The Financial Reporting Council of Nigeria (“FRCN”) on Monday, 5 August 2019, issued a public notice which revoked its Rule 4, requiring regulatory approval for events/transactions having financial reporting implications prior to recognising same in the financial statements. This revocation was issued on a prospective basis.
Under the erstwhile Rule 4 which came into effect in 2015, companies who had not obtained regulatory approval could not take any benefit from such transaction (e.g. deduction of cost from revenue). Also, agencies like Federal Inland Revenue Service (FIRS), usually require relevant regulatory approval(s) before allowing such transaction(s) as deduction for tax purposes.
While not expressly stated, this revocation appears to be a fall-out from Stanbic IBTC Holdings PLC V. FRCN & anor (CA/L/208/2016), where the Court of Appeal (CoA) ruled that non-registration of a registrable agreement with National Office for Technology Acquisition and Promotion (NOTAP) does not render such agreements void, illegal or null and void. The CoA however, stated that notwithstanding the validity of such registrable agreements, parties cannot make payments (Naira or foreign currency) for underlying transactions through the Ministry of Finance, Central Bank of Nigeria (CBN) or any licenced bank.
In essence, though companies can now recognise transactions requiring NOTAP approval in financial statements, they cannot make payment for such transactions through a licenced bank without approval.
Notwithstanding, it is arguable that companies may access the required funds through other sources for payment, which raises other issues, some of which are described below:
- Whether the payments would be tax-deductible
- Whether the potential losses arising from sourcing foreign currency would be deductible for tax purposes
- Whether payment of Naira to source foreign currency outside of CBN or licenced banks amount to a circumvention of the underlying legislation and consideration of the impact.
Ultimately, with this revocation, companies who hitherto could not recognise transactions in the financial statements where regulatory approval has not been obtained can now do so.