impact on economic activities by adoption of...

IMPACT ON ECONOMIC ACTIVITIES BY ADOPTION

OF INTERNATIONAL FINANCIAL REPORTING STANDARDS BY INDIAN COMPANIES

A thesis submitted to Christ University for the Degree of

DOCTOR OF PHILOSOPHY

IN

COMMERCE

RAM KESH GUPTA

Research Scholar

UNDER THE GUIDANCE OF

Dr D. N. S. KUMAR

Professor and Associate Director Centre for Research-Projects

Christ University Bangalore - 29

Centre for Research

Christ University, Bangalore-560029

March 2012

i

CERTIFICATE

This is to certify that, the thesis entitled IMPACT ON ECONOMIC ACTIVITIES

BY ADOPTION OF INTERNATIONAL FINANCIAL REPORTING

STANDARDS BY INDIAN COMPANIES submitted by Ram Kesh Gupta to

Christ University, Bangalore for the award of the degree of Doctor of Philosophy is

an original research work carried out by Ram Kesh Gupta under my supervision. The

contents of this thesis, in full or part(s) have not been submitted to any other

University for the award of any degree or diploma.

Place: Bangalore Dr D. N. S. Kumar

Date: Professor and Associate Director

Centre for Research-Projects

Christ University

Bangalore - 29

ii

DECLARATION

I hereby declare that Ph.D. thesis on titled IMPACT ON ECONOMIC

ACTIVITIES BY ADOPTION OF INTERNATIONAL FINANCIAL

REPORTING STANDARDS BY INDIAN COMPANIES is an original research

work done by me under the guidance and supervision of Dr D. N. S. Kumar,

Associate Director, Centre for Research-Projects, Christ University. This thesis is

submitted to Christ University, Bangalore, for the award of the degree of DOCTOR

OF PHILOSOPHY IN COMMERCE.

I also declare that, this thesis or any part(s) of it have not been submitted to any other

University for the award of any degree or diploma.

Place: Bangalore Ram Kesh Gupta

Date: Research Scholar

iii

ACKNOWLEDGEMENT

The Ph.D. research study has been a treasure in my life. I wish to take this

opportunity to acknowledge the valuable help provided by many people in this

journey.

First of all, I wish to express my sincere gratitude to my supervisor and guide,

Professor Dr D. N. S. Kumar for his insightful suggestions that have shaped the

necessary progress of this research. His boundless energy combined with his patience

and support has enabled me to complete this work.

I would also like to thank the Vice Chancellor Dr (Fr) Thomas C. Mathew and

the Pro-Vice Chancellor Dr (Fr) Abraham V. M., Christ University for the

opportunity to do this research.

Further, I would also like to thank Prof. (CA) J. Subramanian, Registrar and

Dean of Commerce and Management, Fr Thomas T.V., C. K. T. Chandrashekara and

T. S. Ramchandran, Institute of Management, Christ University for their constant

encouragement.

My special thanks to Dr Srikanta Swamy, Additional Director, Centre for

Research, Christ University, who has been equally enthusiastic and provided valuable

insights into my work.

I would also like to thank my professional friends in KPMG India, Deloitte

India and executives of Infosys Ltd., Dabur India Ltd., Noida Toll Bridge Co. Ltd and

Rolta India Ltd. for their suggestions and guidance in my research. Thanks are also

due to Prof. R. Narayanaswamy and Prof. M. Jayadev of Indian Institute of

Management, Bangalore for their valuable suggestions and guidance that have helped

me in my research.

iv

I extend my thanks to Sreekumar Nair, Librarian, Christ University Library for

his help and support in enabling me to use valuable resources.

I would also like to thank Prof. Anil Pinto, Christ University and Saurabh

Pandya, Indian Institute of Management, Bangalore for providing valuable

contributions.

I wish to thank my parents and most of all; I deeply thank my wife Deepika

for her patience, love and positive support. Deepika, I adore you for your continued

encouragement and appreciation of what I do.

Finally, I humbly acknowledge the glory of The Supreme God, the true

essence and strength of life who provides perseverance during all tasks.

Ram Kesh Gupta

v

TABLE OF CONTENTS

Certificate i

Declaration ii

Acknowledgement iii

Table of Contents v

List of Tables ix

List of Graphs xi

List of Acronyms and Abbreviations xii

Chapter I INTRODUCTION 1

I.0 Introduction 2

I.1 Brief History of International Financial Reporting Standards 5

I.2 Related Literature 9

I.3 Statement of Problem 13

I.4 Research Question 14

I.5 Scope and Significance of the Study 15

I.6 Objectives of the Study 16

I.7 Hypotheses of the Study 17

I.8 Operational Definitions 17

I.9 Major Findings 19

I.10 Limitations of the Study 21

I.11 Chapter Scheme 21

vi

Chapter II LITERATURE REVIEW 23

II.0 Introduction 24

II.1 Brief History of the International Accounting Standards

Committee 24

II.2 Origin of International Accounting Standards Board 26

II.2.i International Accounting Standards Board 26

II.2.ii International Financial Reporting Interpretations

Committee 27

II.3 Popularity and Acceptance of International Financial

Reporting Standards Worldwide 28

II.4 Literature Review 30

II.5 Description of International Financial Reporting Standards 38

II.6 Description of International Accounting Standards 40

II.7 Indian Accounting Standards with relevant International

Accounting Standards/International Financial Reporting

Standards 44

II.8 Overview of International Financial Reporting Standards in

Summarized Form 46

II.9 Summarization of Indian Accounting Standards 65

II.10 Major Differences between Indian Generally Accepted

Accounting Principles and International Financial Reporting

Standards/International Accounting Standards 148

Chapter III RESEARCH DESIGN AND METHODOLOGY 168

III.0 Purpose of the Study 169

III.1 Research Methodology 169

III.1.i Study Design 169

III.1.ii Data Collection 170

III.1.iii Companies under Study 171

vii

III.1.iv Tools for Collecting Data and Information 171

III.1.v Financial Matrix for Data analysis and Inference 171

III.1.vi. Graphical Presentation 172

Chapter IV COMPANIES UNDER STUDY 173

IV.0 Accounting Regulations and International Financial Reporting

Standards in India 174

IV.1 Legal Recognition for Accounting Standards 176

IV.1.i Presentation of Financial Statements 177

IV.2 Convergence with International Financial Reporting Standards 179

IV.2.i Applicability of International Financial Reporting

Standards to Small and Medium Size Entities 181

IV.3 Companies under Study 182

IV.3.i Dabur India Ltd 182

IV.3.ii Infosys Ltd 186

IV.3.iii Noida Toll Bridge Company Ltd 189

IV.3.iv Rolta India Ltd 191

Chapter V ANALYSIS AND INTERPRETATION 194

V.0 Data Analysis and Measurement 195

V.1 Measurement of Variables 195

V.2 Data Analysis 196

V.2.i Hypothesis 1-Financial Risk and International

Financial Reporting Standards 196

V.2.i.a Financial Matrix-Hypothesis 1 198

V.2.i.b Testing of Hypothesis 1 202

viii

V.2.ii Hypothesis 2-Investment activities and International


V.2.ii.a Financial Matrix-Hypothesis 2 206

V.2.ii.b Testing of Hypothesis 2 210

V.2.iii Hypothesis 3-Mergers and Acquisitions activities and

International Financial Reporting Standards 212

V.2.iii.a Financial Matrix-Hypothesis 3 214

V.2.iii.b Testing of Hypothesis 3 219

V.2.iv Hypothesis 4-Diversification activities and

International Financial Reporting Standards 221

V.2.iv.a Financial Matrix-Hypothesis 4 222

V.2.iv.b Testing of Hypothesis 4 227

V.3 Interpretation of Results 229

Chapter VI CONCLUSION, SUGGESTIONS, AND SCOPE FOR

FURTHER RESEARCH 233

VI.0 Conclusion 234

VI.1 Contributions 235

VI.2 Suggestions 238

VI.3 Scope for Further Research 241

REFERENCES 244

ix

LIST OF TABLES

Sl. No. Table No. Title Page No.

1. I.8.i Operationalisation of Variables 18

2. II.5.i Comparative position of International Financial

Reporting Standards with Indian Generally

Accepted Accounting Principles 40

3. II.6.i Comparative position of International Accounting

Standards and Indian Generally Accepted

Accounting Principles 42

4. II.7.i Indian Accounting Standards with Relevant

International Accounting Standards/International


5. II.10.i Differences between Indian Generally Accepted

Accounting Principles and International Financial

Reporting Standards/International Accounting

Standards 148

6. IV.3.i Information about the Indian Companies

selected for study 182

7. V.2.i.a Hypothesis 1 Variables 198

8 V.2.i.a.ai Financial Matrix under IFRS-Hypothesis 1 198

9. V.2.i.a.aii Financial Matrix under IGAAP-Hypothesis 1 199

10. V.2.i.a.aiii Financial Matrix of difference between IFRS

and IGAAP for Hypothesis 1 200

11. V.2.i.a.aiv Descriptive Statistics of Financial Ratios

(Hypothesis 1) 201

12. V.2.i.a.av Descriptive Statistics of Financial Risks

(Hypothesis 1) 202

13. V.2.ii.a Hypothesis 2 Variables 206

14. V.2.ii.a.ai Financial Matrix under IFRS-Hypothesis 2 206

15. V.2.ii.a.aii Financial Matrix under IGAAP-Hypothesis 2 207

x

16. V.2.ii.a.aiii Financial Matrix of Difference between IFRS


17. V.2.ii.a.aiv Descriptive Statistics of Financial Ratios

(Hypothesis 2) 209

18. V.2.ii.a.av Descriptive Statistics of Investment Activities

(Hypothesis 2) 210

19. V.2.iii.a Hypothesis 3 Variables 214

20. V.2.iii.a.ai Financial Matrix under IFRS-Hypothesis 3 214

21. V.2.iii.a.aii Financial Matrix under IGAAP-Hypothesis 3 216

22. V.2.iii.a.aiii Financial Matrix of Difference between IFRS


23. V.2.iii.a.aiv Descriptive Statistics of Financial Ratios

(Hypothesis 3) 218

24. V.2.iii.a.av Descriptive Statistics of Mergers and Acquisitions

Activities (Hypothesis 3) 218

25. V.2.iv.a Hypothesis 4 Variables 222

26. V.2.iv.a.ai Financial Matrix under IFRS-Hypothesis 4 223

27. V.2.iv.a.aii Financial Matrix under IGAAP-Hypothesis 4 224

28. V.2.iv.a.aiii Financial Matrix of Difference between IFRS


29. V.2.iv.a.aiv Descriptive Statistics of Financial Ratios

(Hypothesis 4) 226

30. V.2.iv.a.av Descriptive Statistics of Diversification Activities

(Hypothesis 4) 226

31. V.3.i Hypotheses Testing with t-test Results 230

xi

LIST OF GRAPHS

Sl. No. Graph No. Title Page No.

1. V.2.i.b.bi Hypothesis 1 testing-left tail with critical region 203

2. V.2.ii.b.bi Hypothesis 2 testing-right tail with critical region 211

3. V.2.iii.b.bi Hypothesis 3 testing-right tail with critical region 219

4. V.2.iv.b.bi Hypothesis 4 testing-right tail with critical region 227

xii

ACRONYMS and ABBREVIATIONS

(In alphabetical order)

AS : Accounting Standards of India

ASB : Accounting Standards Board of India

CRISIL : Credit Rating and Information Services of India Ltd.

DEPS : Diluted Earnings per Share

DIL : Dabur India Limited

ER : Equity Ratio

FAT : Fixed Asset Turnover Ratio

FMCG : Fast Moving Consumer Goods

IAS : International Accounting Standards

IASB : International Accounting Standards Board

IASC : International Accounting Standards Committee

ICAI : Institute of Chartered Accountants of India

IFAC : International Federation of Accountants

IFRIC : International Financial Reporting Interpretations Committee

IFRS : International Financial Reporting Standards

IGAAP : Indian Generally Accepted Accounting Principles

xiii

ILFS : Infrastructure Leasing and Financial Services Ltd.

InvCF : Investing Cash Flows

InvFA : Investments in Fixed Assets

IRDA : Insurance Regulatory and Development Authority

EPS : Earnings per Share

EU : European Union

FASB : Financial Accounting Standards Board

GAAPs : Generally Accepted Accounting Principles

GDR : Global Depository Receipt

GR : Gearing Ratio

MCA : Ministry of Corporate Affairs of India

NACAS : National Advisory Committee on Accounting Standards

NASDAQ : National Association of Securities Dealers Automated Quotations

NSE : National Stock Exchange of India

NTBCL : Noida Toll Bridge Company Limited

NZGAAP : New Zealand Generally Accepted Accounting Principles

OpCF : Operating Cash Flows

PE : Price Earnings Ratio

QR : Quick Ratio

xiv

RBI : Reserve Bank of India

ROA : Return on Assets

ROE : Return on Equity

SAGR : Sales Growth

SEBI : Securities and Exchange Board of India

SEC : Securities Exchange Commission

SICs : Standing Interpretations Committee Standards

SMC : Small and Medium sized Companies

USA : United States of America

USSEC : United States Securities Exchange Commission

USGAAP : United States Generally Accepted Accounting Principles

1

CHAPTER I

INTRODUCTION

2

I.0 INTRODUCTION

The importance of international accounting practice studies has grown over

the past few years in order to meet economic agent demands and to facilitate

international business practices. It is essential to understand that international

accounting convergence is an important topic for capital market regulators, investors,

markets, governments and all others who deal with financial information of public

companies. This brings out the importance of accounting as being an essential fiscal

tool for various economic agents. The merit of international accounting convergence

lies in its ability to minimize negative effects resulting from diversity of accounting

practices in different countries (Cordeiro et al. 2007). In such a scenario, the

introduction of International Financial Reporting Standards (IFRS) for listed

companies in many countries around the world is viewed as one of the most

significant regulatory changes in accounting history (Daske et al. 2008).

IFRS issued by the International Accounting Standards Board (IASB) are now

being recognized as the premier global reporting standards of accounting information

world over. Today, more than hundred nations demand or permit the use of IFRS in

their countries. Many countries have already announced their willingness to adopt

IFRS in their countries. This is becoming the most popular and commonly accepted

financial reporting model around the world, such as, European Union, Australia, New

Zealand and Russia. The legal frameworks currently permit the use of IFRS in their

countries. The importance of IFRS grew as they provide greater comparability of

financial information for investors and also encourage them to invest across borders.

Studies show that, IFRS adoption help in lowering the cost of capital for the

companies and benefits more efficient allocation of capital.

3

Levitt (1998) in his paper on the importance of high quality accounting

standards emphasized the need for harmonization of accounting standards to deliver

credible information grounded in transparent financial reporting. The author lists out

three key objectives for international standards to gain acceptance, as under:

1) The standards should include a core set of accounting pronouncements that

constitute a comprehensive, generally accepted basis of accounting.

2) The standards must be of ‘high quality’-they must result is comparability and

transparency and provide for full disclosure. Investors must be able to

meaningfully analyse performance across time periods and among companies.

3) The standards must be rigorously interpreted and applied. If the accounting

standards are to satisfy the objective of having similar transactions and events

accounted for in similar ways-whenever and wherever they are encountered,

auditors and regulators around the world must insist on rigorous interpretation and

application of those standards. Otherwise, the comparability and transparency that

is the objective of common standards will get eroded.

The Securities Exchange Commission (SEC) of United States of America

(USA) has allowed usage of IFRS without reconciliation of United States Generally

Accepted Accounting Principles (USGAAP) in the financial reports filed by foreign

private issuers, thereby, giving foreign private issuers a choice between IFRS and

USGAAP. SEC has proposed that the USA issuers should begin reporting under IFRS

from 2014 with full conversion to occur by 2016 depending on size of the entity, this

will bring almost the entire world on one single, uniform accounting platform, that is,

IFRS.

With the economy growing and increasing integration among the global

economies, Indian companies are also raising their capital globally due to

4

diversification, cross-border mergers, investments or divestments. Under these

circumstances, it is imperative for Indian corporate world to adopt IFRS for their

financial reporting. The Core Group of Ministry of Corporate Affairs of India (MCA)

has recommended convergence to IFRS in a phased manner from April 1, 2012. Till

then, an Indian corporate having global aspirations should consider voluntary

adoption of IFRS. The convergence with IFRS standards is set to change the

landscape for financial reporting in India. Indian companies currently follow the local

accounting standards known as Indian Generally Accepted Accounting Principles

(IGAAP) issued by Institute of Chartered Accountants of India (ICAI) on behalf of

MCA, Government of India.

The proponents of IFRS argue that accounting standards harmonization via

IFRS enhances the quality and comparability of corporate financial disclosures, and

accounting disclosure qualities have been the major focus of investors and also

regulators. The only positive and direct method of reducing agency cost and risk due

to information asymmetry is through better accounting disclosure policies. The

accounting quality pertains to better information disclosure quality. Various

accounting standards and ‘GAAPs’ (Generally Accepted Accounting Practices)

around the world lay down different set of norms for accounting disclosures hence the

quality of accounting information also differ across nations. The basic feature of IFRS

is that it is a principle-based standard rather than being a rule-based one.

Since IFRS is still in its infancy, researches across the globe are interested to

study the importance and impact on the financials of the companies. It is argued that

the use of IFRS enhances the comparability of financial statements, improves

corporate transparency, increases quality of financial reporting and thus benefits

investors. Daske et al. (2008) in their study on economic consequences due to

5

mandatory IFRS reporting around the world, argue that, from an economic

perspective, there are reasons to be skeptical about the above expectations because the

economic consequences of mandating IFRS reporting are not obvious. Arguing on the

same basis, this research aims to study the impact on economic activities of Indian

companies by adopting IFRS. Even though there are several similarities between

IGAAP and IFRS, still there exist differences that can have significant economic

impacts. The research aims to understand these impacts due to IFRS adoption by

Indian companies.

I.1 BRIEF HISTORY OF INTERNATIONAL FINANCIAL REPORTING

STANDARDS

With the rampant rise of globalization, it is really difficult to disagree with

Thomas L. Friedman, author of the world-renowned book, The World is Flat, who

said around the year 2000 that we have entered a new stage of globalization, a whole

new era that he referred to as Globalization 3.0. According to him, the size of the

world is shrinking from small to tiny. Some people believe that this magical

phenomenon of globalization has led to the emergence of a global village that we live

in.

If we believe in the old adage, “Accounting is the language of business,” then

business enterprises around the world should not be speaking in different languages to

each other while exchanging and sharing financial results of their international

business activities and also reporting the results of business and trade to their

international stakeholders. One school of thought believes that since business

enterprises around the world are so highly globalized now and need to refer to each

other in a common language of business, there is real need for single, universal set of

6

accounting standards that would unify the accounting world and, more importantly,

solve the problem of diversity of accounting practices across borders.

Historically, countries around the world have had their own national

accounting standards. However, with such a compulsion to be part of the globalization

movement, wherein business across national boundaries are realizing that it is an

astute business strategy to embrace the world as their workplace and marketplace,

having different rules or standards of accounting for the purposes of reporting

financial results would not help them at all; rather, it would serve as an impediment to

the smooth flow of information. Businesses, therefore, have realized that they need to

talk to each other in a common language.

IFRS are clearly emerging as a global financial reporting benchmark and most

countries have already started using them as their benchmark standard for listed

companies. With the recent issuance of IFRS for Small and Medium Enterprises, a

stand-alone set of standards for private entities that do not have public accountability,

the global reach of the IASB is further enhanced. However, if these international

standards are not applied uniformly across the world, due to interpretational

differences, then their effectiveness as a common medium of international financial

reporting will be in question. If the different entities within the region apply them

differently based on their interpretation of the standards, it would make global

comparison of published financial statements of entities using IFRS difficult.

Debate still rages amongst accountants and auditors globally on many burning

and contentious accounting issues that need a common stand based on proper

interpretation of these standards.

According to one school of thought, IFRS are emerging as the much-awaited

answer to the ‘billion-dollar question’ on the minds of accountants, financial

7

professionals, financial institutions, and regulators, that is, Which set of accounting

standards would solve the conundrum of diversity in accounting practices worldwide

by qualifying as a single or a common set of standards for the world of accounting to

follow and rely upon?

Undoubtedly, for years, USGAAP was leading this much-talked about

international race to qualify as the most acceptable set of accounting standards

worldwide. Due to several reasons, including the highly publicized corporate debacles

such as Enron in the United States, the global preference of most countries has now

been clearly in favour of IFRS as the most acceptable set of international accounting

and financial reporting standards worldwide.

With the current acceptance of IFRS in more than hundred countries and with

several more expected to adopt IFRS in the coming years, one can argue that IFRS

could possibly qualify as an Esperanto of international accounting. However, there is

a strong possibility of the USSEC’s accepting IFRS ultimately. Judging from the

amazing change in attitude of the USSEC, which has already allowed use of IFRS by

foreign issuers for filings on USA stock exchanges, one may expect-that is, if the

SEC’s road map to convergence with IFRS goes through successfully without any

glitches, that by 2014, the world of accounting may be rejoicing and celebrating under

a strong common banner of a global set of accounting and financial reporting

standards, namely the IFRS.

The history of IFRS can be traced back to 1973 when representatives of the

professional accounting bodies from major developed economies-Australia, Canada,

France, Germany, Japan, Mexico, the Netherlands, the United Kingdom, Ireland and

the US-reached an agreement to establish the International Accounting Standards

Committee (IASC) with no statutory mandates given by political jurisdictions. In

8

1975, the IASC pronounced its first International Accounting Standard (IAS). Since

then the IASC issued a total of 41 IAS until it was restructured into the International

Accounting Standard Board (IASB) in 2001. The IASB has pronounced a total of

eight International Financial Reporting Standards (IFRS) as on 2006.

A major task of the IASB is to cooperate with national accounting standard

setting bodies to achieve harmonization in accounting standards around the world.

Nowadays, the IAS and IFRS are widely accepted and have become one of the most

prevalent accounting standards around the world. In 2002, the IASB and the Financial

Accounting Standards Board (FASB) embarked on a joint programme to make

USGAAP and IFRS converge to the maximum possible extent (Schipper, 2005). Also,

the IFRS has been widely adopted in the Asia-Pacific region. For example,

Bangladesh requires companies listed on local stock exchanges to adopt IFRS. Some

countries-Australia, Hong Kong and New Zealand-have changed their local standards

into new standards that are virtually similar to IFRS. Other countries, for example,

Singapore, India, Malaysia, Thailand, and others, have changed most parts of local

standards that are equivalent to IFRS.

Economic activities such as investments, mergers and acquisitions, and

diversifications are key activities of development, survival and sustainability.

Companies are in competition at global level, hence the pertinent research is

undertaken to study the impact of IFRS on such of the economic activities.

Interestingly it is found that the financial risks have not improved and investments,

mergers and acquisitions and diversification do not impact statistically on economic

activities even though differences are seen in absolute numbers.

