Credit Raters, Disclosure Requirement & Matters Arising

Out of the many important features of the Companies and Allied Matters Act (CAMA) 2020, one of the most significant is the premium it places on the disclosure requirement pertaining to the activities of both private and public companies in Nigeria. 

The International Financial Reporting Standards (IFRS) and the Financial Reporting Council of Nigeria (FRC) equally demand full financial disclosures for all ‘public interest entities’ in the country including quoted or unquoted companies.

The philosophy of disclosure does not call for the release of every piece of available information to the public, as this is impracticable and would only dump a high volume of information on analysts and investors. The principle urges the disclosure of information that can have a material impact on the company’s financial results or financial position.

 In ensuring that there is limited information asymmetry between the company’s management and its current shareholders, debtors, or other third parties, ‘Full Disclosure Principle’ is very vital. 

Generally, the most common items that the companies must report include the following:  Audited financial statements; Employed accounting policies and changes in the accounting policies; Non-monetary transactions; Material losses; Asset retirement obligations; Details and reasons for goodwill impairment; and Existing litigation.

Full disclosure requirement is crucial to the role Credit Rating Agencies (CRAs) play in the economy. 

It is believed that Credit Raters should be able to facilitate improvement in the quality of disclosure from Issuers, as this is a key rating consideration. Although, no one system of disclosure is able to satisfy everyone.   This is because information considered as too much for some might be insufficient for some others. 

 Also, not every factor identified as material at the industry level will be a material determinant of the credit rating of a given Issuer; and in some instances, more factors may be considered as material for Rating.

In the light of the aforementioned, it is therefore essential for Credit Raters to develop and disclose systematic methodologies for assessing material considerations. Clarity on the rating considerations for each industry is needed as doing this not only sensitizes Issuers, but also improves the quality of disclosure. 

On Friday, 16th of September, 2022 the Securities and Exchange Board of India (SEBI) enhanced disclosure rules for CRAs and put in place a framework for rating withdrawal of perpetual debt securities. The move is aimed at allowing investors and other stakeholders to properly use such disclosures in a fair assessment of CRAs.

It is worthy to note that over the years, the Securities and Exchange Commission (SEC) in Nigeria has constantly regulated the framework in place to ensure full disclosure requirement.  The framework helps foster transparency in financial markets and limits the opportunities for potentially fraudulent activities.


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