subsidiaries of the company as well as the company‐

(i) complies with the requirements of this Act relating to consolidated profit and loss account; and

(ii) shows how much of the consolidated profit and loss for the year is dealt with in the individual financial statements of the company.

(11) If group financial statements are prepared and advantage is taken of subsection (7) of this section, that fact shall be disclosed in a note to the group financial statements.

Statutory requirements and compliance

with Statements of Accounting Standards Financial Reporting Council of Nigeria (FRCN)

The Financial Reporting Council of Nigeria (FRCN) formerly the Nigerian Accounting Standard Board (NASB) is a parastatal of the Federal government founded on September 9, 1982 but enacted as the NASB Act of 2003. The board came into being after the Nigerian Enterprises Promotion Decree was promulgated to transfer ownership of companies to Nigerians. The companies existing at that time exploited the fact that there was no uniform accounting practice. They utilized any accounting measure that seemed suitable to them. Those companies whose parents were residents outside Nigeria followed the dictates of their parents outside the shore of Nigeria, thereby, resulting to non- coherent accounting practices. FRCNwas therefore established at that time to stop the unpalatable conditions that existed before and after indigenization.

Specifically FRCN was set up to narrow areas of differences in practices so that financial statements are structurally uniform and meaningful; produce accounting information relevant to the economic environment and introduce measures that will enhance the readability and validity of the accounting information (FRCN, 2007). The standards are rules governing the preparation of the financial statements and they are essential because they result in efficient allocation of resources within the economy. The FRCN was given a legal backing by its inclusion in Section 335(1) of the Companies and Allied Matters Act of 1990 which mandates all companies to prepare financial statements that comply with the Statement of Accounting Standards (SAS) as developed and issued by FRCN from time to time. The FRCNin 2003 was given the full autonomy as a legal entity with the enactment of the NASB Act of 2003. FRCN is the only body that has the statutory power under the Act to monitor and enforce compliance with accounting standards.

Statutory requirements and compliance with Statements of Accounting

Standards… cont.

The FRCN Act No 22 of 2003 identifies three objectives of the Law as follows:

i. to establish the NASB charged with the responsibility of developing and publishing accounting standards to be observed in the preparation of financial statements;

ii. to seek to promote and enforce compliance with accounting standards issued by the Board; and

iii. to provide penalties for non-compliance with its provisions.

FRCN’s membership includes representative of government and relevant interest groups drawn from the banking, manufacturing, commercial and educational sectors of the economy. They are as follows:

1. Central Bank of Nigeria (CBN)

2. Corporate Affairs Commission (CAC)

3. Federal Inland Revenue Service (FIRS)

4. Federal Ministry of Commerce (FMC)

5. Federal Ministry of Finance (FMF)

6. Nigerian Accounting Association (NAA)

7. Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA)

8. Nigeria Deposit Insurance Corporation (NDIC)

9. Securities and Exchange Commission (SEC)

10. The Institute of Chartered Accountants of Nigeria (ICAN)

11. Auditor-General of the Federation

12. Accountant-General of the Federation

13. Association of National Accountants of Nigeria (ANAN)

14. The Chartered Institute of Taxation of Nigeria (CITN)

Statutory requirements and compliance with Statements of Accounting

Standards… cont.

The FRC of Nigeria have adopted the old SASs and the new International Financial Reporting Standards (IFRSs).

Below are the provisions of the Statement of Accounting Standard – SAS 1 - Disclosure of Accounting Policies.

The end product of financial accounting process is the preparation and publication of financial statements. A substantial number of alternatives postulate assumptions, principles and methods adopted by a reporting entity in the preparation of its accounts can significantly affect its results of operations, financial position and changes thereof. It is therefore essential to the understanding; interpretation and use of financial statements, whenever there are several acceptable accounting methods, which may be followed, that those who prepare them disclose the main assumptions on which they are based. The Companies Act 1968 requires in the Eighth Schedule the disclosure of the method or basis used to deal with or calculate the amount of an item or information where the account could be misleading by reason of failure to explain such method or basis.

Statutory requirements and compliance with Statements of Accounting

Standards… cont.