An important step towards accounting standards harmonization through IFRS

was made in March 2002, when the European Parliament broadly endorsed the

9

proposal that all European Union companies listed on organized stock exchanges

(about 9,000 companies in total) should, from 2005 onwards at the latest, prepare and

publish their consolidated accounts in accordance with IFRS. Implementation of IFRS

practices in the European Union turned out to be a historic event. It was the most

significant revolution concerning accounting standards and accounting practices ever

(Cordeiro et al. 2007). The countries in European Union that required domestic listed

firms to follow IFRS from 2005 were Austria, Belgium, Cyprus, Czech Republic,

Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland,

Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, the Netherlands, Norway,

Poland, Portugal, Slovakia, Spain, Sweden and the United Kingdom.

I.2 RELATED LITERATURE

There are different streams of IFRS literature. One stream investigates the

impact of IFRS adoption on earnings quality and finds mixed results (Cuijpers &

Buijink, 2005; Gassen & Sellhorn, 2006; Barth et al. 2008; Tendeloo & Vanstraelen,

2005). Another stream of research examines the value relevance of IFRS in

comparison with local GAAP (Hung & Subramanyan, 2007; Bartov et al. 2005;

Goodwin et al. 2008). The third stream of research examines the impact of IFRS

adoption on cost of capital (Leuz & Verrecchia, 2000; Daske, 2006). There are also

other streams of IFRS literature that examine factors influencing disclosure on

transition to IFRS (Kent & Stewart, 2008; Palmer, 2008), relevance of accounting

classification in the IFRS era (Nobes, 2008), impact of particular IFRS on

harmonization (Morais & Fialho, 2008) and value relevance (Chalmers et al. 2008).

Regulators and investors have commonly expressed the view that more the

transparency and higher the quality in accounting, lower is the cost of capital for

adopting companies (Levitt, 1998; IASB, 2002). Proponents of IFRS often claim that

10

IFRS adoption leads to greater and higher-quality disclosures. When compared with

local accounting standards in most countries, IFRS is considered as being more fair-

value-oriented, reducing accounting flexibility allowed for the issuers of financial

statements, incorporating the effects of economic events on firm performance into

financial statements in a timelier manner (Coopers & Lybrand 1993; Dumontier &

Raffounier 1998; GAAP 2000).

In one of the major work on studying economic consequences due to

mandatory IFRS reporting Daske et al. (2008) with a sample of 26 countries for a

period from 2001 to 2005 found that, on an average, market liquidity increased

around the time of introduction of IFRS. Capital market benefits occur only in

countries where firms have incentives to be transparent and where legal enforcement

is strong. Capital market also affects most of the firms that voluntarily switch to IFRS,

both in the year they switch and again later, when IFRS become mandatory. Many

adopting countries make concurrent efforts to improve enforcement and governance

regimes.

Moreover, several studies provide empirical evidence suggesting that IFRS is

of higher quality than local GAAP. Bartov et al. (2005) assess the value relevance of

earnings produced under USA and German GAAP relative to that under IFRS, and

finds that USGAAP-based and IFRS-based earnings are of higher value relevance

than German GAAP-based earnings. Armstrong et al. (2008) examine the European

stock market reaction to adoption of IFRS through an event study approach and find

that, market perceives net benefits associated with either convergence of accounting

standards or improved information quality by IFRS.

While these studies focus on the impact of IFRS adoption on the disclosure

quality, the other stream of research focuses on the association between the disclosure

11

quantity or level and a firm’s voluntary adoption of IFRS. Ding et al. (2005) report

that IFRS require more comprehensive disclosures than the domestic standards of

most countries.

Lantto and Sahlstrom (2009) in their study examine the impact of IFRS

adoption on key financial ratios using Finland as a sample country. The results clearly

show that, the adoption of IFRS changes the magnitude of the key accounting ratios.

Moreover, it also found that, adoption of fair value accounting rules and stricter

requirements on certain accounting issues are the reasons for the changes observed in

accounting figures and financial ratios. In this regard, the results of the study indicate

that, the adoption of IFRS changes the magnitudes of the key accounting ratios of

Finnish companies by considerably increasing the profitability ratios and gearing ratio

moderately, and considerably decreasing the PE ratio and equity and quick ratios

marginally. The results indicate that the increases in the profitability ratios and the

decrease in the PE ratio can be explained by increases in the income statement profits.

In another study using financial ratios based on profitability, activity, liquidity

and solvency, Padrtova and Vochozka (2011) compare the informative value of

financial statements of CEZ Inc drawn up under IFRS and Czech accounting

standards for 2004 and 2005. The financial analysis results proved the impact of IFRS

implementation on financial performance of the company. Financial statements

prepared under Czech accounting standards showed the company healthier than

financial statements drawn under IFRS.

Similarly, Beuren et al. (2008) in their study developed on economic-financial

indicators of 37 English companies suggested divergence between IFRS and

USGAAP, indicated significant correlation between differences of these indicators.

However, in contrast, Ferrer et al. (2011) investigate how liquidity and

12

leverage ratios exert significant effect on the degree of compliance with IFRS

disclosures as measured by disclosure indexes constructed from Balance Sheets and

Income Statements of 100 publicly listed companies in Philippines. Multiple

regression analysis based findings suggest that none of the indices exert a significant

effect on the financial variables based on computed t-statistics. The study accepts null

hypotheses that liquidity and financial leverage have no effect with IFRS when

expressed in terms of Balance Sheet and Income Statement indices.

Zhou et al. (2009) undertake a study in China, an emerging economy as

sample country, investigated whether firms adopting IFRS have higher earning

quality as compared to non-adopting firms in an emerging market. The results suggest

some improvement in the quality of accounting information associated with the

adoption of IFRS. The findings point to the need for a stricter enforcement

mechanism of accounting standards in emerging markets. Enforcing the same

sentiment, Liu et al. (2011) examine the impact of IFRS on accounting quality in

China, a regulated market using a sample of 870 firms that were mandated to follow

the new standards. Results of the data from 2005 to 2008 show that changes are less

likely to result from changes in economic conditions but from changes in the market.

This study is important because it provides direct evidence on the question whether

IFRS can be relevant to markets that are still disciplined mainly by regulators than by

market mechanisms.

In one of the only descriptive study using Indian banking industry, Firoz et al.

(2011) critically analyse financial statements like business per employee, capital and

reserves, investments and advances, net non-performing assets ratios and the impact

thereon on relevant provisions of IFRS. The authors conclude that certain issues need

13

clarity from tax authorities as well as from Reserve Bank of India to ensure successful

IFRS implementation by banking industry.

The idea that IFRS adoption enhances disclosure level and/or quality of

corporate disclosures forms the basis of arguments in this thesis. The intuition is that a

firm’s voluntary adoption of IFRS can be viewed as commitment to better disclosure,

which may have various economic impacts on the firm.

I.3 STATEMENT OF PROBLEM

The statement of problem is to test what are the impacts on economic

activities, that is, on financial risks, investments, diversifications, mergers and

acquisitions and other key functions of finance after adoption of International

Financial Reporting Standards by Indian companies and to study whether disclosures

under IFRS really have an impact on economic activities of the Indian companies or

not.

As the necessity demands, the researcher has planned to study how IFRS has

impacted key economic activities such as:

1) What is the impact on financial risk after voluntary adoption of IFRS by Indian

companies?

2) What is the impact on investment activities after voluntary adoption of IFRS by

Indian companies?

3) What is the impact on merger and acquisition activities after voluntary adoption

of IFRS by Indian companies?

4) What is the impact on diversification activities after voluntary adoption of IFRS

by Indian companies?

14

I.4 RESEARCH QUESTION

The main purpose of this thesis is to examine the impact of firms’ voluntary

IFRS adoption on economic activities. In order to empirically address the issue, the

researcher employs four types of economic activities-financial risks, investment

activities, merger and acquisition activities and diversification activities.

In the first study, given that, impact on financial risks measures the amount of

firm-specific information being impounded into liquidity, profitability, leverage and

market based ratio, the researcher investigates whether IFRS adoption has an impact

on financial risks. A detailed look at how IFRS adoption impacts economic activity-

financial risk is included in this research. The researcher hypothesizes that financial

risks improved after adoption of IFRS voluntarily.

In the second study, given that, impact on investment activities measures the

amount of firm-specific information being impounded into investments in fixed

assets, investing cash flow and return on assets, the researcher investigates whether

IFRS adoption has an impact on investment activities. A detailed look at how IFRS

adoption impacts economic activity-investment activities is included in this research.

The researcher hypothesizes that investment activities increased after the adoption of

IFRS voluntarily.

In the third study, given that, impact on mergers and acquisitions activities

measure the amount of firm-specific information being impounded into diluted

earnings per share (EPS), equity ratio and operating risk, the researcher investigates

whether IFRS adoption has an impact on mergers and acquisitions activities. A

detailed look at how IFRS adoption impacts economic activity-mergers and

acquisitions activities is included in this research. The researcher hypothesizes that

mergers and acquisitions activities improved after the adoption of IFRS voluntarily.

15

In the fourth study, given that, impact on diversification activities measures

the amount of firm-specific information being impounded into growth and operating

cash flow, the researcher investigates whether IFRS adoption has an impact on

diversification activities. A detailed look at how IFRS adoption impacts economic

activity-diversification activities is included in this research. The researcher

hypothesizes that diversification activities increased after the adoption of IFRS

voluntarily.

I.5 SCOPE AND SIGNIFICANCE OF THE STUDY

This study is significant because Indian companies have started going abroad

to raise money and therefore they have to comply with the international accounting

standards. This gives importance to the use of IFRS being a single accounting

standard across the globe.

The scope of this research is restricted to listed Indian companies on National

Stock Exchange (NSE). NSE listed companies have to publish their financial annual

reports in the mandatory accounting principles as required in India. In addition to this,

some of these companies also publish their financial annual reports in IFRS

voluntarily in India. The foreign companies that have obligations to publish their

results in IFRS due to their multiple listing are excluded from this analysis.

This research will significantly contribute to accounting and finance

knowledge from the perspective of users of such information. The research also tries

to uncover factors influencing the economic activities like financial risk management,

investments, diversification and mergers and acquisitions in Indian companies and see

how these activities are affected by better disclosures through IFRS.

16

I.6 OBJECTIVES OF THE STUDY

The overall objective of the research is to study the impact on economic

activities due to voluntary adoption of IFRS by Indian companies. The specific

objectives are as follows:

i. To study the existing accounting and disclosing norms;

ii. To know what made the companies under study to adopt IFRS voluntarily;

iii. To measure the impact on economic activities by adoption of IFRS; and

iv. To make suitable suggestions for better disclosures that would enhance the value

with such economic activities.

The adoption of accounting standards that requires high-quality, transparent,

and comparable information is welcomed by investors, creditors, financial analysts,

and other users of financial statements. It is difficult to compare worldwide

information without a common set of accounting and financial reporting standards.

The use of a single set of high quality accounting standards would facilitate

investment and other economic decisions across borders, increase market efficiency,

and reduce the cost of raising capital.

The motivation for this research is to evaluate the impact on economic

activities of Indian companies by disclosing their accounting information under IFRS.

As a matter of fact, better disclosures reduce the estimation risk of future earnings,

thereby reducing the cost of information asymmetry that occurs due to adverse

selection and risk premium which in turn reduces the financial risks faced by the

companies and increases the economic activities like investment activities,

diversifications, mergers and acquisitions and other key functions of finance.

17

I.7 HYPOTHESES OF THE STUDY

Based on the objectives of the study, the researcher hypothesizes the

following:

Hypothesis 1:

Ho: Financial risk did not improve after the adoption of IFRS voluntarily.

H1: Financial risk improved after the adoption of IFRS voluntarily.

Hypothesis 2:

Ho: Investment activities did not increase after the adoption of IFRS

voluntarily.

H1: Investment activities increased after the adoption of IFRS voluntarily.

Hypothesis 3:

Ho: Merger and acquisitions activities did not improve after the adoption of

IFRS voluntarily.

H1: Mergers and acquisitions activities improved after the adoption of IFRS

voluntarily.

Hypothesis 4:

Ho: Diversification activities did not increase after the adoption of IFRS

voluntarily.

H1: Diversification activities increased after the adoption of IFRS voluntarily.

I.8 OPERATIONAL DEFINITIONS

In order to test the hypotheses, the researcher needs to identify the different

variables. For this, the researcher analysed the important terms in the above

hypotheses.

Since each hypothesis is aimed to test specific economic activity due to IFRS

18

adoption, it is important to go deeper into each economic aspect of the above

hypotheses to operationalize these variables.

The definitions for variables operationalization are supported from the

extensive literature review done in Chapter II. These variables are discussed in greater

details in Chapter V. These variables are tabulated as under:

Table I.8.i: Operationalization of Variables

Hypothesis Economic

activity

Ratios Definition Related literature

Hypothesis 1 Financial risk Liquidity Quick ratio Lantto &

Shalstrom (2009),

Padrtova &

Vochozka (2011)

Profitability Return on

equity

Lantto &

Shalstrom (2009),

Padrtova &

Vochozka (2011)

Leverage Gearing ratio Lantto &

Shalstrom (2009),

Padrtova &

Vochozka (2011)

Market based

ratio

Price earnings

ratio

Lantto &

Shalstrom (2009)

Hypothesis 2 Investment

activities

Investment in

fixed assets

Gross value to

be used

Aubert &

Grudnitski (2011)

Investing

cash flow

As originally

reported in

cash flow

statements

Aubert &

Grudnitski (2011)

Return on

assets

Ratio between

total assets and

net income

Kabir et al. (2010),

Padrtova &

Vochozka (2011)

19

Hypothesis Economic

activity

Ratios Definition Related literature

Hypothesis 3 Mergers and

acquisitions

activities

Diluted EPS As reported Aubert &

Grudnitski (2011)

Equity ratio Equity ratio Lantto &

Shalstrom (2009),

Padrtova &

Vochozka (2011)

Operating

risk

Fixed asset

turnover ratio

Aubert &

Grudnitski (2011),

Padrtova &

Vochozka (2011)

Hypothesis 4 Diversification

activities

Growth Sales variation

over previous

year

Byard et al. (2010)

Operating

cash flow

As originally

reported in

cash flow

statements

Aubert &

Grudnitski (2011)

I.9 MAJOR FINDINGS

The findings of this research are very interesting in relation to the impact on

economic activities of Indian companies due to voluntary IFRS adoption. There are

positive and negative differences, some greater, some lesser, in each financial

indicator of economic activity. These changes in financial ratios exist in absolute

numbers (magnitude) calculated based on IFRS and IGAAP financial statements. This

suggests that the adoption of stricter accounting rules under IFRS could be the reasons

for the changes observed in accounting figures and financial ratios. However, there

was no statistical evidence at 5% level of significance to prove that any of the

20

economic activities improved/increased under voluntary adoption of IFRS by Indian

companies.

The main findings of this research, therefore, do not lend support to

proponents of IFRS. In the first study, the researcher finds no empirical evidence at

5% level of significance to suggest that there is improvement in financial risks under

IFRS voluntary adoption.

In the second study, the researcher finds no empirical evidence at 5% level of

significance to suggest that there is improvement in investment activities under IFRS

voluntary adoption.

In the third study, the researcher finds no empirical evidence at 5% level of

significance to suggest that there is improvement in mergers and acquisitions

activities under IFRS voluntary adoption.

In the fourth study, the researcher finds no empirical evidence at 5% level of

significance to suggest that there is improvement in diversification activities under

IFRS voluntary adoption.

It is, therefore, interesting to know that none of the economic activities

showed improvement statistically with IFRS voluntary adoption by Indian companies,

though differences were observed in absolute financial ratios. These results find

support in various studies as in (a) Auer (1996) where the empirical results suggested

no statistically significant differences in the information between IFRS-based and

Swiss GAAP-based statements; (b) Tendeloo & Vanstralen (2005) where there was

no significant differences in earnings management between companies using adopted

IFRS and others using German GAAP; (c) Daske (2006) where risk for IFRS

companies was found to have increased; (d) Kabir et al. (2010) where there was no

statistical support for information based on IFRS and New Zealand GAAP.

21

I.10 LIMITATIONS OF THE STUDY

This research is subject to some limitations. The sample size is relatively very

small and hence the research design has been adapted to this condition. The sample

periods of the four companies in this research cover 2007-2011 only, the reason being

reporting in both IFRS as well as IGGAP is done only by these companies, Because

of this, the sample size is small as IFRS adoption in India is still voluntary. Therefore,

selecting the sample size itself was difficult given data availability constraints. The

measures used in the research may also suffer from measurement errors because some

indicators are included in the financial matrix used, the research may not be able to

control all reporting indicators.

This research encompasses an empirical investigation of impact of voluntary

IFRS adoption and economic activities in the emerging market of India. As a country-

specific study (Zhou et al. 2009), the conclusions from this research are probably

difficult to extrapolate to other countries exhibiting different socio-economic and

socio-political characteristics. This constitutes another limitation of this research.

I.11 CHAPTER SCHEME

The thesis is divided into six chapters, organized as follows:

Chapter 1: Introduction

This chapter deals with a brief history of Indian Generally Accepted

Accounting Principles, International Financial Reporting Standards, International

Accounting Board, and Financial Accounting Standard Board. The chapter also

provides information on the objectives, statement of problem, research question,

scope and significance, hypotheses and operational definitions of the study. It also

provides findings and limitations and presents an overview of the thesis chapter

organization.

22

Chapter 2: Literature Review

This chapter covers literature across various nations including studies in India.

It also discusses the origin of International Accounting Standards. Further, it covers

literature on various IAS, IFRS and their major differences with IGAAP.

Chapter 3: Research Design and Methodology

This chapter covers the purpose of study, design, data collection, methods and

tools and financial matrices used for analysis.

Chapter 4: Companies under study

This chapter covers accounting regulations and IFRS reporting and

convergence in India. It includes discussion about the companies considered for study

(1) Dabur India Ltd (2) Infosys Ltd (3) Noida Toll Bridge Co. Ltd and (4) Rolta India

Ltd. Brief description in terms of history and background, products, investment

activities, diversification and mergers and acquisitions and other activities about each

company are covered.

Chapter 5: Analysis and Interpretation

This chapter covers data analysis and measurement of variables from the

annual reports of the companies through the financial matrices. Data analysis is done

by testing of the hypotheses through the statistical tools.

Chapter 6: Conclusion, Suggestions, and Scope for Further Research

This chapter summarizes the results presented in the thesis, suggestions and,

how stage-wise IFRS can be implemented, benefits of usage and various training

required for different types of management teams. It also highlights potential areas for

future research studies.

23

CHAPTER II

LITERATURE REVIEW

24

II.0 INTRODUCTION

IFRS are a set of standards promulgated by the IASB, an international

standard-setting body based in London. The IASB places emphasis on developing

standards based on sound, clearly stated principles, from which interpretation is

necessary. IFRS are also referred to as principles-based standards. These contrast

with sets of standards, like Indian/USGAAP as well as standards of other countries,

which contain significantly more application guidance. Such standards are referred to

as rules-based standards.

According to one school of thought, since IFRS are primarily principles-based

standards, the IFRS approach focuses more on business or the economic purpose of a

transaction and the underlying rights and obligations, instead of providing prescriptive

rules (or guidance). IFRS provides guidance in the form of principles.

II.1 BRIEF HISTORY OF THE INTERNATIONAL ACCOUNTING

STANDARDS COMMITTEE

The International Accounting Standards Committee (IASC), the predecessor

of the IASB, was established in 1973 and came into being through an agreement by

professional accountancy bodies from Australia, Canada, France, Germany, Japan,

Mexico, the Netherlands, the United Kingdom, Ireland, and the United States. The

objective behind setting up the IASC was to develop, in the public interest,

accounting standards that would be acceptable around the world in order to improve

financial reporting internationally. Over the years, IASC saw several changes to its

structure and functioning. For example, by the year 2000, IASC’s sponsorship grew

from the original nine sponsors to 152 accounting bodies from 112 countries, that is,

all professional accounting bodies that were members of the International Federation

of Accountants (IFAC). Such fundamental changes to the IASC have helped it to

25

achieve the objectives for which it was set up: changing the perception of the global

standard setters about the international nature of participation in the standard setting

process.

As part of their membership in IASC, professional accountancy bodies

worldwide committed themselves to use their best endeavours to pursue governments,

standard setting bodies, securities regulators, and the business communities that

published financial statements to comply with International Accounting Standards.

This also drew the world’s attention to the fact that there exists a truly representative

international accounting body that could ultimately qualify as a global standard setter

and be able to develop a single set of accounting standards that would be acceptable

to most, if not all, countries worldwide. The objectives of the IASC foundation, as

stated in its Constitution, were:

a. To develop, in the public interest, a single set of high quality,

understandable, and enforceable global accounting standards that require

high quality, transparent, and comparable information in financial

statements and other financial reporting to help participants in the various

capital markets of the world and other users of the information to economic

decision;

b. To promote the use and rigorous application of those standard; and

c. In fulfilling the objectives associated with (a) and (b), to take account of, as

appropriate, the special needs of small and medium-sized entities and

emerging economies; and

d. To bring about convergence of National Accounting Standards and

International Financial Reporting Standards to high-quality solutions.

26

II.2 ORIGIN OF INTERNATIONAL ACCOUNTING STANDARDS BOARD

With tremendous pressure on the IASC to transform itself into a truly global

standard setting body by addressing some of the serious concerns of the established

standard setters around the world, in the year 2001, fundamental changes were made

to strengthen the independence, legitimacy, and the quality of the international

accounting standard-setting process. In particular, IASC Board was replaced by the

International Accounting Standard Board (IASB). The significant structural change in

which the IASC functioned for several years since its inception was brought about as

a result of the recommendations of the Strategy Working Party, which was

specifically formed to take a fresh look at-the then IASC’s structure and strategy.

At its first meeting in 2001, the IASB adopted all the outstanding IAS and

Standing Interpretations Committee Standards (SICs) issued by the IASC as its own

standards. These IAS and SICs still continue to be in force to the extent they are not

amended or withdrawn by the IASB. New standards issued by the IASB are known as

IFRS. New interpretations issued by the International Financial Reporting

Interpretations Committee (IFRIC) are known as IFRIC Interpretations. When

referring to IFRS, the term collectively includes IAS, SICs, IFRS, and IFRIC

Interpretations.

II.2.i International Accounting Standards Board

The IASB is responsible for standard-setting activities, including the

development and adoption of IFRS. The Board usually meets once a month and its

meetings are open to the public, in person and via, the Internet. The IASB comprises

of 14 members appointed by the Trustee-12 full-time members and 2 part-time

members. With recent amendments to the constitution of the IASC Foundation, the

size of the IASB is to be increased from 14 to 16 members by 2012. Stringent criteria

27

have been laid out in the IASC Foundation constitution for the appointment of IASB

Board members. These criteria are:

• Demonstrated technical competency, knowledge of financial accounting and

reporting, and ability to analyse,

• Effective communication skills,

• Awareness and understanding of the global economic environment,

• Ability to work in a congenial manner with other members and show respect, tact

and consideration for one another’s views and the views of the constituents, and

• Capability to take into consideration varied viewpoint presented, weighing the

evidence presented in an impartial manner, and arriving at well-reasoned and

supportable decisions in a timely fashion.

The Board members, who are appointed for a term up to five years, renewable

once, are chosen from a mix of backgrounds, including auditors, preparers of financial

statements, users of financial statements, and academicians. The members of IASB

are usually individuals who possess professional competence, high level of technical

skills, and have diversity of international business and market experience. Possessing

such personal attributes would normally ensure that the Board members are able to

contribute to the development of high quality global accounting standards. The IASB

has the complete responsibility for all IASB technical matters including preparation

and issuing of IFRS and Exposure Drafts that precede issuance of the final standards-

the IFRS.

II.2.ii International Financial Reporting Interpretations Committee

The Trustees appoint the members of the International Financial Reporting

Interpretation Committee (IFRIC). The IFRIC is the IASB’s interpretive body and has

the charge of developing interpretive guidance on accounting issues that are not

28

specifically dealt within IFRS or that are likely to receive divergent or unacceptable

interpretations in the absence of authoritative guidance. The Trustees select members

of the IFRIC keeping in mind personal attributes such as technical expertise and

diversity of international business and market experience in the practical application

of IFRS and analysis of financial statements prepared in accordance with IFRS.

The IFRIC shall comprise of 14 voting members. The Trustee, if then fit, may

also appoint non-voting observers representing regulatory bodies, who shall have the

right to attend and speak at the meetings of the IFRIC. A member of the IASB staff,

or another appropriately qualified individual, shall be appointed by the Trustees to

chair the IFRIC. The IFRIC shall meet as and when required, and 10 voting members

present in person or by telecommunication shall constitute a quorum. Meetings of the

IFRIC (and the IASB) are open to public but certain discussions may be held in

private at the discretion of the IFRIC. It is important to note that an IFRIC

Interpretation requires the IASB’s approval before its final issuance.

II.3 POPULARITY AND ACCEPTANCE OF IFRS WORLDWIDE

In the last few years, the popularity of IFRS has grown tremendously. The

international accounting standard-setting process has been able to claim a number of

successes in achieving greater recognition and use of IFRS. A major breakthrough

came in 2002 when the European Union (EU) adopted legislation that required listed

companies in Europe to apply IFRS in their consolidated financial statements.

The legislation came into effect in 2005 and applies to more than 8,000

companies in 30 countries, including countries such as France, Germany, Italy, Spain,

and the United Kingdom. The adoption of IFRS in Europe means that IFRS has

replaced national accounting standards and requirements as the basis for preparing

29

and presenting group financial statements for listed companies in Europe, which is

considered by many as a major milestone in the history of international accounting.

Outside Europe, many other countries also are moving towards IFRS. By

2005, IFRS had become mandatory in many countries in Africa, Asia, and Latin

America. In addition, countries such as Australia, Honk Kong, New Zealand,

Philippines, and Singapore had adopted national accounting standards that mirrored

IFRS.

Today, IFRS are used in more than 100 countries. A significant number of

Global Fortune 500 companies already use IFRS and this number is expected to

increase in 2012 with further convergence or adoption to IFRS by major global

players, most notably, Brazil, Canada, and India, and substantial convergence of local

GAAPs in China and Japan to IFRS.

The popularity and acceptance of IFRS is not only restricted to business

entities, but has also caught the awareness of academicians and researchers who, on

regular basis, have been trying to understand the benefits of IFRS convergence or

adoption by the various users. The growth in research in IFRS has witnessed a spurt

post 2005 only after EU mandated IFRS usage through legislation. Though majority

of research and relevant studies have concentrated in developed economies, largely

EU countries, limited studies are found in developing countries due to delayed IFRS

convergence or adoption. The literature on IFRS is recently developed and would

keep expanding as and when IFRS acceptance grows across the globe.

30

II.4 LITERATURE REVIEW

There are different streams of IFRS literature. One stream investigates the

impact of IFRS adoption on earnings quality and finds mixed results (Cuijpers &

Buijink, 2005; Gassen & Sellhorn, 2006; Barth et al. 2008; Tendeloo & Vanstraelen,

2005). Another stream of research examines the value relevance of IFRS in

comparison with local GAAP (Hung & Subramanyan, 2007; Bartov et al. 2005;

Goodwin et al. 2008). The third stream of research examines the impact of IFRS

adoption on cost of capital (Leuz & Verrecchia, 2000; Daske, 2006). There are also

other streams of IFRS literature that examine factors influencing disclosure on

transition to IFRS (Kent & Stewart, 2008; Palmer, 2008), relevance of accounting

classification in the IFRS era (Nobes, 2008), impact of particular IFRS on

harmonization (Morais & Fialho, 2008) and value relevance (Chalmers et al. 2008).

Proponents of IFRS often claim that IFRS adoption leads to greater and

higher-quality disclosures. When compared with local accounting standards in most

countries, IFRS is considered as being more fair-value-oriented, reducing accounting

flexibility allowed for the issuers of financial statements, and incorporating the effects

of economic events on firm performance into financial statements in a timely manner

(Coopers & Lybrand 1993; Dumontier & Raffounier 1998; GAAP 2000).

Regulators and investors have commonly expressed the view that more the

transparency and higher the quality in accounting, lower is the cost of capital for

adopting companies (Levitt, 1998; IASB, 2002). The lower cost of capital is based

on the theory that higher information quality lowers the estimation risk of future

returns (Barry & Brown, 1985) and this lowers the information asymmetries between

managers and investors that lower the choices of adverse selection, thus increasing

31

liquidity and ultimately lowering the required rate of return (Diamond & Verrecchia,

1991).

It is generally accepted that under internationally recognized standards such

as IFRS or USGAAP the quality of accounting is high, as shown by earlier studies.

Amir, Harris and Venuti (1993) have shown that 20-F reconciliations of USGAAP

are of value relevance and there are economic benefits for the investors. Using 20-F

filings to reconcile from IFRS to USGAAP for financial years ending before

November 15, 2007, Liu and O’Farrell (2011) study a sample of US-listed foreign

companies using IASB-IFRS and their matched US-listed foreign companies using

Regional-IFRS from the same industry and find that it is possible to directly

measure the comparability between accounting measures prepared under IFRS and

USGAAP.

Botoson (1997) has shown that higher disclosure levels tend to bring down

cost of control. Leuz and Verrechhia (2000) have shown that adoption of

USGAAP/IFRS reduces factors that affect information asymmetry like bid-ask

spread and low volume, and thus help in reaping economic benefits for adopting

companies.

Daske (2006) has found a relationship between cost of capital and disclosure

policy for German companies but his results show that the risk for companies

adopting USGAAP/IFRS has increased which is counter intuitive and no explanation

can be given for the results, as the author has also expressed doubt on the method of

estimating the cost of capital.

While these studies focus on the impact of IFRS adoption on the disclosure

quality, the other stream of research focuses on the association between the disclosure

quantity or level and a firm’s voluntary adoption of IFRS. Ding et al. (2005) report

32

that IFRS require more comprehensive disclosures than do most countries’ domestic

standards.

The information asymmetry literature suggests that greater disclosure

mitigates the adverse selection problem and enhances liquidity, thereby reducing the

cost of equity through lower transaction costs and/or stronger demand for a firm’s

securities (Amihud & Mendelson 1986). Diamond and Verrechhia (1991) also find

that higher information quality lowers the information asymmetries between

managers and investors, thus lowering the choices of adverse selection hence

increasing liquidity and ultimately lowering the required rate of return. Tweedie

(2006) argues that IFRS will “reduce the cost of capital and open new opportunities

for diversification and investment return”.

Auer (1996) in his study compares the Swiss GAAP and IFRS and finds that

IFRS-based earnings announcements convey significantly higher information contents

than local GAAP. Jermakowicz (2004) in his study examines the adoption of IFRS

by BEL-20 companies in Belgium to analyse the application of IFRS in the

consolidated financial statements of Belgian publicly traded companies. In Belgium,

and several other European countries, a close link exists between accounting and

taxation. The study has thrown some insight into IFRS implementation problems

based on a survey sent to BEL-20 companies. The survey focused on the impact IFRS

conversion had on companies, their internal organization and accounting and finance

strategy.

In a similar study, Tendeloo and Vanstralen (2005) examine whether adoption

of IFRS is associated with lower earnings management and the results indicate that, in

general, adopters of IFRS cannot be associated with lower earnings management. The

study uses a sample of German companies, because, in Germany, a relatively large

33

number of companies chose to voluntarily adopt IFRS prior to 2005. Controlling for

other differences in earnings management incentives and enforcement mechanisms,

the study found that the German companies that have adopted IFRS engage

significantly less in earnings management, as compared to German companies

reporting under domestic GAAP.

Beckman et al. (2007) in their investigation of financial statements footnotes

disclosures with a sample size of 22 German firms making 59 reconciliations of net

income and stockholders’ equity as reported under Germany’s Commercial Code

(HGB) to either IFRS or US, found German aggressiveness and conservatism in

reporting and market valuation. Cordeiro et al. (2007) measure the impact of the

application of IFRS to financial information of Portuguese public companies. The

results show that the Balance Sheet and Income Statement structures of the firms

studied suffered relevant accounting conversions in the process of compliance.

In one of the major work on studying economic consequences due to

mandatory IFRS reporting Daske et al. (2008) with a sample of 26 countries for a

period from 2001 to 2005 found that, on an average, market liquidity increases around

the time of introduction of IFRS. Capital market benefits occur only in countries

where firms have incentives to be transparent and where legal enforcement is strong.

Capital market also affects most of the firms that voluntarily switch to IFRS, both in

the year when they switch and again later, when IFRS become mandatory. Many

adopting countries make concurrent efforts to improve enforcement and governance

regimes.

In another major recent study by Aubert and Grudnitski (2011), by taking a

sample across 13 countries and 20 industries, two-stage analysis was conducted on the

impact and importance of mandatory adoption of IFRS on European Union. Results

34

showed significant differences in return on assets for firms computed under IFRS and

local Generally Accepted Accounting Principles. Specifically, there was no statistical

support for any of the samples to show that, accounting information under IFRS was

any more value relevant than the accounting information derived using local

accounting principles. In another study taking European Union as sample, Byard et al.

(2011) use control sample of firms that had already voluntarily adopted IFRS at least

two years prior to the mandatory adoption date. They found that analysts’ absolute

forecast errors and forecast dispersion decrease relative to this control sample only for

those mandatory IFRS adopters domiciled in countries with both strong enforcement

regimes and domestic accounting standards that differ significantly from IFRS.

Palmer (2008) with a sample size of 150 Australian listed firms found that

extent and quality of disclosure is influenced by firm size, leverage and auditor firm

size. Cormier et al. (2009) in their study investigated the impact of managerial

incentives in influencing the decision to elect optional exemptions when first adopting

IFRS by French firms. It also examines the value-relevance of the mandatory and

optional equity adjustments that need to be recognized in connection with the first-

time adoption of IFRS. The study found that, managerial incentives influence the

decision to strategically elect one or more optional exemption choices at the transition

date. First-time adoption of IFRS by French firms is perceived as a signal of an

increase in the quality of the financial statements.

Major and Marques (2009) in their study assess the relationship between the

application of IFRS, corporate governance and firm performance in Portugal with a

sample of 240 observations, in 80 firms, over the period of 2003-2005. Results show

that Portuguese companies that follow Portuguese Securities Market Commission

(CMVM) recommendations have a higher level of firm performance, which indicates

35

an important link between financial and managerial accounting, however, the level of

compliance with the recommendations is still low.

Lantto and Sahlstrom (2009) in their study examine the impact of IFRS

adoption on key financial ratios using Finland as the sample country. The results

clearly show that the adoption of IFRS changes the magnitude of the key accounting

ratios. Moreover, it also found that adoption of fair value accounting rules and stricter

requirements on certain accounting issues are the reasons for the changes observed in

accounting figures and financial ratios. In this regard, the results of the present study

indicate that the adoption of IFRS changes the magnitudes of the key accounting

ratios of Finnish companies by considerably increasing the profitability ratios and

gearing ratio moderately, and considerably decreasing the PE ratio and equity and

quick ratios marginally. The results indicate that the increase in the profitability ratios

and the decrease in the PE ratio can be explained by increase in the income statement

profits.

In another study using financial ratios based on profitability, activity, liquidity

and solvency, Padrtova and Vochozka (2011) compare the informative value of

financial statements of CEZ Inc. drawn up under IFRS and Czech accounting

standards for 2004 and 2005. The financial analysis results proved the impact of IFRS

implementation on financial performance of the company. Financial statements

prepared under Czech accounting standards showed the company healthier than

financial statements drawn under IFRS.

Similarly, Beuren et al. (2008) in their study developed on economic-financial

indicators of 37 English companies suggested divergences between IFRS and

USGAAP indicating significant correlation between differences of these indicators.

36

However, in contrast, Ferrer et al. (2011) investigate how liquidity and

leverage ratios exert significant effect on the degree of compliance with IFRS

disclosures as measured by disclosure indexes constructed from Balance Sheets and

Income Statements of 100 publicly listed companies in Philippines. Multiple

regression analysis based findings suggest that none of the indices exert a significant

effect on the financial variables based on computed t-statistics. The study accepts null

hypotheses that liquidity and financial leverage have no effect on IFRS when

expressed in terms of Balance Sheet and Income Statement indices.

Kabir et al. (2010) in their study find contrasting results using New Zealand

firms from 2002 to 2009 that absolute discretionary accruals were significantly higher

under IFRS than under pre-IFRS NZGAAP, suggesting lower earnings quality under

IFRS than under pre-IFRS NZGAAP. In another work, Hellman (2011) studies the

impact of IFRS on financial statements of 132 largest Swedish-listed companies as

December 2005, and finds out the differences between Sweden’s voluntary adoptions

of IFRS during 1991-2004. With regard to the EU’s international standards voluntary

adoption before 2005, results indicate that firms on an average used the flexibility

offered by the soft adoption regime to manage earnings and shareholders’ equity

upwards. In another study on the impact of IRFS adoption in Europe and Australia on

the relevance of book value and earnings for equity valuation, Clarkson et al. (2011)

use a huge sample of 3,488 firms in 2004 and 2005 and control for non-linear effects,

they find no change in price relevance for firms either in Code Law or Common Law

countries after IFRS adoption, thus contradicting results from linear pricing models.

Zhou et al. (2009) studied China-emerging economy as sample country-to

investigate whether firms adopting IFRS have higher earnings quality as compared to

non-adopting firms in an emerging market. The results suggest some improvement in

37

the quality of accounting information associated with the adoption of IFRS. The

findings point to the need for a stricter enforcement mechanism of accounting

standards in emerging markets. Enforcing the same sentiment, Liu et al. (2011)

examine the impact of IFRS on accounting quality in China, a regulated market, using

a sample of 870 firms that were mandated to follow the new standards. Results of the

data from 2005 to 2008 show that changes are less likely to result from changes in

economic conditions but from changes in market. This study is important because it

provides direct evidence on the question whether IFRS can be relevant to markets that

are still disciplined mainly by regulators than by market mechanisms.

In the only descriptive study using Indian banking industry, Firoz et al. (2011)

critically analyse financial statements like business per employee, capital and reserve,

investments and advances, net non-performing assets ratios and the impact thereon on

relevant provisions of IFRS. The authors conclude that certain issues need clarity

from tax authorities as well as from Reserve Bank of India to ensure successful IFRS

implementation by banking industry.

From the above, it is important to observe that majority of the studies in IFRS

are concentrated in the developed nations. It is because countries in European Union,

Australia and New Zealand have mandated IFRS way back in 2005, there are various

studies trying to understand the post-adoption scenarios. Since the USA and India are

going to mandate IFRS, these studies are more futuristic in nature.

Studies using emerging countries as their samples are very rarely done.

Except for one study on Indian banking industry and another two on China, none of

them have focused on other issues pertaining to IFRS implementation in emerging

economies. From the above literature review, it is apparent that none of the research

has directly been able to relate the impact on economic activities like investments,

38

financial risks, diversifications, mergers and acquisitions and other key financial

functions by the adoption of International Financial Reporting Standards by Indian

companies. The intuition is that adoption of IFRS is viewed as a commitment to

better disclosure, which may have various impacts on Indian companies, which is

required to be researched and thus check the impact on economic activities after

adoption of IFRS by Indian companies.

II.5 DESCRIPTION OF INTERNATINAL FINANCIAL REPORTING

STANDARDS

Statements of IAS issued by the Board of the IASC (1973-2001) are

designated as IAS. However, the IASB announced in April 2001 that its Accounting

Standards would be designated as International Financial Reporting Standards (IFRS).

IASB publishes its Standards in a series of pronouncements called International

Financial Reporting Standards (IFRS). It also adopted the body of Standards issued by

the Board of the International Accounting Standards Committee. Those

pronouncements continue to be designated as “International Accounting Standards”

(IAS).

Procedure that is followed for issue of an IFRS/IAS

The IASB follows a due process for issuing the IAS. The process ensures that

IAS is of high quality standards. The due process of IASB involves the following

steps:

1. During the early stages of a project, IASB establishes a Advisory Committee to

give advice on the issues arising in the Project. Consultation with the advisory

Committee and the Standards Advisory Councils occurs throughout the project;

2. IASB develops and publishes Discussion Documents for public comment;

39

3. Following the receipt and review of comments, IASB develops and publishes an

exposure draft for public comment; and

4. Following the receipt and review of comments, IASB issues the final

International Financial Reporting Standard.

Uses of IFRS

IFRS are increasingly being recognized as Global Reporting Standards.

Currently more than 100 countries require or permit the use of IFRS. These include

members of European Union (EU), Australia, New Zealand, Mauritius, Russia, Nepal,

Canada among others. USA has also taken up convergence project with IASB with a

view to permit filing of IFRS Compliance Financial Statements in the USA Stock

Exchanges without requiring the presentation of reconciliation statement.

Various currently applicable IFRS

IASB has so far issued 9 IFRS. Out of these only 8 IFRS are in force. The list

of IFRS that are currently in force.

• IFRS 1: First time adoption of International Financial Reporting Standards

• IFRS 2: Share Based Payment

• IFRS 3: Business Combinations

• IFRS 4: Insurance Contracts

• IFRS 5: Non-current Assets Held for Sale and Discounted Operations

• IFRS 6: Exploration for and Evaluation of Mineral Resources

• IFRS 7: Financial Instruments: Disclosure

• IFRS 8: Operating Segments

40

Table II.5.i: Comparative position of IFRS and IGAAP

Sl. No. IFRS No. Corresponding IGAAP

1. First Time Adoption of IFRS Voluntary in India

2. Share based Payment ICAI-Under preparation

3. Business Combination AS-14

4. Insurance Contracts ICAI-Under preparation

5. Non-Current Assets Held for Sale and

Discontinued Operations AS-24

6. Explanation for and Evaluation of

Mineral Resources Covered by guidance

7. Financial Instruments: Disclosure AS-32 (Not mandatory now)

8. Operative Segments AS-17

II.6 DESCRIPTION OF INTERNATIONAL ACCOUNTING STANDARDS

IASB has so far issued 41 IAS. Out of these 12 Accounting Standards have

been superseded and large numbers of these have been revised.

The list of IAS that are currently in force

• IAS 1: Presentation of Financial Statements

• IAS 2: Inventories

• IAS 7: Statement of Cash Flows

• IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors

• IAS 10: Events After the Reporting Period

• IAS 11: Construction Contracts

• IAS 12: Income Taxes

• IAS 16: Property, Plant and Equipment

• IAS 17: Leases

• IAS 18: Revenue

• IAS 19: Employee Benefits

41

• IAS 20: Accounting for Government Grants and Disclosure of Government

Assistance

• IAS 21: The Effects of Changes in Foreign Exchange Rates

• IAS 23: Borrowing Costs

• IAS 24: Related Party Disclosures

• IAS 26: Accounting and Reporting by Retirement Benefit Plans

• IAS 27: Consolidated and Separate Financial Statements

• IAS 28: Investments in Associates

• IAS 29: Financial Reporting in Hyperinflationary Economies

• IAS 31: Interests in Joint Ventures

• IAS 32: Financial Instruments: Presentation

• IAS 33: Earnings per Share

• IAS 34: Interim Financial Reporting

• IAS 36: Impairment of Assets

• IAS 37: Provisions, Contingent Liabilities and Contingent Assets

• IAS 38: Intangible Assets

• IAS 39: Financial Instruments: Recognition and Measurement

• IAS 40: Investment Property

• IAS 41: Agriculture

IAS 3, 4, 5, 6, 9, 13, 14, 15, 22, 25, 30, and 35 have been superseded

42

Table II.6.i: Comparative position of IAS and IGAAP

The comparative position of IAS and IGAAP is presented below

IAS No. International Accounting Standards Corresponding IGAAP

1. Presentation of Financial Statements AS 1

2. Inventories AS 2 (Revised)

7. Statement of Cash Flows AS 3 (Revised)

8. Accounting Policies, Changes in

Accounting Estimates and Errors AS 5 (Revised)

10. Events after the Reporting Period AS 4 (Revised)

11. Construction Contracts AS 7 (Revised)

12. Income Taxes AS 22

16. Property, Plant and Equipment AS 10 and AS 6 (Revised)

17. Leases AS 19

18. Revenue AS 9

19. Employee Benefits AS 15

20. Accounting for Government Grants and

Disclosure of Government Assistance AS 12

21. The Effects of Changes in Foreign

Exchange Rates AS 11 (Revised)

23. Borrowing Costs AS 16

24. Related Party Disclosures AS 18

26. Accounting and Reporting by

Retirement Benefit Plans ICAI-Preparation

27. Consolidated and Separate Financial

Statements AS 21

28. Investments in Associates AS 23

29. Financial Reporting in

Hyperinflationary Economies India-Not applicable

31. Interests in Joint Ventures AS 27

32. Financial Instruments: Presentation AS 31-Not applicable

33. Earnings Per Share AS 20

34. Interim Financial Reporting AS 25

43

IAS No. International Accounting Standards Corresponding IGAAP

36. Impairment of Assets AS 28

37. Provisions, Contingent Liabilities and

Contingent Assets AS 29

38. Intangible Assets AS 26

39. Financial Instrument: Recognition and

Measurement AS 30-Not applicable

40. Investment Property AS 13 (Partly)

41. Agriculture ICAI-Preparation

IFRIC Interpretations Issued up to December 31, 2011

IFRIC 1-Changes in Existing Decommissioning, Restoration and Similar Liabilities

IFRIC 2-Member’s Shares in Cooperative Entities and Similar Instruments

IFRIC 3-Emission Rights (Withdrawn)

IFRIC 4-Determining Whether an Arrangement Contains a Lease

IFRIC 5-Rights to Interests Arising from Decommissioning, Restoration and

Environmental Rehabilitation Funds

IFRIC 6-Liabilities Arising from Participating in a Specific Market- Waste Electrical

and Electronic Equipment

IFRIC 7-Applying the Restatement Approach under IAS 29 Financial Reporting in

Hyperinflationary Economies

IFRIC 8-Scope of IFRS 2 (withdrawn)