Notes and Accounting Policies

Examples of items that constitute notes to the financial statements include:

• Reporting entity

• Basis of preparation

• Significant accounting policies

• Determination of fair values

• Financial risk management

• Operating segments

• Discontinued operation

• Non-current assets held for sale

• Acquisitions of subsidiary and non-controlling interests

• Revenue

• Other income

• Other expenses

• Personnel expenses

• Finance income and finance costs

• Income tax expense

• Property, plant and equipment

• Intangible assets

• Biological assets

• Investment property

Statutory requirements and compliance with Statements of Accounting

Standards… cont.

• Equity accounted investees

• Other investments

• Deferred tax assets and liabilities

• Inventories

• Trade and other receivables

• Cash and cash equivalents

• Capital and reserves

• Earnings per share

• Loans and borrowings

• Employee benefits

• Share-based payment

• Deferred income

• Provisions

• Trade and other payables

• Financial instruments

• Operating leases

• Capital commitments

• Contingencies

• Related parties

• Group entities

• Service concession arrangement

• Subsequent events

• Explanation of the transition to IFRSs

Statutory requirements and compliance with Statements of Accounting

Standards… cont.

Statement of Accounting Standard – SAS 2 – Information to be disclosed in Financial Statements

Clearly and understandable information, about the nature and ownership of an enterprise or entity reported on, are usually disclosed in one or more of the contents of financial statements described in the following paragraphs:

1) The Balance Sheet shows the assets, liabilities and proprietors’ interest at a point in time. Generally, enterprises present their balance sheets in the form of assets and claims against those assets by creditors and owners.

2) The profit and Loss Account or the Income Statement reports revenue, earnings or turnover and the expenses of an enterprise for a given accounting period.

3) Notes on the Accounts usually form an integral part of financial statements and provide detailed or supplementary information in respect of items disclosed in the Balance Sheet and the Profit and Loss Account.

4) Sources and Application of Funds Statement provides information on the derivation and utilization of funds during the period covered by the financial statements. When the Statement of Sources and Application or Funds is taken together with the Balance Sheet and the Profit and Loss Account, a better insight is obtained as to how the activities of an enterprises have been financed.

5) Value Added Statement reports the wealth created by an enterprise during the period covered by the financial statements. It usually shows how the wealth created is distributed among various interest groups (e.g. employees, government, creditors and proprietors). Thus, the statement reports the claims of social and economic groups reaffirming the contemporary belief that enterprises do not exist for the benefit of their owners (proprietors) only; but, also for the society at large.

Statutory requirements and compliance with Statements of Accounting

Standards… cont.

6) Historical Financial Summary enables an instant comparison over a period, usually five years, of vital financial information about an enterprise particularly with regard to its:

Turnover

profit before and after taxation

dividends

assets employed

issued and paid up capital

reserves

medium and long term liabilities

earnings and dividends per shares

At present, the information disclosed by some enterprises is limited to the minimum legal requirements. Whilst other enterprises disclose additional information such as Source and Application of Fund Statement and Value Added Statement, little information is provided in respect of related company transactions.

Disclosure of information relating to financial implications of inter-company transfers and technical/management agreements between a subsidiary/associated company and its immediate and/or ultimate parent/ related company usually provides additional insight into the understanding of financial statements. This Standard takes the view that disclosure, which goes beyond minimum legal requirements, is useful for a more meaningful understanding of financial statements.

Review Questions

1. Highlight the numbers of Statement of Accounting Standards developed by the FRCN.

2. According to Section 334 of CAMA, the Directors of the company has the duty to prepare annual accounts. Required: Explain with the relevant sub-sections.

3. There are several Legal frameworks for preparing financial statements. Highlight the relevant ones aside CAMA.

References • Aborode, R. Advanced Financial Accounting, Lagos: Masterstroke

Consulting

• Adejola, P. A (2010): Revision Pack on Advanced Corporate Reporting for Professionals, Conversion and Undergraduate Students, Danladi Press, Abuja.

• Adejola, P. A., Financial Accounting and Reporting Standards for Students and Professionals, Revised Edition (2011)

• Companies and Allied Matters Act (2004) as amended