IFRIC 9-Reassessment of Embedded Derivatives

IFRIC 10-Interim Financial Reporting and Impairment

IFRIC 11-IFRS 2- Group and Treasury Share Transactions (withdrawn)

IFRIC 12-Service Concession Arrangements

IFRIC 13-Customer Loyalty Programmes

44

IFRIC 14-IAS 19-The Limit on a Defined Benefit Asset, Minimum Funding

Requirements and their Interaction

IFRIC 15-Agreements for the Construction of Real Estate

IFRIC 16-Hedges of a Net Investment in a Foreign Operation

IFRIC 17-Distribution of Noncash Assets to Owners

IFRIC 18-Transfer of Assets from Customers

II.7 INDIAN ACCOUNTING STANDARDS WITH RELEVANT IAS/IFRS

The following table sets out the current Indian Accounting Standards with the

corresponding number of the relevant IAS/IFRS:

Table II.7.i: Indian Accounting Standards with relevant IAS/IFRS

Indian Accounting Standards IAS/IFRS

AS

No. Name of Standard

IAS/IFRS

No. Name of Standard

1 Disclosure of Accounting

Policies 1

Presentation of Financial

Statements

2 Valuation of Inventories 2 Inventories

3 Cash Flow Statements 7 Statement of Cash Flows

4

Contingencies and Events

Occurring after the Balance

Sheet Date

10 Event after the Reporting

Period

5

Net Profit or Loss for the

Period, Prior Period Items and

Changes in Policies

8

Accounting Policies, Changes

in Accounting Estimates and

Error

6 Depreciation Accounting No equivalent Standard.

Included in IAS 16

7 Construction Contracts 11 Construction Contracts

9 Revenue Recognition 18 Revenue

10 Accounting for Fixed Assets 16 Property, Plant and Equipment

11 The Effects of Changes in

Foreign Exchange Rate 21

The Effects of Changes in

Foreign Exchange Rates

45


12 Accounting for Government

Grants 20

Accounting for Government

Grants and Disclosure of

Government Assistance

13

Accounting for Investment (will

be superseded once AS 30

come)

Mainly Dealt with in IAS 39

14 Accounting for Amalgamations IFRS 3 Business Combinations

15 Employee Benefits 19 Employee Benefits

16 Borrowing Costs 23 Borrowing Costs

17 Segment Reporting IFRS 8 Operating Segments

18 Related Party Disclosure 24 Related Party Disclosures

19 Leases 17 Leases

20 Earnings Per Share 33 Earnings Per Share

21 Consolidated Financial

Statements 27

Consolidated and Separate

Financial

22 Accounting for Taxes on

Income 12 Income Taxes

23

Accounting for Investments in

Associates in Consolidated

Financial Statements

28 Investment in Associates

24 Discounting Operations IFRS 5

Non-current Assets Held for

Sale and Discontinued

Operations

25 Interim Financial Reporting 34 Interim Financial Reporting

26 Intangible Assets 38 Intangible Assets

27 Financial Reporting of Interest

in Joint Ventures 31 Interest in Joint Ventures

28 Impairment of Assets 36 Impairment of Assets

29 Provisions, Contingent

Liabilities, Contingent Assets 37

Provisions, Contingent

Liabilities, Contingent Assets

30 Financial Instrument:

Recognition 39

Financial Instrument:

Recognition

46



Presentation 32


Presentation


Disclosure IFRS 7


Disclosure

There are currently no corresponding Standards available under IGAAP for

the following International Accounting Standards/IFRSs:

• IAS 26-Accounting and Reporting by Retirement Benefit Plans

• IAS 29-Financial Reporting in Hyperinflationary Economies

• IAS 40-Investment Property

• IAS 41-Agriculture

• IFRS 1-First time Adoption of International Financial Reporting Standards

• IFRS 2-Share-Based Payment

• IFRS 4-Insurance Contracts

• IFRS 6-Exploration for and Evaluation of Mineral Resources

II.8 OVERVIEW OF INTERNATIONAL FINANCIAL REPORTING

STANDARDS IN SUMMARIZED FORM

The related literatures of principle-based IFRS are summarized below in

tabular form to understand the documented IFRS in an easier manner. The overview

contains objective, scope, key requirements and key provisions of IFRS and

disclosure policies as required in the respective standards. These details are tabulated

for quick referencing purposes to the users of these standards. These IFRS are 8 in

number.

47

IFRS 1: First Time Adoption of International Financial Reporting Standards

IFRS 1 requires that in preparing an opening IFRS statement of financial

position, a first-time adopter should consistently apply the same accounting policies

throughout the periods presented in its first IFRS financial statements, and these

accounting policies should be based on the latest version of the IFRS effective at the

reporting date. When the new IFRS is issued on the reporting date but it is not yet

effective, entities are encouraged to apply it before the effective date, then the first-

time adopter is permitted, but not required to apply it.

Topic IFRS 1 Para No. Main Contents

1. Objective

1 To set out the basis for preparation and

presentation of its first IFRS financial

statements and interim financial

statements by an entity

2. Scope 2 Applies to-

(a) First IFRS financial statements

(b) Each interim report presented under

IAS 34 for part of the period covered

by first IFRS financial statements of

an entity.

3. Key Requirements

(i) Statement of

Compliance

with IFRS

(ii) Opening IFRS

Balance Sheet

3

6&10

Give an explicit and unreserved

statement of compliance with IFRS in

the first financial statements prepared as

per IFRS.

(a) Prepare opening IFRS balance sheet

on the date of transition to IFRS.

(b) (i) Recognize all assets and

liabilities where recognition is

required by IFRS.

(ii) Derecognize all assets and

48


(iii) Optional

Exemption

13

liabilities whose recognition is

not permitted under IFRS.

(iii) Classify all assets and liabilities

as per IFRS. May require

reclassification in certain cases.

(iv) Measure all recognized assets

and liabilities as per IFRS

Use all or some or none of the following

optional exemption:

(i) Business combinations

(ii) Fair value or revaluation as deemed

cost for Property, Plant and

Equipment (PPE), Intangible assets

and investment property

(iii) Employee benefits

(iv) Cumulative translation differences

(v) Compound financial instruments

(vi) Assets and liabilities of subsidiaries,

associates and joint ventures

(vii) Designation of previously

recognized financial instruments

(viii) Share-based payment transactions

(ix) Insurance contracts

(x) Decommissioning liabilities

included in cost of PPE

(xi) Lease

(xii) Fair value measurement of financial

assets or financial liabilities at initial

recognition

(xiii) A financial assets or an intangible

assets accounted for as per IFRIC 12

(xiv) Borrowing cost (provision of

49


(iv) Mandatory

Exemptions-

Prohibition from

Retrospective

Application

(v) Comparatives

26

36

revised IAS 23 on ‘Borrowing Cost’

are in line with the current Indian

Accounting Standard AS 16)

(i) Derecognition of financial assets

and financial liabilities

(ii) Estimates

(iii) Hedge accounting

(iv) Assets classified as held for sale

and discontinued operations

(v) Some aspects of accounting for

non-controlling interests

Previous year comparatives (including

related notes) to be stated as per IFRS.

IFRS 2: Share-based Payment

IFRS 2 deals with the issue of the measuring and disclosing share-based

compensation and requires that such amounts be recorded as expense over the

employees’ service years. It covers issues such as share appreciation rights, employee

share purchase plans, employee ownership plans or share option plans, among others.

It adopts the fair-value method in accounting for shares or options granted to its

employees. Under this approach, companies measure the value of the share options on

the date of grant, instead of the date of the exercise. It requires that the option value

be expensed over the service period the employees are expected to work.


1. Objective 1 To lay down financial reporting

requirements by an entity when it

undertakes a share-based payment

transactions. Basically, it requires an

entity to reflect in its balance sheet and

50


profit and loss account, the effect of

share based payment transactions,

including expenses associated with

transactions in which share options are

granted to employees.

2.Scope

- Applies to

- Exceptions (Do

not apply to)

2

5,6

All share-based payment transactions

including:

• equity settled as well as cash settled

share-based payment transactions

• issuance of shares or rights to shares

in return for goods or services

• Issuance of shares in a business

combination

• Share based payments within the

scope of paragraphs 8-10 of IAS 32

or paragraphs 5-7 of IAS 39. IAS 32

and 39 should be applied for

commodity- based derivative

contracts that may be settled in

shares or rights to shares

3. Key requirements

(i) Recognition

7,8

• Recognize the goods or services

received when goods have been

obtained or services have been

received

• If goods and services received do not

qualify for recognition as assets,

expense them off, else:

- increase equity if goods and

services are received in an equity

settled share based payment

51


(ii) Measurement

(a) General principle

(b) Transactions in

which goods or

services are

received as

consideration for

equity instruments

(c) Transactions with

employees and

others providing

similar services

(d) When to measure

fair value

10-43

transactions; or

- recognize liability if goods and

services are received in a cash

settled share-based payment

transaction

Measure using fair value

• Measure at fair value of goods or

services received. If that cannot be

measured reliably, use fair value of

equity instruments granted.

• Use fair value of equity instruments

granted

• At the date of receipt of goods or

services when transactions are

measured at fair value of goods or

services

• At the date of grant when

transactions are measured at fair

value of equity instruments granted

4. Disclosure

Requirements

44-52 • The nature and extent of share-based

payment arrangements that existed

during the period.

• How the fair value of the goods or

services received, or the fair value of

the equity instruments granted,

during the period has been arrived

at; and

52


• The effect of share-based payment

transactions on the entity’s profit or

loss for the period and on its

financial position.

IFRS 3: Business Combinations

The objective of IFRS 3 is to improve the relevance, reliability and

comparability of the information that a reporting entity provides in its financial

statements about a business combination and its effects. Mergers and acquisitions are

common examples of business combinations.


1. Objective 1 Establishes principles and requirements,

for an acquirer, in respect of the

following:

(a) Recognition and measurement of

identifiable assets acquired,

liabilities assumed and any non-

controlling interest in the acquiree

(b) Recognition and measurement of

goodwill acquired in a business

combination or a gain from bargain

purchase

2. Scope

- Applies to

- Does not

apply to

2

• Business consideration

[transaction or event in which an

acquirer obtains control of a

business(es)]

• Formation of a joint venture

• Combination of entities under

common control

53


• Acquisition of an asset or group of

assets or a group of assets that does

not constitute a business

3. Key provisions

(i) Acquisition

method

(ii) Steps in

applying

acquisition

method

(iii) Measurement

criteria

(a) Minority

interest or

non- controlling

interest (NCI)

(b) Other assets

and liabilities

(c) Goodwill or

bargain

purchase

4

5

19

18

32

• Use purchase method

• Pooling of interest method not to be

used

1. Identification of the ‘acquirer’- the

combining entity that obtains control

of the acquiree.

2. Determine ‘acquisition date’- the

date on which the acquirer obtains

control of the acquiree.

3. Recognize and measure the

identifiable assets acquired, the

liabilities assumed and any non-

controlling interest (formerly called

minority interest) in the acquire

4. Recognize the measure goodwill or

gain from bargain purchase

• Fair value; or

• Non-controlling interest’s

proportionate share of the acquiree’s

identifiable net assets

Acquisition date fair value (subject to

exceptions)

• Measured as difference between (a)

and (b) below:

(a) aggregate of (i) the acquisition-date

fair value of consideration

54


(d) Business

combinations

achieved in

stages

(e) Provisional

measurement

(iv) Acquisition

41,42

45

53

transferred, (ii) the amount of any

non-controlling interest, and (iii) in

a business combination achieved in

stage, the acquisition-date fair value

of the acquirer’s previously-held

equity interest in the acquire; and

(b) the net of the acquisition-date

amounts of the identifiable assets

acquired and the liabilities assumed

• If the difference of (a) and (b) above

is negative, the resulting gain is

treated as a bargain purchase in the

profit or loss.

Acquirer to: (a) re-measure its

prevailing held equity interest in the

acquire at its acquisition date fair value

(b) recognize the resulting gain or loss

in profit or loss

• If the initial accounting for a

business combination can be

determined only provisionally by the

end of the first reporting period, the

combination to be accounted for

using provisional values

• Make adjustments to provisional

values within one year relating to

facts and circumstances that existed

at the acquisition date.

• No adjustments to be made after one

year, however, error can be corrected

in accordance with IAS 18

• Recognize in profit or loss (advisory,

55


related costs

(v) Disclosure

Requirements

59-63

legal, accounting, finder fees,

general administration costs; etc

• Costs to issue debt/equity to be

recognized as Per IAS 32 and 39.

• Disclose information that helps in

evaluating nature and financial

effects of a business combination

that occurs either during the current

period or after the end of the

reporting period but before the

financial statements are authorized

for issue.

IFRS 4: Insurance Contracts

The major issues covered under IFRS 4 are treatment of embedded derivative

that meets the definition of an insurance contract, unbundling deposit components,

liability adequacy test, temporary exemptions from IAS 8, change in accounting

policies, and discretionary participation features.


1. Objective 1 To prescribe

(a) limited improvements to accounting

by issuers for insurance contracts

(b) disclosures that will enable users of

financial statements to understand

that amount, timing and uncertainty

of cash flow

2. Scope

- Applies to

2

• Insurance contracts (including

reinsurance contracts) issued by an

insurer and also to reinsurance

contract held by an insurer

56


- Does not apply

to

3,4

• Financial instrument issued by an

insurer with a discretionary

participation feature

• Product warranties issued directly by

a manufacturer, dealer or retailer

• Employee’s assets and liabilities

under employee benefit plans and

retirement benefit obligations

reported by defined benefit

retirement plans

• Contractual rights or contractual

obligations contingent on the future

use of, or right to use, a non-

financial item

• A lessee’s residual value guarantee

embedded in a finance lease

• Financial guarantee contracts

• Direct insurance contracts in which

the reporting entity is the policy

holder

• Contingent consideration payable or

receivable in a business combination

3. Key Provisions

(i) Liability

adequacy test

(ii) Changes in

accounting

policies

15,20

22

• Conduct a test for the adequacy of

recognized insurance liabilities

• Conduct an impairment test for

reinsurance assets

• Very stringent criteria

• Can change only and only when the

change makes the financial

statements are more relevant to the

economic decision-making needs of

57


users and does not affect the

reliability and relevancy to those

needs.

4. Disclosure

requirements

36,38 • Information to explain amounts in

financial statements arising from

insurance contracts

• Information that helps evaluating the

nature and extent of risk arising from

insurance contracts

IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations

IFRS 5 requires that companies reclassify noncurrent assets in the statement of

financial position to be either held for sale or disposal group assets when management

decides to sell these assets within one year. Disposal groups may be classified as

discontinued operations when they meet specified criteria. IFRS 5 requires that all of

these assets be recorded at the lower of (i) carrying value or (ii) its estimated selling

price less costs to sell, that is, net realizable value. Once these assets are reclassified

as held for sale or a disposal group, they are no longer subject to depreciation.


1. Objective 1 To prescribe the accounting for non-

current assets held for sale, and the

presentation and disclosure of

discontinued operations.

2. Scope

- Applies to

- Does not apply

to

2

5

All recognized non-current assets and to

all disposal groups of an entity.

• Deferred tax assets

• Assets arising from employee benefits

• Financial assets within the scope of

IAS 39

58


• Non-current assets accounted for in

accordance with fair value model in

IAS 40.

• Non-current assets measured at fair

value less estimated point of sale costs

as per IAS 41.

• Contractual rights under insurance

contracts.

3. Key Provisions

(i) When to

classify

disposal

group as held

for sale

(ii) Measurement

of disposal

group held for

sale

(iii) Depreciation

or amortization

(iv) Changes to a

plan of sale

6

15

25

26,27

• If the carrying amount of the

disposal group will be recovered

principally through a sale transaction

rather than through continuing use.

• Lower of carrying amount and fair

value less cost to sell

• Discount costs to sell to their present

value when sale is expected to take

place after one year or more.

Not to be provided while the assets are

classified as held for sale.

(a) Discontinue classification as assets

held for sale

(b) Measure these assets at lower of:

• Carrying amount before it was

classified as held for sale, adjusted by

depreciation, amortization,

revaluation, etc. that would have been

recognized if these would not have

been classified as held for sale; and

• Recoverable amount at the date of

decision of not to sell.

59


4. Disclosure

Requirements

30

Present and disclose information that

helps the users in evaluating the

financial effects of discontinued

operation and disposal of non-currents

assets. (disposal groups)

IFRS 6: Exploration for and Evaluation of Mineral Resources

The objective of IFRS 6 is to specify the financial reporting for the exploration

for and evaluation of mineral resources. It deals with only limited aspects of

accounting for extractive activities.


1. Objective

1 To specify financial reporting for

exploration for and evaluation of

mineral resources

2. Scope

- Applies to

- Does not apply

to

3

4,5

Exploration and evaluation expenditure

incurred

(a) Other aspects of accounting by

entities engaged in the exploration

for and evaluation of mineral

resources

(b) To expenditure incurred

• before the exploration for and

evaluation of mineral resources

• after the technical feasibility and

commercial viability of a mineral

resource are demonstrable

3. Key provisions

(i) Measurement of

exploration and

evaluation assets

8

• Initial recognition at cost

• Subsequent measurement at cost or

revalued amounts

60


(ii) Changes in

accounting

policies

(iii) Impairment

testing

13

18,21

• Stringent criteria for change

• Can change only if it makes

financial statements more relevant to

the economic decision-making needs

of users and does not affect the

reliability and relevance

• When there are indications that the

carrying amount of exploration and

evaluation assets exceeds

recoverable amount.

• Each CGU or group of units to

which exploration and evaluation

assets are allocated not to be larger

than an ‘operating segment’.

4. Disclosure

Requirements

23 Disclose information that identifies and

explains amounts arising from

exploration and evaluation of mineral

resources

IFRS 7: Financial Instruments: Disclosures

IFRS 7 is a disclosure standard. It requires an entity to provide disclosure in

their financial statements that enable users to evaluate (a) significance of financial

instruments for the entity’s financial position and performance, (b) nature and extent

of risks arising from financial instruments, and (c) how the entity manages these risks.

Topics IFRS 7 Para No. Main Contents

1. Objective 1 To prescribe disclosures that enable

financial statement users to evaluate the

• significance of financial instruments

to an entity

• the nature and extent of their risk, and

• how the entity manages those risks.

61


2. Scope 3 Applies to all financial instruments

except:

- Interests in subsidiaries, associates

and joint ventures accounted for as

per IAS 27, IAS 28 or IAS 31

- Employer’s rights and obligations

arising from employee benefits plans

to which IAS 19 applies

- Insurance contracts

- Financial instruments, contracts and

obligations under share-based

payment transactions

3. Disclosure

requirements

(i) Relating to

significance

of financial

instruments

7-30

(a) Relating to the entity’s financial

position-

• information about financial assets and

financial liabilities by category

• special disclosures when the fair

value option is used

• reclassifications

• derecognitions

• pledges of assets

• embedded derivatives

• breaches of terms of agreements, etc

(b) Relating to the entity’s performance

in the period

• information about recognized income,

expenses, gains and losses

• interest income and expense

• fees income, impairment losses, etc

(c) Other disclosures

62


• information about accounting policies

• hedge accounting and the fair values

of each class of financial assets and

financial liability, etc

(ii) Relating to

nature and

extent of risks

arising from

financial

instruments

31-42 (a) Qualitative disclosures

• Exposure to risk and how they arise

• Objectives, policies and processes for

managing the risks and methods used

to measure the risk

• Changes in above from previous

period

(b) Quantitative disclosures

• Exposure to each class of risk

including credit risk, liquidity risk

and market risk, including sensitivity

analysis.

IFRS 8: Operating Segments

According to core principle of IFRS 8, an entity should disclose information to

enable users of its financial statements to evaluate the nature and financial effects of

the types of business activities in which it engages and the economic environments in

which it operates.


1. Scope 2 • Applies to the separate or individual

financial statements of an entity and to

the consolidated financial statements

of a group with a parent:

(a) whose debt or equity instruments

are traded in a public market; or

(b) that files, or is in the process of

filing, its (consolidated) financial

63


statements with a securities

commission or other regulatory

organisation for the purpose of

issuing any class of instruments in

a public market.

• If both separate and consolidated

financial statements for the parent are

presented in a single financial report,

segment information to be prescribed

only on the basis of consolidated

financial statements.

2. Core principle 1 To provide information to enable users

of financial statements to evaluate the

nature and financial effects of the

business activities in which it engages

and the economic environments in

which it operates.

3. Key provisions

(i) Operating

segment

(ii) Reportable

segment

5

13-19

Component of an entity

• That engages in business activities

from which it may earn revenues and

incur expenses (including transactions

with other components of same entity);

• Whose operating results are received

regularly by the entity’s chief operating

decisions makers to make decisions

about resources to be allocated to the

segment and assess its performance;

• For which discrete financial

information is available.

(a) Generally when 10% threshold is

met for

64


- combined revenue (including inter

segment revenue); or

- 10 per cent or more of the greater,

in absolute amount, of (i) the

combined reported profit of all

operating segments that did not

report a loss and (ii) the combined

reported loss of all operating

segments that reported a loss; or

- 10% or more of the greater

- 10% of combined assets of all

operating segments

(b) At least 75% of the entity’s external

revenue must be included in

reportable segments

4. Disclosure

Requirement

20-24 • General information about how the

entity identified its operating segments

and the types of the products and

services from which each operating

segments derives its revenues;

• Information about the reported

segment profit or loss, including

certain specified revenues and

expenses

• Information about transactions with

major customers

• Other information that helps in

evaluating the nature and financial

effect of the business activities in

which the entity engages and the

economic environment in which it

operates.

65

II.9 SUMMARIZATION OF INTERNATIONAL ACCOUNTING

STANDARDS

The related IASs literatures are summarized below in tabular form to

understand the documented IAS in an easier manner. The overview contains

objective, scope, key requirements and key provisions of IAS and disclosure policies

as required in the respective standards. These details are tabulated for quick

referencing purposes to the users of these standards.

IAS 1: Presentation of Financial Statements

IAS 1 sets out overall requirements for their presentation of general purpose,

financial statements, prescribes guidelines for their structure, and lays out the

minimum requirements for their content and disclosure. The objectives of IAS 1 are to

ensure comparability of presentation of that information with the entity’s financial

statements of previous periods and with the financial statements of other entities.

Topic IAS 1 Para No. Main Contents


(a) requirements for presentation

(b) guidelines for structure

(c) minimum content of financial

statements

2. Scope 2 Applies in preparing and presenting

general purpose financial statements in

accordance with IFRS

3. Key terms defined 7 • General purpose financial statements

• IFRS

• Materials

• Notes

• Other comprehensive income

• Reclassification adjustments

66


• Total comprehensive income, etc.

4. Key provisions

(a) Complete set of

financial

statements

(b) General features

10

15-24

• Statement of Financial Position

(Balance Sheet) at the end of the

period

• Statement of Comprehensive Income

(Profit and Loss Account) for the

period

• Statement of Changes in Equity for the

period

• Cash flow statement for the period

• Notes containing significant

accounting policies and other

explanatory information (Schedules)

• Statement of financial position as at

the beginning of the earliest

comparative period when amenity

- applies an accounting policy

retrospectively

- makes a retrospective restatement

of items in its financial statements

- reclassifies items in its financial

statements

• Fair presentation and faithful

representation

• To contain an explicit and unreserved

statement, of compliance with IFRS,

in the Notes

• Disclosure cannot remedy

inappropriate accounting policies

• Departure from IFRS permitted only

in the extremely rare circumstances

67


(c) Fundamental

accounting

assumptions

(d) Materiality and

aggregation

(e) Offsetting

(f) Frequency of

reporting

(g) Comparative

information

(h) Reclassification

(i) Identification

information

25, 27, 45

29

32

36

38

41

49-53

• Going concern

• Consistency

• Accrual (except for cash flows)

Allowed for immaterial items of a

similar nature and function

Do not offset assets and liabilities or

income and expenses unless permitted

or required by an IFRS

At least annually (52 week period

permitted)

To be disclosed for financial as well as

narrative and descriptive information

When presentation or classification of

item in the financial statements is

changed, comparative amounts also

need to be reclassified

To be provided in the financial

statements

(j) Contents of

financial

statements

54-116 • Minimum contents prescribed-to be

given on the face of respective

financial statements

• Current and non-current distinction to

be made in the statement of financial

position unless liquidity provides more

reliable and relevant information

• Analysis of expenses in profit and loss

to be provided based on their nature

and function

• when analysis given based on

function, additional information to

be provided on depreciation,

amortization and employee benefits

68


• Notes to be presented in a systematic

manner (follow the order of financial

statements and also follow the order in

which each line items appears therein,

to the extent possible)

(k) Disclosure of

accounting

policies

117-133 • Disclose signification accounting

policies used

• Disclose judgements made by

management in the process of

applying the accounting policies and

that have the most significant effect on

the amounts recognized in the


• Disclose information made about

assumptions for future and other major

sources of estimation uncertainty.

IAS 2: Inventories

IAS 2 prescribes the basis of determining and accounting for inventories as an

asset until the related revenues are recognized. The standard also provides guidance

on the valuation of inventories and their consequent write-down as an expense, and

the treatment to be adopted on related revenues being recognized.


1. Objective 1 • Prescribes accounting treatment for

inventories

• Guidance on determination of cost

and its subsequent recognition as an

expense

• Guidance on cost formulas used to

assign costs to inventories

69


2. Scope

- Applies to

- Does not apply

to

2

2 & 3

All inventories subject to certain

exceptions

• Work in process arising under

construction contracts

• Financial instruments

• Biological assets related to

agricultural activity and agricultural

produce at the point of harvest

• Measurement of inventories held by:

(a) producers of agricultural and

forest products, agricultural

produce after harvest, and

minerals and mineral products, to

the extent that they are measured

at net realizable value (above or

below cost) in accordance with

well-established practices in

those industries

(b) commodity brokers and dealers

who measure their inventories at

fair value less costs to sell

3. Key terms defined 6 • Inventories

• Net realizable value (NRV)

• Fair value

4. Key provisions

(a) Measurement

(b) Cost to include

9

10

Lower of:

Cost &

NRV

• Cost of purchase

• Cost of conversion

• Other costs incurred in bringing the

70


(c) Cost to exclude

(d) Cost of

inventories of

service provide

(e) Cost formulae

(f) NRV

(g) Write down to

NRV

16

19

23

30

32, 34

inventories to the present location

and condition

• Abnormal waste

• Storage costs

• Administrative overheads not related

to production

• Selling costs

• Financing element contained in

purchase on deferred settlement basis

• Measure at cost of production (labour

and other costs of personnel directly

engaged in providing the service,

including supervisory personnel and

attributable overheads)

• Specific identification for items that

are not ordinarily interchangeable

and goods or services produced and

segregated for specific projects

• FIFO or weighted average cost for

other cases

• LIFO not permitted

• To be based on most reliable

evidence available at the time when

estimates are made

• To be treated as an expense in the

period in which write down occurs

• Materials and other supplies held for

use in the production of inventories

not to be written down below cost if

finished products in which they will

be used are expected to be sold at or

above cost

71


5. Disclosure

requirements

36 • Accounting policy for inventories

• Cost formula used

• Carrying amount duly classified as

supplies, materials, work in progress,

finished goods, etc.

• Carrying amount of any inventories

carried at fair value less costs to sell.

• Amount of any write-down of

inventories recognized as an expense

in the period; or reversal thereof

• Carrying amount of inventories

pledged as security for liabilities

• Amount of inventories recognized as

expense.

IAS 7: Statement of Cash Flows

IAS 7 is one of the primary statements in financial reporting, along with the

statement of financial position, the statement of comprehensive income, and the

statement of changes in equity. The statement of cash flows presents the inflows and

outflows of cash and cash equivalents by category (operating, investing, and financing

activities) over a period of time. It provides users with a basis to assess the entity’s

ability to generate and utilize its cash.


1. Objective - Presentation of information about

historical changes in an entity’s cash

and cash equivalents by means of a

statement of cash flows that classifies

cash flows during the period according

to operating, investing and financing

activities.

72


2. Scope 1 Statement of cash flows to be presented

as an integral part of financial

statements for each period for which

financial statements are presented.

3. Key terms defined 6 • Cash and cash equivalents

• Operating, investing and financing

activities

4. Key provisions

(a) Classification of

cash flows

(b) Methods of

presenting cash

flows from

operating

activities

(c) Foreign currency

cash flows

(d) Interest and

dividend

(e) Taxes on income

(f) Changes in

ownership

interests in

10

18

25

31

35

39, 40

• Operating activities

• Investing activities

• Financing activities

• Direct method (preferable)

• Indirect method

• Recorded in reporting entity’s

functional currency

• Use exchange rate prevailing at the

date of cash flow

• Whether received or paid, can be

classified as operating, investing or

financing activities at the discretion

of the entity.

• Classification to be consistent from

one period to another

• Operating activities unless can be

specifically identified with financing

or investing activities

• Aggregate cash flows relating to

obtaining or losing control of

subsidiaries and other business units

73


subsidiaries and

other business

are presented separately and

classified as investing activities, with

certain additional disclosures

5. Disclosure

requirements

(a) Significant non-

cash transactions

(b) Components of

cash and cash

equivalents

43

45

• Excluded from cash flow statement

• Disclosed separately in the financial

statements.

• Disclose and present a reconciliation

of amounts in the cash flow

statement with the equivalent items

in the statement of financial position.

(c) Others 48 • Disclose significant cash and cash

equivalent balances not available for

use by the group, along with

commentary by the management.

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors

The objectives of IAS 8 are to enhance the relevance and reliability of an

entity’s financial statements and to be able to compare the financial statements of an

entity over time as well as the financial statements of other entities. The standard

describes the basis for the selection of accounting policies and amendments.


1. Objective 1 • To prescribe the criteria for selecting

and changing accounting policies.

• Accounting treatment and disclosure

of changes in accounting policies,

changes in estimates and errors.

2. Scope 2 To be applied in

• Selecting and applying accounting

74


policies

• Accounting for changes in

accounting policies

• Changes in accounting estimates

• Correction of prior period errors

3. Key terms defined 5 • Accounting policies

• A change in accounting estimate

• Prior period errors

• Retrospective application

• Retrospective restatement

4. Key provisions

(a) Selection and

application of

accounting

policies

7-12

• Apply the Standard or Interpretation

and consider any relevant

Implementation Guidance issued by

the IASB for the Standard or

Interpretation

• If no Standard or an Interpretation

specifically applies to a transaction,

other event or condition, management

must use judgement in developing and

applying an accounting policy that

results in information that is relevant

and reliable. In making that

judgement, management must refer to,

and consider the applicability of, the

following sources in descending order:

• the requirements and guidance in

IASB standards and interpretations

dealing with similar and related

issues; and

• the definitions, recognition criteria

and measurement concepts for

75


assets, liabilities, income and

expenses in the Framework.

• Also consider the most recent

pronouncements of other standard-

setting bodies that use a similar

conceptual framework to develop

accounting standards, other

accounting literature and accepted

industry practices.

(b) Consistency

(c) Change in an

accounting

policy

(d) Effective date of

change

(e) Change in

accounting

estimates

13

14

19

36

Apply accounting policies consistently

for similar transactions.

Only when

• Required by an IFRS; or

• Change results in reliable and more

relevant information

• If a change is required by an IFRS,

the pronouncement’s transition

requirements are followed

• If no transition requirements

specified, or if the change is

voluntary, the new accounting policy

is applied retrospectively by

restating prior periods.

• If restatement is impracticable, the

cumulative effect of the change is

included in profit or loss.

• If the cumulative effect cannot be

determined, the new policy is

applied prospectively.

• Applied in current year or future

years or both.

76


(f) Prior period

errors

42 • Material errors corrected by restating

the comparative amounts for the

prior period amounts

• If the error has occurred before the

earliest period presented, restate the

opening statement of financial

position.

5. Disclosure

requirements

28-30, 39-40,

49

Extensive disclosures required regarding

nature and amount along with the effect

of changes in accounting policies,

estimates and prior period errors.

IAS 10: Events after the Reporting Period

IAS 10 deals with the situations under which the entity should adjust its

financial statements for events after the reporting period and the disclosures that it

should make about the authorization date and about the events after the reporting

period. It also states that an entity should not prepare its financial statements on a

going concern basis when events after the reporting period indicate that the going

concern assumption is not appropriate.


1. Objective 1 To prescribe adjustments in the

financial statements for events

occurring after the reporting period.

2. Scope 2 Applies in the accounting for and

disclosure of events occurring after the

reporting period

3. Key terms defined

3 • Events after the reporting period

• Adjusting events

• Non-adjusting events

77


4. Key provisions

(i) Adjusting events

- Meaning

- Treatment

- Examples

(ii) Non-adjusting

entries

- Meaning

- Treatment

- Examples

(iii) Dividends

declared after

the reporting

period

(iv) Going concern

3

8

9

3

10

11

12

14

Events that provide evidence of

conditions that existed at the end of the

reporting period

Adjust the financial statements

• Bankruptcy of a customer from

whom money is receivable on

balance sheet date

• Discovery of fraud or errors that

show that financial statements are

incorrect

• Determination of profit-sharing or

bonus payments

Events which are indicative of

conditions that arose after the reporting

period

Do not adjust the financial statements

Decline in the market value of

investments between the end of the

reporting period and the date when the

financial statements are authorized for

issue.

Non-adjusting event

Do not prepare the financial statements

on a going concern basis if

management determines after the

78


reporting period that it intends to

liquidate the entity or to cease trading

or that it has no realistic alternative but

to do so.

5. Disclosure

requirements

17, 19 • Date when financial statements were

authorized for issue.

• Who gave the authorization

• Update disclosures that relate to

conditions that existed at the end of

the reporting period to reflect any

new information that it receives after

the reporting period about those

conditions.

• Non-adjusting events to be disclosed

if they are of such importance that

non-disclosure would affect the

ability of users to make proper

evaluations and decisions.

IAS 11: Construction Contracts

The primary objective of IAS 11 is the allocation of contract revenue and

contract cost to the accounting period in which construction work is performed. It is

applicable in accounting for construction contracts in the contractor’s financial

statements. In other words, this standard does not apply to the customer (contractee).


1. Objective - To prescribe the accounting treatment

of revenue and costs associated with

construction contracts.

2. Scope 1 To be applied in accounting for

construction contracts in the financial

statements of contractors.

79


3. Key provisions

(i) Contract revenue

(ii) Contract costs

(iii) Recognition

method

(iv) Expected loss

11

16

22

36

Consist of

• Amount agreed in the initial contract,

• Variations in contract work, claims

and incentive payments to the extent

that it is probable that they will result

in revenues and can be measured

reliably

Consist of

• Costs that relate directly to the

specific contract

• Costs attributable to general

contract activity and that can be

reasonably allocated to the contract.

• Other costs which are specifically

chargeable to the customer under

the contract terms.

Percentage completions

To be recognized as an expense

immediately

4. Disclosure

requirements

39, 40 (a) Amount of contract revenue

recognized

(b) Method used to determine revenue

and stage of completion of contract

(c) For contracts in progress at balance

sheet date, disclose

• aggregate costs incurred and

recognized profits (less recognized

losses) to date

• advances received

• amount of retentions

80

IAS 12: Income Taxes

IAS 12 prescribes the accounting treatment for income taxes. Income tax

includes all domestic and foreign taxes that are based on taxable profits, as well as

withholding and other taxes that are payable by subsidiaries on distributions to the

reporting entity.


1. Objective - To lay down principles for accounting

for the current and future tax

consequences of:

• the future recovery (settlement) of

carrying amounts of assets

(liabilities) recognized in an entity’s

statement of financial position, and

• transactions and other events of the

current period that are recognized in

an entity’s financial statements

2. Scope 1, 2 All domestic and foreign taxes based

on taxable profits

3. Key terms defined 5 • Deferred tax liabilities and assets

• Temporary differences

• Tax base

4. Key provisions

(a) Temporary

differences

- Meaning &

types

3

• Difference between the carrying

amount of an asset or liability or its

tax base

• Two types

Taxable temporary difference

(results in taxable amounts in the

future when the carrying amount of

the asset is recovered or the liability

is settled)

81


(b) Tax base

- Meaning

(c) Recognition of

current tax assets

and liabilities

3

12

Deductible temporary difference

(results in amounts that are tax

deductible in the future when the

carrying amount of the asset is

recovered or liability is settled)

• Amount attributed to that asset or

liability for tax purposes

• Recognized for current and prior

period taxes

(d) Recognition of

deferred tax and

liabilities

15, 39

Recognized for future tax

consequences of all taxable temporary

differences with the following

exception where deferred tax liability

arises from:

- Initial recognition of goodwill

- Initial recognition of an

asset/liability other than in a

business combination which, at

the time of the transaction, affect

neither the accounting nor the

taxable profit, and

- Differences arising from

investments in subsidiaries,

branches and associates and

interests in joint ventures (e.g.,

due to undistributed profits)

where the entity is able to control

the timing of the reversal of the

differences and it is probable that

the reversal will not occur in the

foreseeable future.

82


(e) Recognition of

deferred tax

assets

(f) Measurement

(i) Current tax

assets and

liabilities

24, 34, 44

46

To be recognized for deductible

temporary differences unused tax

losses and unused tax credits to the

extent it is probable that taxable profit

will be available against which the

deductible temporary differences can

be utilized with the following

exceptions where the deferred tax asset

arises from:

• The initial recognition of an

asset/liability other than in a

business combination which, at the

time of the transaction, does not

affect the accounting or the taxable

profit

• Investments in subsidiaries,

associates, branches and joint

ventures (to be recognized to the

extent it is probable that the

temporary difference will reverse in

the foreseeable future and that

taxable profit will be available

against which the temporary

difference will be utilized)

At rates applicable for the period

83


(ii) Deferred tax

assets and

liabilities

(DTA &

DTL)

(g) Discounting

47

53

At rates expected to apply when the

liability is settled or the asset is realized

based on tax rates and tax laws enacted

or substantively enacted by the end of

the reporting period.

DTA & DTL not to be discounted

5. Disclosure

requirements

79-82A Major components of tax expense or

income along with other prescribed

disclosures.

IAS 16: Property, Plant and Equipment

IAS 16 sets out requirements for the recognition and measurement of property,

plant and equipment as well as prescribes financial statement disclosure requirements.

This helps users of financial statements assess information about an entity’s

investment in its property, plant and equipment and the changes in that investment.



• Recognition criteria for Property,

Plant and Equipment (PPE)

• Determination of the carrying

amount of PPE

• Depreciation thereon

2. Scope

- Applies to

- Does not apply

to

2

3

Accounting for PPE

(a) PPE classified as held for sale

(b) Biological assets related to

agricultural activity

(c) Recognition and measurement of

exploration and evaluation assets

(d) Mineral rights, mineral reserves

However, PPE used to develop or

84


maintain the assets in (b), (c) and (d)

above are covered by IAS 16.

3. Key terms defined 6 • Cost

• Entity specific value

• Fair value

• PPE

• Recoverable amount

• Residual value

• Useful life

4. Key provisions

(i) Recognition

(ii) Measurement at

initial

recognition

(iii) Components of

cost

7

15

13, 14, 16

Recognized as assets when

• It is probable that future economic

benefits associated with the asset

will flow to the entity; and

• Cost of the item can be measured

reliably

At cost

• Purchase price

• Directly attribute costs necessary to

get the asset ready for its intended

use

• Estimated cost of dismantling and

removing the asset and restoring the

site

• Replacement cost and major

inspection cost can be capitalized

subject to meeting the recognition

criteria

85


(iv) Subsequent

measurement

(v) Revaluation

Model

(vi) Depreciation

- Component

accounting

- Depreciation

charge

- Review of

depreciation

method, residual

value and useful

life

(vii) Decognition

(Retirements

and disposals)

29

31, 36, 39 & 40

43

50

51, 61

67, 68, 71

Two Models:

• Cost Model

• Revaluation Model

• Carry out regular revaluation

• All items of a class assets to be

revalued

• Revaluation increases directly

credited to equity

• Charge revaluation decreases first

against revaluation surplus in equity

relating to that asset, charge any

excess to profit or loss

• On disposal of revalued asset, keep

revaluation surplus in equity,

recycling through profit or loss not

allowed

Each part of PPE to be depreciated

separately if its cost is significant in

relation to total cost of the item.

Depreciation amount of an asset to be

allocated on a systematic basis to

useful life

To be reviewed atleast at each financial

year end.

• Derecognize asset on disposal or

when it is withdrawn from use and

no future economic benefits are

expected from its disposal

86


• Gain or loss on depreciation to be

included in profit or loss

• Gain not to be treated as revenue

5. Disclosure

requirements

70, 74, 77 • Measurement bases, depreciation

methods, useful lives or

depreciation rates etc. for each class

of PPE

• Additional information in case of

revaluation.

IAS 17: Leases

IAS 17 prescribes the accounting treatment for leases in the financial

statements of lessees and lessors and shall be applied in accounting for all leases other

than those to explore for or use non-regenerative resources like minerals and oil and

to the licensing arrangements for motion picture films, video recordings, plays,

manuscripts and so on.


1. Objective 1 To prescribe the accounting policies

and disclosure requirements in relation

to leases

2. Scope

- Applies to

- Does not apply

to

2

2

All leases other than lease agreements

for minerals, oil, natural gas, and

similar regenerative resources and

licensing agreements for films, videos,

plays, manuscripts, patents, copyrights

and similar items

• Property held by lessees that is

accounted for as investment

property

87


• Investment property provided by

lessors under operating leases

• Biological assets held by lessees

under finance leases

• Biological assets provided by

lessors under operating leases

3. Key terms defined 4 • Finance lease

• Operating lease

• Non-cancellable lease

• Inception of lease

• Lease term

• Commencement of lease term

• Minimum lease payments

• Fair value

• Guaranteed and unguaranteed

residual value

• Gross and net investment

• Unearned finance income

• Interest rate implicit in lease, etc.

4. Key provisions

(i) Classification of

lease

(ii) Treatment in the

books of lessee

(a) Finance lease

- Initial

recognition

8

20

Finance lease if it transfers

substantially all the risks and rewards

incidental to ownership else treat it as

an operating lease

Asset and liability to be recognized at

the lower of the present value of

minimum lease payment and fair value

of the asset

88


- Subsequent

measurement

(b) Operating lease

(iii) Treatment in the

books of lessor

(a) Finance lease

- Initial

recognition

- Subsequent

measurement

(b) Operating lease

(iv) Sale and lease

back

transactions

25, 27

33

36

39

59, 61, 63

• Lease payments to be apportioned

between interest expense and

reduction in liability

• Depreciation policy similar to

owned assets

Recognize as an expense on straight

line basis over the lease term

As receivable at an amount equal to net

investment in the lease

Finance income recognized based on a

pattern reflecting a constant periodic

rate of return on the lessor’s net

investment in the finance lease

• Present the asset in balance sheet

according to the nature of the asset

• Lease income to be recognized as

income on a straight line basis over

the lease term

(a) If it results in a finance lease, any

excess of proceeds over the

carrying amount is deferred and

amortized over the lease term

(b) If it results in an operating lease:

• If the transaction is clearly carried

out at fair value-recognize profit

or loss immediately

• If sale price is below fair value-

profit or loss to be recognized

immediately. However, if a loss is

89


compensated for by future rentals

at below market price, the loss

should be amortized over the

period of use;

• If sale price is above fair value-

the excess over fair value to be

deferred and amortized over the

period of use;

• If the fair value at the time of the

transaction is less than the

carrying amount-loss equal to the

difference to be recognized

immediately

5. Disclosure

requirements

31, 35, 47, 56,

65

Extensive disclosures required

depending on classification of lease in

the books of reporting entity.

IAS 18: Revenue

The term income that encompasses both revenue and gains is defined in the

Framework for the Preparation and Presentation of Financial Statements. Revenue

arises from an entity’s ordinary course of activities. Revenue can arise from such

sources as sales of goods, provision of services, royalty fees, franchise fees,

management fees, dividends, interest and subscriptions. Gains do not arise out of the

core business operations and include such items as profit on disposal of noncurrent

assets, retranslating balances in foreign currencies, or fair value adjustments to

financial and nonfinancial assets.

90


1. Objective - To lay down a practical guidance for

revenue recognition

2. Scope

- Applies to

- Does not apply

to

1

6

Revenue arising from

(a) sale of goods

(b) rendering of services

(c) interest, royalties and dividends

Revenue arising from:

• lease agreements

• dividends from investments which

are accounted for under the equity

method

• insurance contracts

• changes in the fair value of

financial assets and financial

liabilities or their disposal

• changes in the value of other

current assets

• initial recognition and from changes

in fair value of biological assets

related to agricultural activity

• initial recognition of agricultural

produce

• extraction of mineral ores

3. Key provisions

(i) Measurement

(ii) Recognition

criteria for sale

of goods

9

14

Fair value of consideration received or

receivable

• Significant risks and rewards of

ownership have been transferred to

the buyer;

• The seller retains neither continuing

managerial involvement to the

91


(iii) Rendering of

services

- Criteria

- Method

- When outcome

cannot be

measured

reliably

(iv) Interest, royalty

and dividend

- Criteria

Method

- Interest

20, 26

-

29, 30

degree usually associated with

ownership nor effective control over

the goods sold;

• The amount of revenue can be

measure reliably;

• It is probable that the economic

benefits associated with the

transaction will flow to the seller;

• The costs incurred/to be incurred in

respect of the transaction can be

measured reliably

Percentage completion

• the amount of revenue can be

measured reliably;

• it is probable that the economic

benefits will flow to the entity;

• stage of completion at the balance

sheet date can be measured reliably;

and

• costs incurred/to be incurred, in

respect of the transaction can be

measured reliably.

• Recognized to the extent of the

expenses recognized that are

recoverable (Cost recovery

approach to be used)

• When it is probable that economic

benefits will flow to the entity

• Amount of revenue can be measure

reliably

Effective interest method

92


- Royalties

- Dividends

Accrual basis

When shareholders’ right to receive

payment is established

4. Disclosure

requirements

35 • Accounting policy adopted for

revenue recognition

• Amount of each significant

category of revenue recognized

during the period.

IAS 19: Employee Benefits

IAS 19 prescribes the accounting treatment and disclosure by employers for

employee benefits. In accordance with this standard, an employer should recognize a

liability when service has been provided by an employee in exchange, for the benefits

to be paid in the future. Similarly, an employer should recognize an expense when the

economic benefits are received by the employer from the services provided by the

employee.


1. Objective

- • To prescribe accounting and

disclosure for employee benefits

• The Standard requires an entity to

recognize a liability when an

employee has provided service in

exchange for employee benefits to

be paid in future and an expense

when those economic benefits are

consumed.

2. Scope

- Applies to

1 & 4

All employee benefits including

• Short-term employee benefits

• Post employment benefits

93


• Other long-term employee benefits

• Termination benefits

3. Key provisions

(i) Short term

employee

benefits

(a) Meaning

(b) Examples

-

7

8

Benefits payable within 12 months

• Wages

• Salaries

• Social security contributions

• Short-term compensated absences

• Profit sharing and bonus payable

• Non-monetary benefits for current

employees

(c) Recognition

(ii) Post employment

benefits

(a) Meaning

(b) Example

-

10, 17

7

24

• As expense in the period in which

service is rendered

• Unpaid liability to be measured at

undiscounted amount

• Profit sharing and bonus payments

to be recognized only when the

entity has a legal or constructive

obligation to pay and cost can be

measured reliably,

Employment benefits payable after the

completion of employment

• Pension

• Post employment life insurance

• Post employment medical care, etc

94


(c) Types

(d) Recognition of

defined

contribution

plans

(e) Recognition of

defined benefit

plans

- Steps

-

25

44, 45

50

• Defined contribution plans

• Defined benefit plans

• Recognize expense in the period in

which contribution is made

• Discount contributions when they

do not fall due wholly within 12

months after the end of the period

in which the employees render the

related service

i. Using actuarial techniques make

reliable estimate of the amount of

benefit that employees have earned

in return for their service in the

current and prior periods.

ii. Find Present Value of the defined

benefit obligation and current

service cost using Projected Unit

Credit Method (PUCM)

iii. Determine fair value of plan assets

iv. Determine the total amount of

actuarial gains & losses and amount

of those actuarial gains and losses

to be recognized

v. Determine resulting past service

cost where a plan has been

introduced or changed

vi. Determine resulting gain or loss

where a plan has been curtailed or

settled.

95


- Recognition 54

i. As a liability in balance sheet

ii. Amount to be equal to net of :

- the present value of the defined

benefit obligation (the present

value of expected future payments

required to settle the obligation

resulting from employee service in

the current and prior periods),

- deferred actuarial gains and losses,

and deferred past service cost, and

- the fair value of any plan assets at

the end of the reporting period

- Actuarial gains

or losses

(iii) Other long-term

employee

benefits

(a) Meaning

92, 93

7

• Recognize immediately in profit or

loss; or

• Use corridor approach whereby if

the net cumulative unrecognized

actuarial gains and losses at the end

of the previous reporting period

exceeds the 10% corridor then the

excess portion can be recognized as

an expense over the expected

average remaining working lives of

the employees participating in that

plan

• Recognize immediately any other

comprehensive income subject to

certain conditions.

Employee benefits that do not fall due

96


(b) Examples

(c) Recognition

(iv) Termination

benefits

(a) Meaning

(b) Recognition

126

128

7

133

wholly within 12 months after the end

of the period in which the employees

render the related service.

• Long-term paid leave

• Jubilee benefits

• Long-term disability benefits

• Profit sharing and bonus payable 12

months or later

• Similar to defined benefit plans

• Actuarial gains and losses and past

service cost to be expensed off

immediately in profit or loss

Employee benefits payable as a result

of termination of an employee by the

entity or the employee option for VRS

in exchange for benefits.

When the entity is demonstrably

committed to terminating one or more

employees before the normal

retirement date or to providing

termination benefits as a result of an

offer made to encourage voluntary

redundancy.

4. Disclosure

requirements

- Extensive disclosures including amount

recognized as an expense, actuarial

assumptions, description of defined

benefit plans, accounting policy for

recognizing actuarial gains and losses,

etc.

97

IAS 20: Accounting for Government Grants and Disclosure of Government

Assistance

IAS 20 prescribes the accounting treatment and disclosure of government

grants and the disclosure of other forms of government assistance.


1. Scope

- Applies to

- Does not apply to

1

2

Accounting for all government grants

and other forms of government

assistance

• Government participation in the

ownership of the entity

• Government grants covered by IAS

41

• Government assistance provided in

the form of benefits in determining

taxable income

2. Key terms defined 3 • Government

• Government assistance

• Government grants

• Grants related to assets and income

• Forgivable loans

• Fair value

3. Key provisions

(a) Recognition

conditions

(b) Recognition

principle

7

12

On reasonable assurance that

• Entity will comply with attached

conditions; and

• Grant will be received

• Recognized as income in profit or

loss

• Recognized over periods necessary

to match them with related costs

98


(c) Non- monetary

grants

(d) Presentation

(i) Asset related

grants

(ii) Income

related grants

(e) Repayment of

government

grants

23

24

29

32

which they are intended to

compensate

• Need to be credited directly to equity

Two alternatives:

• Recognize at fair value of the non-

monetary asset; or

• Recognize at nominal value

Two alternatives

• Presented as deferred income in

balance sheet; or

• Deducted in arriving at the carrying

amount of the asset

Two alternatives

• Present separately as income; or

• As a deduction in reporting the

related expense

• Treat it as a change in an

accounting estimate

• Refund of income related grant to

be applied first against any

unamortized deferred credit set up

in respect of the grant; balance

sheet treated as expense

• For refund of asset related grant,

either increase the carrying amount

of the related asset or reduce the

deferred income balance by amount

repayable cumulative depreciation

that would have been recognized as

expense in the absence of grant to

be expensed off immediately.

99


4. Disclosure

requirements

39 • Accounting policy

• Method of presentation

• Nature and extent of grants

recognized

• Unfulfilled conditions and other

contingencies

IAS 21: The Effects of Changes in Foreign Exchange Rates

IAS 21 prescribes the methodologies of (1) translation of foreign currency

transactions into functional currency; (2) inclusion of financial elements of foreign

operations in the financial statements of an entity; and (3) translation of financial

statements into a presentation currency. The primary issues involved are selection of

exchange rate(s) and reporting the effects of changes in exchange rates in the financial

statements.


1. Objective

1 To prescribe

• How to include foreign currency

transactions and foreign operations

in the financials of an entity

• Translation of financials to

presentation currency

• Exchange rate to be used

• Reporting the effect of changes in

exchange rates

2. Scope 3 To be applied in

• Accounting for transactions and

balances in foreign currency except

for derivative transactions and

balances covered in IAS 39

100


• Translation of results and financial

position of foreign operations

3. Key terms defined 8 Functional currency: The currency of

the primary economic environment in

which the entity operates

Presentation currency: The currency in

which financial statements are

presented

Net investment in a foreign operation:

Amount of the reporting entity’s

interest in the net assets of that

operation

4. Key provisions

(i) Initial recognition

(ii) Subsequent

reporting

(iii) Recognition of

exchange

differences

21

23

28, 32

• Recognize on the date the

transactions occur

• Use exchange rate prevailing on the

date of transaction

• Non-monetary items carried at

historical cost continued to be

measured using transaction-date

exchange rates;

• Monetary items to be retranslated

using the closing rate;

• Non-monetary items carried at fair

value to be measured at valuation-

date exchange rates

• Exchange differences arising on

settlement of monetary items and on

translation of monetary items at a

rate different than the rate at the time

of initial recognition should be

included in profit or loss.

101


• However, differences arising on

monetary items that form part of the

reporting entity’s net investment in a

foreign operation should be

recognized in the consolidated

financial statements that include the

foreign operation in other

comprehensive income. Such

differences to be reclassified from

equity to profit or loss on disposal of

the net investment.

(iv) Translation to

the presentation

currency

39, 42, 47

• Assets and liabilities for each

balance sheet presented (including

comparatives) to be translated at the

closing rate at the date of that

balance sheet. Goodwill arising on

the acquisition of a foreign operation

and any fair value adjustments to the

carrying amounts of assets and

liabilities arising on the acquisition

of that foreign operation to be

treated as part of the assets and

liabilities of the foreign operation

• Income and expenses for each

income statement (including

comparatives) to be translated at

exchange rates at the date of the

transactions; and

• All resulting exchange differences to

be recognized as a separate

component of equity.

102


(v) Disposal of a

foreign operation

48

• Special rules to be applied for

translating the results and financial

position of an entity whose

functional currency is the currency

of a hyperinflationary economy

• Recognize the cumulative amount of

the exchange differences deferred in

the separate component of equity

relating to that foreign operation

• To be recognized in profit or loss

when the gain or loss on disposal is

recognized

5. Disclosure

requirements

52, 54 • Exchange differences recognized in

profit or loss

• Net exchange differences classified

in a separate component of an

equity along with a reconciliation of

such exchange differences at the

beginning and end of the period

• Fact and reasons for change, if any,

in the functional currency of either

the reporting entity or a significant

foreign operation

IAS 23: Borrowing Costs

The objective of IAS 23 is to prescribe the accounting treatment for borrowing

costs. This standard does not deal with the actual or imputed cost of owners’ equity,

including preferred capital that is not classified as a liability.

103


1. Scope

- Applies to

- Does not apply to

2

3, 4

Accounting for borrowing costs

• Actual or imputed cost of equity,

including preferred capital and not

classified as a liability

• To borrowing costs directly

attributable to the acquisition,

construction or production of a

qualifying asset measured at fair

value or inventories manufactured or

produced in large quantities on a

repetitive basis

2. Core principle 1 Borrowing costs directly attributable to

the acquisition, construction or

production of a qualifying asset to be

capitalized

3. Key terms defined 5 • Borrowing costs

• Qualifying asset

4. Key provisions

(i) Specific

borrowings

(ii) General

borrowings

12

14

• Borrowing cost to be capitalized will

be actual borrowing costs incurred on

such borrowings during the period as

reduced by any investment income on

the temporary investment of those

borrowings

• Apply capitalization rate to

expenditure incurred during the

period to ascertain borrowing costs

eligible for capitalization

• Capitalization rate to be weighted

average of borrowing costs applicable

to the general outstanding borrowings

104


(iii) Commencement

of capitalization

(iv) Suspension of

capitalization

(v) Cessation of

capitalization

17

20

22, 24

during the period

When all of the following 3 conditions

are met:

• Expenditure has been incurred

• Borrowing costs have been incurred

• Activities necessary to prepare the

asset for its intended use or sale are

undertaken

During extended period in which active

development of a qualifying asset is

suspended

• When substantially all the activities

necessary to prepare the qualifying

asset for its intended use or sale are

complete.

• For construction of a qualifying asset

in parts, cease capitalization of

borrowing costs when substantially

all the activities necessary to prepare

that part for its intended sale or use

are complete. This is, however

subject to the condition that such part

is capable of being used while

construction continues on other parts.

5. Disclosure

requirements

26 • Borrowing costs capitalized during

the period

• Capitalization rate used to

determine the amount of borrowing

costs eligible for capitalization

105

IAS 24: Related Party Disclosures

The objective of IAS 24 is to ensure that an entity’s financial statements

contain the disclosures necessary to draw attention to the possibility that its financial

position and profit or loss may have been affected by the existence of related parties

and by transactions and outstanding balances with such parties.


1. Objective

1 To ensure that the financial statements

contain disclosures necessary to draw

attention to the fact that the financials

may have been affected by the

existence of related parties and by

transactions and outstanding balances

with such parties

2. Scope 2 To be applied in –

• Identifying related party relationship,

transactions and outstanding balance

between an entity and its related

parties.

• Disclosures to be made.


(i) Related party

9

Related to an entity if:

(a) Directly, or indirectly through one

or more intermediaries, the party:

i. controls, is controlled by, or is

under common control with, the

entity (includes parents,

subsidiaries and fellow

subsidiaries)

ii. has an interest in the entity that

gives it significant influence over

the entity; or

106


(ii) Close members

of the family of

an individual

(iii) Key

management

personnel

7

7

iii. has joint control over the entity

(b) It is an associate of the entity;

(c) It is a joint venture in which the

entity is a venturer

(d) It is a member of the key

management personnel of the entity

or its parent;

(e) It is a close member of the family

of any individual referred to in (a)

or (d);

(f) It is a controlled, jointly controlled

or significantly influenced by or for

which significant voting power in

such entity resides with, directly or

indirectly, any individual referred to

in (d) or (e); or

(g) It is a post-employment benefit plan

for the benefit of employees of the

entity, or of any entity that is a

related party of the entity.

• Individual’s domestic partner and

children

• Children of the individual’s

domestic partner

• Dependants of the individual or the

individual’s domestic partner

Those persons having authority and

responsibility for planning, directing

and controlling the activities of the

entity, directly or indirectly, including

all directors (whether executive or

otherwise)

107


(iii) Compensation 7 All employee benefits including share

based payments

4. Disclosure

requirements

12 (i) Nature of the relationship and of

sufficient information to enable an

understanding of the potential effect of

the transactions;

(ii) Relationships involving control,

even when there have been no

transactions;

(iii) Related party transactions;

(iv) Management compensation, etc.

IAS 26: Accounting and Reporting by Retirement Benefit Plans

IAS 26 prescribes accounting and reporting requirements for retirement

benefits plans. In other words, this standard is applicable to the retirement benefit

plans and affects participants of a retirement benefit plan as a group but does not

address reports that might be made to individuals about their particular retirement

benefits.


1. Scope

1 To be applied in the financial

statements of retirement benefit plans

where such financial statements are

presented


(i) Retirement

benefit plans

8

• Arrangement by which an enterprise

provides benefit for employees on or

after termination of service

• Cash in the form of an annual income

or as a lump sum

108


(ii) Funding

(iii) Participants

(iv) Actuarial

present value of

promised

retirement

benefits

(v) Vested benefits

8

8

8

8

Transfer of assets of an entity separate

from the employer’s entity to meet

future obligations for the payment of

retirement benefits

Members of a retirement benefit plan

and others who are entitled to benefits

under the plan

Present value of the expected payments

by a retirement benefit plan to existing

and past employees, attributable to

services already rendered

Benefits, the right to which, are not

conditional on continued employment

3. Key provisions

(i) Valuation of plan

assets

(ii) Defined

contribution

plans

(iii) Defined benefit

plans

32

13

17

At fair value

Financial statements of a defined

contribution plan to contain

• Statement of net assets available for

benefits

• Description of the funding policy

Financial statements of a defined

benefit plan to contain either:

• A statement that shows the net assets

available for benefits, the actuarial

present value of promised retirement

benefits (distinguishing between

vested benefits and non-vested

benefits) and the resulting excess or

deficit; or

109


• A statement of net assets available for

benefits, including either a note

disclosing the actuarial present value

of promised retirement benefits

(distinguishing between vested

benefits and non-vested benefits) or a

reference to this information in an

accompanying actuarial report

4. Disclosure

requirements

34 • Statement of changes in net assets

available for benefits

• Significant accounting policies

• Description of the plan and effect of

any changes in the plan during the

period.

IAS 27: Consolidated and Separate Financial Statements

IAS 27 prescribes the circumstances under which consolidated financial

statements are required to be prepared, and is applied in the preparation and

presentation of consolidated financial statements for a group of entities under the

control of a parent. This standard must also be applied to account for investments in

subsidiaries, jointly controlled entities, and associates when an entity presents

separate financial statements, by choice or to comply with local regulations. However,

it does not deal with accounting for business combinations. That is dealt with in IFRS

3, Business Combinations.

110


1. Scope

1 To be applied in

• Preparation and presentation of

consolidated financial statements for

a group of entities under the control

of a parent; and

• In accounting for investments in

subsidiaries, jointly controlled

entities, and associates when an entity

elects, or is required by local

regulations, to present separate


2. Key terms defined 4 • Control

• Cost-method

• Non-controlling interest (minority

interest)

• Group

• Subsidiary, etc

3. Key provisions

(i) Consolidation

procedure

20, 22, 23, 24,

27, 30

• Eliminate intra-group balances,

transactions, income and expenses in

full.

• All entities in the group to use the

same accounting policies

• The end of the reporting period of a

subsidiary cannot be more than three

months different from the end of the

reporting period of the group

• Non-controlling interests (NCI) to be

reported in equity in the balance sheet

separately from the equity of the

owners of the parent. Total

comprehensive income to be

111


(ii) Loss of control

in a subsidiary

34

allocated between NCI and the

owners of the parent even if this

results in the NCI having a deficit

balance.

• Derecognize the assets (including

goodwill) and liabilities of the

subsidiary at their carrying amount at

the date when control is lost

• Derecognize the carrying amount of

any NCI in the former subsidiary at

the date when control is lost

• Recognize fair value of consideration

received from transaction that

resulted in loss of control

• Any investment retained to be

recognized at fair value on the date of

loss of control

• Resulting difference (gain or loss) to

be taken to profit or loss attributable

to the parent.

(iii) Accounting for

investments in

subsidiaries,

jointly

controlled

entities and

associates in

separate

financial

statements

38 If not classified as held for sale then

account for either at cost or as

investments under IAS 39.

4. Disclosure

requirements

41, 42, 43 Mainly descriptive disclosures required

112

IAS 28: Investments in Associates

IAS 28 prescribes the accounting treatment that is to be adopted for

investments in associates. However, it excludes investments in associates that are held

by venture capital entities or mutual funds, unit trusts, and other similar entities if they

are held for trading financial assets in accordance with IAS 39, Financial Instruments:

Recognition and Measurement.


1. Scope

- Applies to

- Does not apply

to

1 Accounting for investments in

associates

• Investments in associates held by

venture capital organizations; or

• Mutual funds, unit trusts and similar

entities including investment linked

insurance funds which upon initial

recognition are designated at fair

value through profit or loss or are

classified as held for trading and

accounted for as per IAS 39.


(i) Associate

(ii) Significant

influence

2

2

An entity (whether incorporated or not)

in which an investor has significant

influence but not control or joint

control

Power to participate in the financial

and operating policy decisions of the

investor but not control or joint control

3. Key provisions

(i) Significant

influence

6

• Presumed (though rebuttable) when

20% or more of the voting power held

• Holding can be direct or through

subsidiaries

113


(ii) Equity method

- Meaning

- Principles

2

11, 24, 25, 26

Method of accounting in which

investment is initially recognized at

cost and adjusted subsequently for the

post-acquisition change in the

investor’s share of net assets of the

investee.

- Investor’s share of profit or loss of

the investee is recognized in the

investor’s profit or loss

- Distributors received reduce the

carrying amount of the investment

- Associates accounting policies to be

same as that of the investor

- End of the reporting period of the

associate should not be more than 3

months different from that of the

investor

4. Disclosure

requirements

37-40 • Fair value of investments in

associates for which there are

published price quotations;

• Summarized financial information of

associates, including the aggregated

amounts of assets, liabilities,

revenues and profit or loss;

• Use of a reporting date of the

financial statements of an associate

that is different from that of the

investor;

• Nature and extent of any significant

restrictions on the ability of

associates to transfer funds to the

investor in the form of cash

114


dividends, or repayment of loans or

advances;

• Unrecognized share of losses of an

associate, both for the period and

cumulatively, if an investor has

discontinued recognition of its share

of losses of an associate;

• Summarized financial information of

associates, either individually or in

groups, that are not accounted for

using the equity method, including

the amounts of total assets, total

liabilities, revenues and profit or loss

and others.

IAS 29: Financial Reporting in Hyperinflationary Economies

IAS 29 has instituted a methodology of restatement of accounting information

using suitable price indices to make the financial statements of different periods

comparable and the accounting indicators for the same accounting period useful for

users’ decision making.


1. Scope

1 To be applied to the financial

statements of any entity whose

functional currency is the currency of a

hyper-inflationary economy (generally

where the cumulative inflation rate

over 3 years is 100% or more)

2. Key provisions

(i) Restatement of

financial

statements

8

• Financial statements to be stated in

terms of the measuring unit current at

the balance sheet date

115


(ii) Gain or loss on

net monetary

position

(iii) Economies

ceasing to be

hyper-

inflationary

9

38

• Comparative figure for prior period(s)

to be restated into the same current

measuring unit

• Included in profit or loss

• Disclosed separately

Treat the amounts expressed in the

measuring unit current at the end of the

previous reporting period as the basis

for carrying amount in subsequent


3. Disclosure

requirements

39 • The fact that financial statements

and other prior period data have

been restated for changes in the

general purchasing power of the

reporting currency

• Whether the financial statements

are based on a historical cost or

current cost approach

• Identity and level of the price index

at the balance sheet date and moves

during the current and previous

reporting period

IAS 31: Interests in Joint Ventures

IAS 31 sets out the requirements for accounting for “interests in joint

ventures”. Joint ventures are widely used in conducting business, particularly in the

investment property sector and in extractive industries.

116


1. Scope

1 Applies to investments in which an

investor has joint control unless the

investor is a venture capital firm,

mutual fund or unit trust, and it elects

to measure such investments at fair

value through profit or loss in

accordance with IAS 39.


(i) Joint Ventures

(JV)

(ii) Joint control

(iii) Proportionate

consolidation

(iv) Venturer

2

2

2

2

Contractual arrangement whereby

atleast two parties undertake an

economic activity that is subject to

joint control

Contractually agreed sharing of control

over an economic activity in a manner

so that no individual party has the

control

Methods of accounting in which a

venturer’s share of assets, liabilities,

incomes and expenses is combined line

by line with similar items in the

venturer’s financial statements or

reported as separate line item in the

venturer’s financial statements

Party to a Joint Venture (JV) having

joint control over that JV

3. Key provisions

(i) Types of JV

(ii) Jointly controlled

operations

7

15

Three types

• Jointly controlled operations (JCO)

• Jointly controlled assets (JCA); and

• Jointly controlled entities (JCE)

• Recognize the assets it controls, and

expenses and liabilities it incurs,

117


(iii) Jointly

controlled assets

and its share of income earned, in

both its separate and consolidated


Recognize in both separate and

consolidated financial statements:

• Its share of the joint assts

• Any liabilities that it has incurred

directly

• Its share of any liabilities incurred

jointly with the other venturers

• Income from the sale or use of its

share of the output of the joint

venture

• Its share of expenses incurred by the

joint venture, and expenses incurred

directly in respect of its interest in the

joint venture

(iv) Jointly

controlled

entities

- Method of

consolidation

(v) Transactions

between a

venturer and

joint venture

30

48, 49

Two options:

• Proportionate consolidation method;

or

• Equity method

• Recognize the proportion of gain or

loss attributable to the other venturers

• When a venturer purchases assets

from a JV, share of profits of the JV

arising from such transaction not to

be recognized until the asset is resold

to an independent party

118


(vi) Operators or

managers’ fee

52 • Operators or managers should

recognize the fee as per IAS 18 on

‘Revenue’

4. Disclosure

requirements

54, 55 • Information about contingent

liabilities and commitments relating

to its interest in JV

• Method used to recognize the interest

• List and description of interest in

significant JV & proportion of

ownership held, etc.

IAS 32: Financial Instruments: Presentation

IAS 32 covers the presentation issues of financial instruments. This simplified

version standard on financial instruments is an attempt to rationalize the accounting

norms based on the recent experience of global recession.


1. Objective 2 To prescribe principles for classifying

and presenting financial instruments as

liabilities or equity and for offsetting

financial assets and liabilities

2. Scope 4 To be applied by all entities to all types

of financial instruments except the

following:

• Interests in subsidiaries, associates

and joint ventures. However, IAS 32

applies to all derivatives on interests

in subsidiaries, associates or joint

ventures

• Employee’s rights and obligations

under employee benefit plans

119


• Insurance contracts. However, IAS 32

applies to derivatives that are

embedded in insurance contracts

• Financial instruments, contracts and

obligations under share based

payment transactions to which IFRS

2 applies.


(i) Financial

instrument

(ii) Financial asset

11

11

A contract that gives rise to a financial

asset of one entity and a financial

liability or equity instrument of another

equity

Any asset that is:

• Cash;

• An equity instrument of another

entity;

• A contractual right:

• to receive cash or another

financial asset from another

entity; or

• to exchange financial assets or

financial liabilities with another

entity under conditions that are

potentially favourable to the

entity; or

• A contract that will or may be

settled in the entity’s own equity

instruments and is:

• a non-derivative for which the

entity is or may be obliged to

receive a variable number of the

entity’s own equity instruments; or

120


• a derivative that will or may be

settled other than by the exchange

of a fixed amount of cash or

another financial asset for a fixed

number of the entity’s own equity

instruments. For this purpose the

entity’s own equity instruments do

not include instruments that are

themselves contracts for the future

receipt or delivery of the entity’s

own equity instruments.

(iii) Financial

liability

11

Any liability that is:

• A contractual obligation:

• to deliver cash or another financial

asset to another entity; or

• to exchange financial assets or

financial liabilities with another

entity under conditions that are

potentially unfavourable to the

entity; or

• A contract that will or may be

settled in the entity’s own equity

instruments and is

• a non-derivative for which the

entity is or may be obliged to

receive a variable number of the

entity’s own equity instruments; or

• a derivative that will or may be

settled other than by the exchange

of a fixed amount of cash or

another financial asset for a fixed

number of the entity’s own equity

121


(iv) Equity

instrument

11

instruments. For this purpose the

entity’s own equity instruments do

not include instruments that are

themselves contracts for the future

receipt or delivery of the entity’s

own equity instruments.

Any contract that evidences a residual

interest in the assets of an entity after

deducting all of its liabilities.

4. Key provisions

(i) Presentation

(ii) Settlement

options

(iii) Treasury shares

15

26

33

• Issuers’ classification of an

instrument either as a liability or an

equity instrument to be based on

substance, not form, of the

instrument;

• Classification is made at the time of

issue and is not subsequently altered.

When a derivative financial instrument

gives one party a choice over how it is

settled, it is a financial asset or a

financial liability unless all of the

settlement alternatives would result in

it being an equity instrument.

• When an equity reacquires its own

equity instruments, same should be

deducted from equity

• No gain or loss to be recognized in

profit or loss on the purchase, sale,

issue or cancellation of an entity’s

own equity instruments

• Considered paid or received to be

recognized directly in equity.

122


(iv) Interest,

dividends, losses

and gains

(v) Offsetting a

financial asset

and a financial

liability

35

-

• If relates to a financial instrument or a

component that is a financial liability,

then it should be recognized as

income or expense in profit or loss

• Distributors to holders of an equity

instrument to be debited directly to

equity, net of any related income tax

benefits

• Transaction costs of an equity

transaction to be deducted from

equity, net of any related income tax

benefit.

Offset and the net amount reported

when, and only when, an entity has a

legally enforceable right to set off the

amounts, and intends either to settle on

a net basis or simultaneously.

IAS 33: Earnings per Share

The objective of IAS 33 is to describe the methodology for the determination

and presentation of earnings per share (EPS). This standard establishes methodologies

for determining the outstanding shares, which is the denominator that enhances

comparability of the financial reporting. Thus, the focus of IAS 33 is on the

denominator of the earnings per share calculation.


1. Objective 1 To prescribe principles for the

determination and presentation of

earnings per share (EPS)

2. Scope 2, 3, 4, 4A • Applies to separate as well as

consolidated financial statements of

123


publicly traded entities or the entities

that are in the process of issuing shares

• When both separate and consolidated

financial statements are presented,

disclosures to be made on the basis of

consolidated information

• If an entity presents only a statement

of comprehensive income, EPS is

reported in that statement. If it

presents both a statement of

comprehensive income and a separate

income statement, EPS is reported

only in the separate income statement.


(i) Dilution

(ii) Anti-dilution

(iii) Contingent

share agreement

5

5

5

A reduction in EPS or an increase in

loss per share resulting from the

assumption that convertible instruments

are converted, that options or warrants

are exercised, or that ordinary shares

are issued upon the satisfaction of

specified conditions.

An increase in EPS or a reduction in

loss per share resulting from the

assumption that convertible instruments

are converted, that options or warrants

are exercised, or that ordinary shares

are issued upon the satisfaction of

specified conditions

An agreement to issue shares which is

dependent on the satisfaction of

specified conditions

124


(iv) Put options on

ordinary shares

5 Contracts that give the holder the right

to sell ordinary shares at a specified

price for a given period

4. Key provisions

(i) Basic EPS

(ii) Diluted EPS

10, 13, 20

30, 31, 33, 36,

41

Basic EPS = a/b

Where a = Profit or loss attributable to

ordinary equity holder of the parent

b = Weighted average number of

ordinary shares outstanding during the

period

• For computing (a), deduct all

expenses including tax, non-

controlling interest and preference

dividend

• For computing (b), adjust the shares

at issue at the beginning of the period

with the number of shares bought

back or issued during the period,

multiplied by a time-weighing factor

• Diluted EPS = c/d

Where c = Profit for the period

attributable to ordinary shares as

increased by after tax amount of

dividends and interest recognized in

the period in respect of the dilutive

potential ordinary shares and adjusted

for other charges in income or

expense that would arise from

conversion of dilutive potential

ordinary shares

d = (b) + Weighted average number

of shares to be issued on conversion

125


(iii) Presentation

66

of all dilutive potential ordinary

shares into ordinary shares

• Exclude anti-dilutive potential

ordinary shares for computing diluted

EPS

• An entity presents basic and diluted

EPS

- for each class of ordinary share

that has a different right to share

in profit for the period;

- with equal prominence;

- for all periods presented

• EPS to be reported for profit or loss

attributable to equity holders of the

parent entity, for profit or loss from

continuing operations attributable to

equity holders of the parent entity and

for any discontinued operations.

• EPS for discontinued operations can

be presented in Notes

• EPS to be reported even when it is

negative

5. Disclosure

requirements

70 • Details of numerator and

denominator used in computing

Basic and Diluted EPS

• Anti-dilutive instruments, etc.

IAS 34: Interim Financial Reporting

IAS 34 prescribes the minimum content of an interim financial reporting and

the principles for recognition and measurement in complete or condensed financial

statements for an interim financial report. The standard encourages publicly traded

126

entities to provide interim financial reports at least at the end of the first half of its

financial year, and to make available such as interim report within 60 days from the

end of the financial period.


1. Objective - • To prescribe minimum content of an

interim financial report

• To prescribe principles for

recognition and measurement in

financial statements presented for an

interim period

2. Key provisions

(i) Minimum

components of an

interim financial

report

8

• Condensed statement of financial

position

• Condensed statement of

comprehensive income

• Condensed statement of changes in

equity

• Condensed statement of cash flows

• Selected explanatory notes

(ii) Form and

contents

(a) When complete

set is presented

(b) When condensed

set is presented

9

10

Form and content to conform to

requirements of IAS 1

Include, at a minimum, each of the

headings and sub-totals included in the

most recent annual financial statements

and the explanatory notes required by

IAS 34. Additional line-items to be

included if their omission would make

the interim financial information

misleading. If the annual financial

statements were consolidated (group)

127


(iii) Accounting

policies

(iv) Materiality

(v) Selected

explanatory

notes

(vi) Revenue and

costs

(vii) Disclosures in

annual financial

statements

28

23

16

37, 39

26

statements, the interim statements

should be group statements as well.

• Same as used in annual financial

statements except for changes made

after the date of the most recent

annual financial statements which

will be reflected in the next annual


To be based on interim financial data

and not annual data

• Minimum notes prescribed

• Any events or transactions material

to the under-standing of the current

interim period also to be disclosed

Recognized when they incur and not

anticipated or deferred of anticipation

or deferral would not be appropriate at

end of the entity’s financial year.

If an estimate of an amount reported in

an interim period is changed

significantly during the financial

interim period in the financial year but

a separate financial report is not

published for that period, the nature

and amount of that change should be

disclosed in a note to the annual

financial statements for that financial

year.

128

IAS 36: Impairment of Assets

(The existing Indian AS 28 on ‘Impairment of Assets’ is similar to IAS 36)

The objective of IAS 36 is to ensure that assets are carried at an amount not in

excess of their recoverable amount, and to provide guidelines on calculation of

recoverable amount.


1. Objective 1 • To ensure that the assets are carried

at no more than their recoverable

amount

• To prescribe how recoverable

amount should be calculated

• Circumstances when impairment

loss can be reversed

2. Scope 2 Does not apply to

• Inventories

• Assets arising from construction

contracts

• Deferred tax assets

• Assets arising from employee

benefits

• Financial assets

• Investment property measured at

fair value

• Biological assets related to

agricultural activity that are

measured at fair value

• Insurance contract assets

• Non-current assets held for sale


(i) Impairment loss

6

Carrying amount

(-) Recoverable amount

129


(ii) Recoverable

amount

(iii) Value in use

6

6

Higher of :

(i) Value in use; and

(ii) Fair value less costs to sell

Present value of the future cash flows

expected to be derived from an asset or

cash generating unit

4. Key provisions

(i) Discount rate for

computing value

in use

(ii) Recognition of

impairment loss

(iii) Impact on

depreciation

(iv) Cash generating

unit (CGU)

(v) Goodwill

(vi) Reversal of

impairment loss

55

60

63

66

96

117, 119, 121,

124

Pre-tax rate

• Pre-tax rate that reflects current

market assessments of the time value

of money and the risks specific to the

asset.

• Does not reflect risks for which future

cash flows have been adjusted.

• In profit or loss

• Impairment loss of a revalued asset

to be treated as a revaluation

decrease

• Depreciation/amortization will need

to be adjusted so as to allocate the

revised carrying amount less

residual value over the remaining

useful life

• Recoverable amount should be

determined for the individual asset,

if possible, else determine

recoverable amount for the asset’s

cash-generating unit.

To be tested for impairment annually

• Reversal not to be more than what

the depreciated historical cost

would have been if impairment had

130


not occurred

• Recognized in profit or loss

• Depreciation charge to be adjusted

• No reversal of an impairment loss

for goodwill

5. Disclosure

requirements

126, 129, 130,

131, 133, 134,

135

• Impairment losses recognized or

reversed, for each class of assets

• Line items in statement of

comprehensive income in which

impairment loss is included

• Events and circumstances resulting

in recognition or reversal of

impairment loss

• Description of CGU, impairment

loss recognized or reversed by class

of asset, etc.

IAS 37: Provisions, Contingent Liabilities and Contingent Assets

(The existing Indian AS 29 on ‘Provisions, Contingent Liabilities and Contingent

Assets’ is similar to IAS 37)

The objective of IAS 37 is to ensure that appropriate recognition criteria and

measurement bases are applied to provisions, contingent liabilities, and contingent

assets and that sufficient information is disclosed in the notes to the financial

statements so that users can understand their nature, timing, and amount. The standard

aims to ensure that only present obligations arising from past obligating events, if they

meet all criteria of recognition as required by the standards, are recognized within the


131


1. Objective 1 To prescribe recognition criteria and

measurement bases and disclosures for

provision, contingent assets and

contingent liabilities

2. Scope

- Applies to

- Does not apply

to

2

2

Accounting for provisions, contingent

liabilities and contingent assets

• Executory contracts except when

they are onerous

• Provisions covered by another

standard like construction contracts,

income taxes, leases, employee

benefits, insurance contracts

3. Key terms defined 10 • Provision

• Liability

• Obligation event

• Legal obligation

• Constructive obligation

• Contingent liability

• Contingent asset

• Onerous contract

• Restructuring

4. Key provisions

(i) Recognition of

provisions

14

When the following three conditions

are met:

i. There is a present obligation as a

result of a past event

ii. Outflow of resources is probable

(more likely than not) and

iii. Amount of the obligation can be

measured reliably

132


(ii) Measurement of

provisions

36, 42, 45, 47,

51, 53

• At best estimate of the expense

required to settle the obligation at the

end of the reporting period (i.e., on

balance sheet date)

• Consider related risks and

uncertainties to arrive at the best

estimate

• Discount provision when time value

of money is material

• Discount rate to be pre-tax rate

• Gains from expected disposal of

assets not to be considered

• Reimbursements by another party to

be considered only when it is

virtually certain that reimbursement

will be received if obligation is

settled.

(iii) Changes in

provisions

(iv) Use of

provisions

(v) Future operating

losses

(vi) Onerous

contracts

(vii) Contingent

liabilities

59

61

63

66

27

• Review provisions at the end of

each reporting period and adjust to

reflect the current best estimate

• Reverse provisions if payment is

not probable

Provision to be used only for the

expense for which provision was

originally recognized.

Not to be recognized

Recognize present obligation under the

contract and measure it as a provision

Do not recognize

133


(viii) Contingent

assets

31 Do not recognize unless the realization

of income is virtually certain for each

class of provision

5. Disclosure

requirements

84, 85, 86 • Disclose carrying amount at the

beginning and end, changes in

provisions during the year, nature

of the obligation, expected timing

of probable outflows, etc.

• Disclose for each class of

contingent liabilities, an estimate of

its financial effect, indication of the

uncertainties and possibility of any

reimbursement.

• Brief description of the nature of

contingent assets, an estimate of

their financial effect, etc.

IAS 38: Intangible Assets

IAS 38 prescribes the accounting treatment for intangible assets that are not

dealt with specifically by any other standards. It requires an entity to recognize an

intangible asset when specified criteria are met. The standard also outlines ways to

measure the carrying amount of intangible assets and requires disclosures relating to

intangible assets.

134


1. Objective 1 To lay down accounting treatment for

intangible assets which are not covered

specifically by other standards

2. Scope

- Does not apply

to

2, 3

• Intangible assets covered by other

standards like inventories,

construction contracts, deferred tax

assets, assets arising from employee

benefits, goodwill acquired in a

business combination, etc.

• Financial assets

• Recognition and measurement of

exploration and evaluation assets

• Expense on development and

extraction of non-regenerative

resources like mineral, oil, natural

gas, etc.

3. Key provisions

(i) Attributes of an

intangible asset

(ii) Examples of

intangible assets

8

9

• Identifiability

• Control

• Future economic benefits

• Computer software

• Patents

• Copyrights

• Motion picture films

• Customer lists

• Fishing licenses

• Market share, etc.

135


(iii) Recognition

criteria

21

Only when

• Future economic benefits attributable

to the asset are probable and

• Cost of the asset can be measured

reliably

(iv) Modes of

acquisition of

intangible assets

-

• Separate acquisition

• Internally generated

• Acquisition as part of a business

combination

• Acquisition by way of government

grant

• Exchange of assets

(v) Initial

measurement

intangible

(a) General principle

(b) Separate

acquisition

(c) Acquired in

business

combination

24

25

33

At cost

Generally the price paid to acquire the

asset

(a) Cost of the intangible asset is its

fair value at the acquisition date

(b) Recognized separately from

goodwill if they arise as a result of

contractual or legal rights, or they

are separable from the business

(c) Recognition criteria always

considered to be satisfied

(d) Even acquired in-process research

and development is recognized as

an intangible asset

136


(d) Acquisition

through

government

grant

(e) Exchange of

assets

(f) Internally

generated

intangibles

44

45, 46

48, 54, 57, 63

Two alternatives

• Recognize both the intangible asset

and grant initially fair value or

• Recognize the asset at a nominal

amount

Measured at fair value unless

(a) the transaction lacks commercial

substance; or

(b) fair value of neither the asset

received nor the asset given up is

reliably measurable

Commercial substance present if

(a) risk, timing and amount of cash

flows of the asset received and

transferred are different; or

(b) the entity specific value of the

portion of the entity’s operation is

affected by the exchange

• All research costs are charged to

expense when incurred

• Development costs are capitalized

only after technical and commercial

feasibility of the resulting product

or service have been established

• Internally generated goodwill,

brands, mastheads, publishing titles,

customer lists, start up costs,

advertising costs, training costs and

relocation costs not recognized.

137


(vi) Past expenses

(vii) Subsequent

measurement

(viii) Cost model

(ix) Revaluation

model

(x) Useful life

(xi) Amortization

(a) Finite life assets

71

72

74

75, 85

88

97

Not to be recognized as part of the cost

of the intangible asset at a subsequent

date

Two alternatives

• Cost model

• Revaluation model

Asset to be carried at

• Cost

Less: Accumulated amortization and

impairment losses

• Asset to be carried at

Fair value

Less: Subsequent accumulated

amortization and impairment losses

• Revaluation model permitted only

when the asset has a quoted market

price in an active market (which is

rare)

• Regular revaluation to be carried

out

• Revaluation increases to be directly

credited to revaluation surplus

except to the extent that it reverses

a revaluation decrease previously

recognized in profit or loss

Can be –

• Finite

• Indefinite

• Amortized over useful life

• Conduct impairment testing when

indication exists

138


(b) Indefinite life 107 • Not to be amortized

• Review useful life to ensure

indefinite life still exists if not,

change if to finite life and account for

the change as a change in an

accounting estimate as per IAS 8

(c) Review of

amortization

period and method

for finite life assets

(xii) De-recognition

104

112, 113

• At least at each financial year end

• Changes to be treated as change in

accounting estimate as per IAS 8

• On disposal or when no future

economic benefits are expected from

its use or disposal

• Gain or loss to be recognized in

profit or loss

• Gain not to be treated as revenue

4. Disclosure

requirements

118, 122, 124,

126

• Disclose useful life or amortization

rates, amortization method, gross

carrying amount, accumulated

amortization and impairment losses

etc. for each class of asset

• Line items in statement of

comprehensive income where

amortization is included

• Basis for determining that an

intangible asset has an indefinite

useful life

• Additional disclosures in case of

revaluation

• Research and development

expenditure recognized as an expense

in the current period

139

IAS 39: Financial Instruments: Recognition and Measurement

IAS 39 establishes the basis for recognizing and measuring financial assets,

financial liabilities and some contracts to buy or sell nonfinancial items.


1. Objective 1 To lay down principles for recognizing

and measuring financial assets, financial

liabilities and some contracts to buy or

sell non-financial items

2. Scope 2 Applies to all types of financial

instruments except the following:

• Interests in subsidiaries, associates and

joint ventures accounted for under IAS

27, IAS 28 or IAS 31. However it

applies to derivative on an interest in a

subsidiary, associate or joint venture;

• Rights and obligations under lease to

which IAS 17 ‘Leases’ applies, subject

to certain exceptions;

• Employers rights and obligations

under employee benefit plans to which

IAS 19 applies;

• Contracts for contingent consideration

in a business combination;

• Rights and obligations under insurance

contracts;

• Financial instruments that meet the

definition of own equity under IAS 32

• Loan commitments subject to certain

exceptions

• Contracts between an acquirer and a

vendor in a business combination to

buy or sell an acquire at a future date;

140


• Financial instruments, contracts and

obligations under share based payment

transactions to which IFRS 2 applies

3. Key provisions

(i) Initial recognition

(ii) De-recognition

of a financial

asset

(iii) De-recognition

of financial

liability

(iv) Initial

measurement of

financial assets

and liabilities

(v) Classification

and subsequent

measurement of

financial assets

14

17

39

43

45, 46

A financial asset or a financial liability

to be recognized in the balance sheet

only when the entity becomes a party to

the contractual provisions of the

instrument.

Only when the contractual rights to the

cash flows from the financial asset

expire or when the entity transfers the

asset and the transfer qualifies for

derecognition.

Only when it is extinguished (when the

obligation specified in the contract is

discharged/cancelled/expired)

• At a fair value

• In case of a financial asset or a

financial liability not at fair value

through profit or loss, at

Fair value

(+) transaction costs directly

attributable to the acquisition or

issue of the financial asset or

financial liability

• Financial assets at fair value through

profit or loss

- measured at fair value

• Held to maturity investments (HTM)

- measured at amortized cost using

effective interest method

141


(vi) Classification and

subsequent

measurement of

financial

liabilities

(vii) Hedge

accounting

47

85-102

• Loans and receivables

- Measured at amortized cost

using effective interest method

• Available for sale (AFS) financial

assets

- measured at fair value

• Generally at original recorded

amount less principal repayments

and amortization. Three categories

of liabilities are measured at fair

value with value changes recognized

in profit or loss.

- derivative liabilities

- liabilities held for trading (short

sales); and

- any liabilities that the entity

designates, at issuance, to be

measured at fair value through

profit or loss

(a) Type of hedge relationship

i. Fair value hedge: if an entity

hedges a change in fair value of a

recognized asset or liability or firm

commitment, recognize the change

in fair values of both the hedging

instrument and the hedged item in

profit or loss when they occur;

ii. Cash flow hedge: if an entity

hedges changes in the future cash

flows relating to a recognized asset

or liability or a highly probable

forecast transaction, recognize the

142


change in fair value of the heading

instrument in other comprehensive

income until such time as those

future cash flows occur; and

iii. Hedge of a net investment in a

foreign entity treated as a cash

flow hedge.

(b) Hedge of foreign currency risk in a

firm commitment may be accounted

for either a fair value hedge or cash

flow hedge.

IAS 40: Investment Property

IAS 40 addresses the issue of accounting for real estate properties-building,

land, or both-that are held for the purpose of capital appreciation or rental income, or

both, and not for the purpose of using them internally in the production of goods or

services, commonly called plant assets, or for sale in the ordinary course of business

as part of its inventory. Such property should be labelled in the statement of financial

position as investment property. The valuation basis of such assets can either be at

cost, net of depreciation, or at fair value. The rental-producing property that is subject

to this standard can either be owned outright or leased by a lessee as a finance lease.


1. Objective 1 To prescribe the accounting treatment

for investment property and related

disclosure requirements

2. Scope

- Applies to

2

Recognition, measurement and

disclosure of investment property

143


- Does not apply

to

3, 4 • Matters covered in IAS 17 on ‘Leases’

• Biological assets related to agricultural

activity

• Mineral rights and mineral reserves


(i) Investment

property

(ii) Owner occupied

property

5

5

Land or building or part thereof (or

both) held by the owner or a lessee

under a finance lease, to earn rentals

and/or capital appreciation

Property held by the owner or a lessee

under a finance lease for use in the

production or supply of goods or

services or for administrative purposes

4. Key provisions

(i) Recognition

criteria

(ii) Measurement at

recognition

(iii) Measurement

after

recognition

(iv) Fair value model

16

20

30, 32A

35, 38, 53

(a) When it is probable that future

economic benefits associated with

the investment property will flow to

the entity; and

(b) Cost of the investment property can

be measured reliably

At cost (including transaction costs)

Two alternatives

• Cost model; or

• Fair value model

Chosen alternative to be applied to all

investment property of the entity

• Gain or loss arising from change in

fair value to be recognized in profit or

loss for the period in which it arises

• Fair value to reflect market conditions

at the end of the reporting period

144


(v) Treatment on

transfers from

‘investment

property’ to

‘inventories’ or

‘owner occupied

property’ or vice-

versa

57, 60, 62, 63

• If fair value model is used but when a

particular property is acquired, there is

clear evidence that the entity will not

be able to determine fair value on the

continuing basis, use cost model for

that property and continue to use const

model until disposal of the property

• Transfer from ‘investment property’ to

‘inventories’ should be made only

when there is a change in use,

evidenced by commencement of

development with a view to sale.

• Transfer to ‘owner occupied property’

should be made only when there is

change in use evidenced by

commencement of owner occupation

• On transfer, property’s deemed cost

for subsequent accounting to be its fair

value at the end of change in use.

• Upto the date when an owner occupied

property becomes an investment

property at fair value, depreciate the

property and recognize impairment

losses, if any. Any difference, on that

date, between the carrying amount of

the property as per IAS 16 and its fair

value to be treated in the same way as

a revaluation in accordance with IAS

16

• On transfer from ‘inventories’ to

‘investment property’ that will be

carried at fair value, any difference

145


(vi) Disposals

66

between the fair value of the property

at that date and its previous carrying

amount to be recognized in profit or

loss

• Investment property to be

derecognized on

(a) Disposal; or

(b) When the investment property is

permanently withdrawn from use

and no future economic benefits

are expected from its disposal

• Gains or losses to be recognized in

profit or loss in the period of

retirement or disposal

5. Disclosure

requirements

75-79 • Model used (cost or fair value)

• Methods and significant assumptions

used in determining fair value

• Amounts recognized in profit or loss,

etc.

IAS 41: Agriculture

The objective of IAS 41 is to stipulate the accounting treatment and

disclosures in the financial statements of operations relating to agricultural activity.


1. Objective - To prescribe the accounting treatment

and disclosures related to agricultural

activity

2. Scope

- Applies to

1

To account for the following provided

they relate to agricultural activity:

146


- Does not apply to

2

• Biological assets

• Agricultural produce at the point of

harvest

• Certain government grants

Land and intangible assets related to

agricultural activity

3. Key term defined

(i) Agricultural

activity

(ii) Agricultural

produce

(iii) Biological asset

(iv) Harvest

5

5

5

5

Management of the biological

transformation of biological assets for

sale into agricultural produce, or into

additional biological assets

Harvested product of the entity’s

biological assets

Living animals and plants

Detachment of produce from a

biological asset or the cessation of

biological asset’s life processes.

4. Key provisions

(i) Recognition

criteria

(ii) Measurement of

initial

recognition and

subsequent

reporting of

10

Only when the entity controls the asset

as a result of past events

• It is probable that future economic

benefits associated with the asset will

flow to the entity; and

• Fair value or cost of the asset can be

measured reliably

147


- Biological asset

- Agricultural

produce

(iii) Gains and losses

(iv) Inability to

measure fair

value reliably

(v) Government

grants

12

13

26, 28

-

34, 35

• Fair value

Less: Estimated point of sale costs

Unless fair value cannot be reliably

measured

• Fair value

Less: Estimated point of sale costs

• Fair value measurement stop at

harvest. Apply IAS 2 on

‘Inventories’ after harvest

• Report gain on initial recognition of

biological assets at fair value, and

changes in fair value of biological

assets during a period in profit or loss.

• Report gain on initial recognition of

agricultural produce at fair value in

profit or loss for the period in which it

arises

• If there is no active market at the time

of recognition in the financial

statements, and no other reliable

measurement method, then the cost

model is used for specific biological

asset. The biological asset is measured

at depreciated cost less any

accumulated impairment losses

• Report unconditional government

grants received in respect of biological

assets measured at fair value as

income when the grant becomes

receivable.

If such a grant is conditional

(including where the grant requires an

148


entity not to engage in certain

agricultural activity), recognize it as

income only when the conditions have

been met.

5. Disclosure

requirements

40-57 • Description of each group of

biological assets

• Carrying amount of biological assets

• Fair value of agricultural produce

harvested during the period

• Changes in fair value

• Methods and assumptions used for

determining fair value

• Financial risk management strategies

for agricultural activity, etc.

II.10 MAJOR DIFFERENCES BETWEEN INDIAN GENERALLY

ACCEPTED ACCOUTNING PRINCIPLES AND INTERNATIONAL

FINANCIAL REPORTING STANDARDS/INTERNATIONAL

ACCOUNTING STANDARDS

In this research, the researcher is using India for its study, therefore it is

important to understand the differences between IGAAP and IFRS/IAS. These

differences are tabulated as under.

Table II.10.i: Differences between IGAAP and IFRS/IAS

Subject IFRS/IAS IGAAP

Financial Statements

Components of

financial

statements

Two years’ consolidated

balance sheets, income

statements, cash flow

statements, changes in equity

and accounting policies and

Single-entity parent company

(standalone) should present two

years’ balance sheets, income

statements, cash flow statements,

and accounting policies and

149


notes need to be presented. In

limited circumstances or on

voluntary basis, equity may

present single-entity parent

company (standalone)

financial statements along with

its consolidated financial

statements.

notes. Public listed company is

additionally required to prepare

consolidated financial statements

along with the standalone


Balance Sheet IFRS does not prescribe a

particular format. A liquidity

presentation of assets and

liabilities is used, instead of

current/noncurrent

presentation, only when a

liquidity presentation provides

more relevant and reliable

information. Certain minimum

items are presented on the face

of the balance sheet.

Accounting standards do not

prescribe a particular format;

certain items must be presented

on the face of the balance sheet.

Formats are prescribed by the

Companies Act and other

industry regulations like

banking, insurance, etc

Income

Statement

IFRS does not prescribe a

standard format, although

expenditure is presented in one

of two formats (functions or

nature). Certain minimum

items must be presented on the

face of the income statement.

IGAAP does not prescribe a

standard format; but certain

income and expenditure items

are disclosed in accordance with

accounting standards and the

Companies Act. Industry-

specific formats are prescribed

by industry regulations

Statement of

recognized

income and

expense

(SORIE)/

A SORIE can be presented as a

primary statement, in which

case a statement of changes in

shareholder’s equity is not

presented. Alternatively it may

Not Required

150


Other

comprehensive

income and

Statement of

accumulated

other

comprehensive

income

be disclosed separately in the

primary statement of changes

in shareholder’s equity.

Statement of

changes in

share (stock)

holder’s equity

Statement shows capital

transactions with owners, the

movement in accounted profit

and a reconciliation of all other

components of equity. The

statement is presented as a

primary statement unless a

SORIE is presented as a

primary statement. In case

SORIE is presented as a

primary statement,

supplemental equity

information is provided in a

note.

No separate statement is

required. Changes in

Shareholder’s equity are

disclosed in separate schedules

of ‘Share capital’ and ‘Reserves

and surplus’.

Cash Flow

Statement

Cash flows from operating,

investing and financing

activities are classified

separately. Inflows and

outflows of cash and cash flow

statement. The cash flow

statement may be prepared

using the Direct or Indirect

method. The indirect method is

more common.

Cash flows from operating,

investing and financing activities

are classified separately. Inflows

and outflows of cash and cash

equivalents are reported in cash

flow statement. The cash flow

statement may be prepared using

the Direct or indirect method.

However, indirect method is

required for listed companies

151


and direct method for insurance

companies.

Cash and cash equivalents are

short-term, highly liquid

investments that are readily

convertible to know amounts

of cash and are subject to an

insignificant risk of changes in

value. An investment normally

qualifies as a cash equivalent

only when it has a maturity of

three months or less from its

acquisition date. Cash may

also include bank overdraft

repayable on demand but not

short-term bank borrowings;

these are considered to be

financing cash flows.

Cash and cash equivalents are

short-term, highly liquid

investments that are readily

convertible to known amounts of

cash and are subject to an

insignificant risk of changes in

values. An investment normally

qualifies as a cash equivalent

only when it has a maturity of

three months or less from its

acquisition date, bank overdrafts

are not included in cash and cash

equivalents; changes in the

balances of overheads are

classified as financing cash

flows, rather than being included

within cash and cash

equivalents.

Consolidated

financial

statements

Parent entities prepare

consolidated financial

statements that include all

subsidiaries. An exemption

applies to a parent that is itself

wholly owned or if:

• the owners of the minority

interests have been informed

about and do not object to

the parent not presenting

consolidated financial

statements, and the parent’s

Consolidated financials are

mandatory for public listed

companies, whereas optional for

other entities.

152


securities are not traded;

• it is not in the process of

issuing securities in public

securities markets; and

• the immediate or ultimate

parent publishes consolidated

financial statement that

comply with IFRS

Consolidated financial

statements are prepared using

uniform accounting policies

for all of the entities in a group

Consolidated financial

statements are prepared using

uniform accounting policies for

all of the entities in a group. If it

is not practicable to use uniform

accounting policies that fact

should be disclosed together

with the proportions of the items

to which different accounting

policies have been applied

The consolidated financial

statements of the parent and

the subsidiary are usually

drawn up at the same reporting

date. However, the

consolidation of the subsidiary

accounts can be drawn up at a

different reporting date

provided the difference

between the reporting dates is

no more than three months.

Adjustments are made for

significant transactions that

occur in the gap period.

The consolidation financial

statements of the parent and the

subsidiary are usually drawn up

at the same reporting date.

However, the consolidation of

subsidiary accounts can be

drawn up to a different reporting

date provided the difference

between the reporting dates is no

more than six months.

Adjustments are made for

significant transactions that

occur in the gap period

153


Business Combination

Types All business combinations are

acquisitions.

No comprehensive accounting

standards on business

combinations. All business

combinations are acquisitions;

except uniting of interest method

is used in certain amalgamations

when all the specific conditions

are met. Accounting would

differ for following: An entity

acquired and held as a

subsidiary; an acquisition by

way of amalgamation of entity; a

business acquisition (assets and

liabilities only).

Purchase

method values

on acquisition

Assets, liabilities and

contingent liabilities of

acquired entity are fair valued.

If control is obtained in partial

acquisition of a subsidiary, the

fair value of the assets,

liabilities and contingent

liabilities, including portion

attributable to the minority

(non-controlling) interest, is

recorded on consolidated

balance sheet. Goodwill is

recognized as the residual

between the consideration paid

and the parentage of the fair

value of the business acquired.

Liabilities for restructuring

Under IGAAP,

(a) On consolidation of an

acquired entity held as

subsidiary, the acquired assets

and liabilities are incorporated at

their existing carrying amounts

(after making adjustments to

eliminate conflicting accounting

policies);

(b) For amalgamation accounted

under the purchase method, the

acquired assets and liabilities are

incorporated at their existing

carrying amounts (after making

adjustments to eliminate

conflicting accounting policies)

or alternatively, the

154


activities are recognized only

when acquiree has an existing

liability at acquisition date.

Liabilities for future losses or

other costs expected to be

incurred as a result of the

business combination cannot

be recognized.

consideration is allocated to

individual identifiable assets and

liabilities at their fair value.

However a court order approving

an amalgamation may provide

different and/or additional

accounting entries; and

(c) On acquisition of a business,

the acquired assets and liabilities

are incorporated at their fair

value or the value of assets

surrendered. No separate

restructuring provision is

recognized on acquisition.

Purchase

method-

contingent

consideration

Included in cost of

combination at acquisition date

if adjustment is probable and

can be measured reliably.

Included in consideration if

payment is probable and an

amount can be reasonably

estimated

Purchase

method-

minority

interest at

acquisition

Where an investor acquires

less than 100% of a subsidiary,

the minority (non-controlling)

interests are stated on the

investor’s balance sheet at the

minority’s proportion of the

net fair value of acquired

assets, liabilities and

contingent liabilities assumed.

The minority interests are valued

at their historical book value.

Purchase

method-

goodwill and

intangible

assets with

Capitalized but not amortized.

Goodwill and indefinite-lived

intangible assets are tested for

impairment at least annually at

either the cash-generating unit

Goodwill arising on

amalgamation is amortized over

its useful life not exceeding 5

years unless longer period can be

justified. No specific guidance

155


indefinite

useful lives

(CGU) level or groups of

CGUs, as applicable.

exists for goodwill arising on

consolidation or on business

acquisitions (assets and

liabilities only); practice varies

with no amortization versus

amortization over its useful life

not exceeding 10 years.

Goodwill is reviewed for

impairment at the CGU level

whenever there is a trigger or

indication of impairment.

Intangibles assets are not

classified into indefinite useful

lives category. All intangible

assets are amortized over a

period not exceeding 10 years.

Purchase

method-

negative

goodwill

If any excess of fair value over

the purchase price arises, the

acquirer reassesses the

identification and

measurement of the acquiree’s

identifiable assets, liabilities

and contingent liabilities and

the measurement of the cost of

the combination. Any excess

remaining after reassessment is

recognized immediately in the

income statement.

Negative goodwill is termed as

capital reserve (recorded in

equity) and reduced from the

investment value. Capital reserve

is neither amortized nor

available for distribution as

dividends to the shareholders.

However, in case of an

amalgamation accounted under

the purchase method, the fair

value of intangible assets with

no active market is reduced to

the event of capital reserve, if

any, arising on the

amalgamation.

156


Purchase

method-

subsequent

adjustments to

fair values

Adjustment against goodwill to

the provisional fair values

recognized at acquisition are

permitted provided those

adjustments are made within

12 months of the acquisition

date. Adjustments made after

12 months are recognized in

the income statement.

No change is permitted, except

for certain deferred tax

adjustment on carry forward

losses or unabsorbed

depreciation not recognized on

amalgamation. It is permitted to

be recognized if it becomes

recognizable by the first annual

balance sheet date subsequent to

the amalgamation. All other

subsequent adjustments are

recorded in income statements.

Purchase

method-

disclosure

Disclosures include names and

descriptions of combining

entities, date of acquisition,

cost of combination, summary

of fair values and pre-

acquisition IFRS value of

assets and liabilities acquired,

impact on results and financial

position of acquirer, and

reasons behind the recognition

of goodwill.

Disclosures include names and

descriptions of combining

entities, effective date,

consideration (paid or

contingently payable), method of

accounting, amount of

goodwill/capital reserve and

period of amortization.

Uniting of

interests

method

Prohibited. Required for certain

amalgamations when all the

specified conditions are met.

Business

combinations

involving

entities under

common

control

Not specifically addressed.

Entities elect and consistently

apply either purchase or

pooling-of-interest accounting

for all such transactions.

No specific guidance. Normal

business combination accounting

would apply

157


Assets

Property plant

and equipment

Assets are carried at cost less

accumulated depreciation and

impairment. However,

revaluation at fair value is

permitted under the alternative

treatment. The revaluation

model should be applied to an

entire class of assets.

Assets are carried at historical

cost less accumulated

depreciation and impairment or

revalued amounts. Revaluations

are permitted. On revaluation, an

entire class of assets is revalued

or a section of assets for

revaluation is made on a

systematic basis. However,

revaluation should not exceed

the recoverable amount of the

asset.

Intangible

Assets

Intangible assets subject to

amortization are carried at

historical cost less

accumulated

amortization/impairment, or at

fair value less subsequent

amortization/impairment.

Intangible assets not subject to

amortization are carried at

historical cost unless impaired.

Subsequent revaluation of

intangible assets to their fair

value is based on prices in an

active market. Evaluations are

performed regularly and at the

same time for the entire class

of intangible assets if an entity

adopts this treatment

(extremely rare in practice).

All intangible assets are carried

at amortized cost less

impairment. Revaluation is not

allowed.

158


Intangible assets with definite

lives are amortized over the

useful life. Intangibles

assigned an indefinite useful

life are not amortized but

reviewed at least annually for

impairment. There is no

presumed maximum life.

The depreciable amount of an

intangible asset should be

allocated on a systematic basis

over the best estimate of its

useful life. There is a rebuttable

presumption that the useful life

of an intangible asset will not

exceed ten years from the date

when the asset is available for

use. In cases where there is

persuasive evidence that the

useful life of an intangible asset

is longer than ten years, the

enterprise:

(a) amortizes the intangible asset

over the best estimate of its

useful life;

(b) estimates the recoverable

amount of the intangible

asset at least annually in

order to identify any

impairment loss and

(c) discloses the reasons why the

presumption is rebutted and

the factor(s) that played a

significant role in

determining the useful life of

the asset

However the useful life of an

intangible asset may be very

long but it is always finite.

159


Impairment of

assets

Impairment is assessed on

discounted cash flows. If

impairment is indicated, assets

are written down to higher of

fair value less costs to sell and

value in use based on

discounted cash flows.

Reversal of impairment losses

is required in certain

circumstances, except for

goodwill.

Impairment is assessed on

discounted cash flows. If

impairment is indicated, assets

are written down to higher of fair

value less costs to sell and value

in use based on discounted cash

flows. Reversal of impairment

losses for goodwill is required in

certain circumstances.

Financial

Assets

Measurement of assets

depends on classification of

investment-if held to maturity

or loans and receivables, they

are carried at amortized cost;

others (i.e. financial assets at

fair value through profit or loss

or held for trading or available

for sale) at fair value.

Unrealized gains/losses i.e.

changes in fair value of

financial assets on fair value

through profit or loss

classification (including held

for trading) is recognized in

income statement. Unrealized

gains and losses i.e. changes in

fair value on available-for-sale

investments are recognized in

equity.

Investments are classified as

long term investments and

current investments. Long-term

investments are carried at cost

less impairment. The carrying

amount for current investments

is the lower of cost and fair

value. Any reduction in carrying

amount and any reversals are

charged or credited to the

income statement. Unrealized

losses are charged to the income

statement. Unrealized gains are

not recorded except to restore

previously recorded unrealized

losses that may have reversed.

160


Liabilities

Provisions The amount recognized as a

provision is the best estimate

of the expenditure required to

settle the present obligations at

the balance sheet date. The

anticipated cash flows are

discounted using a pre-tax

discount rate (or rates) that

reflect(s) current market

assessments of the time value

of money and those risks

specific to the liability if the

effect is material. If a range of

estimates is predicted and no

amount in the range is more

likely than any other amount in

the range, the ‘mid-point’ of

the range is used to measure

the liability.

The amount recognized as a

provision is the best estimate of

the expenditure required to settle

the present obligation at the

balance sheet date. Discounting

is not required. In practice

provisions are measured by

using a substantial degree of

estimation.

Contingencies Contingent liabilities are

disclosed unless the probability

of outflows is remote.

Contingent asset is recognized

when the realization of the

associated benefit, such as an

insurance recovery, is virtually

certain.

Contingent liabilities are

disclosed unless the probability

of outflows is remote.

Contingent asset is recognized

when the realization of the

associated benefit is virtually

certain. However certain

disclosures as specified under

IFRS are not required.

Deferred

Income Tax

Deferred tax assets and

liabilities are recorded for the

tax effect of temporary

Deferred taxes are required to be

provided for the tax effect of

timing differences which are the

161


differences-i.e. the difference

between carrying amount and

tax base of assets and

liabilities.

differences between taxable

income and accounting income

for a period that originate in one

period and are capable of

reversal in one or more

subsequent periods.

A deferred tax asset is

recognized if it is probable

(more likely than not) that

sufficient taxable profit will be

available against which the

temporary difference can be

utilized.

Deferred tax assets is recognized

(a) if realization is virtually

certain for entities with tax

losses carry forward, whereas

(b) if realization is reasonably

certain for entities with no

tax losses carry forward.


liabilities are measured using

the tax rates and tax laws that

have been enacted or

substantively enacted.

Deferred tax assets and liabilities

are measured using the tax rates

and tax laws that have been

enacted or substantively enacted.


liabilities are classified net as

non-current on the balance

sheet.

Deferred Tax asset, net is

disclosed after “Net current

assets’; whereas deferred tax

liability, net is disclosed after

unsecured loans.

Fringe Benefit

Tax

It is included as a part of

related expense (fringe benefit)

which gives rise to the

incurrence of the tax.

It is disclosed as a separate item

after ‘profit before tax’ on the

face of the income statement.

Expenses

Depreciation The depreciable amount is

allocated on a systematic basis

to each accounting period over

its useful life, reflecting the

The depreciable amount is

allocated on a systematic basis to

each accounting period over its

useful life, reflecting the pattern

162


pattern in which the entity

consumes the asset’s benefits.

in which the entity consumes the

asset’s benefits.

However, depreciation is

generally charged at rates

prescribed in the Companies

Act. These rates are the

minimum rates, and companies

are permitted to charge

depreciation at higher rates, in

order to write off the cost of

assets over their useful lives, if

shorter.

Employee

Benefits-

Defined

Benefit Plans

Projected unit credit method is

used to determine benefit

obligation and record plan

assets at fair value. Actuarial

gains and losses can be

deferred.

With the adoption of AS 15

(revised), Projected unit credit

method is used to determine

benefit obligation and record

plan assets at fair value.

Actuarial gains and losses are

recognized immediately in the

income statement.

Employee

Benefits-

Compensated

expenses

It qualifies as short-term or

other long-term employee

benefits. The expected cost of

accumulating short-term

compensated absences is

recognized on accrual basis.

Liability for long-term


measured using Projected unit

credit method.

With the adoption of AS 15

(revised), it qualifies as short-

term or other long-term

employee benefits. The expected

cost of accumulating short-term


recognized on accrual basis.

Liability for long-term


measured using Projected unit

credit method.

163


Employee

Share

Compensation

The fair value of shares and

options awarded to employees

is recognized over the period

to which the employees’

services relate. The award is

presumed to be for past

services if it is unconditional

without any performance

criteria.

The fair value of shares and

options awarded to employees is

recognized over the period to

which the employees’ services

relate. However the SEBI

guideline requires that the cost

be recognized and amortized on

a straight line basis over the

vesting period.

For equity-settled share-based

payment transactions, the

goods or services received and

the corresponding increase in

equity are measured at the fair

value of the goods or services

received. If the entity cannot

estimate reliably the fair value

of the goods or services

received, as will be the case

with employee services, it

should measure their value and

the corresponding increase in

equity by reference to the fair

value of the equity instruments

granted. For cash-settled share-

based payment transactions,

the goods or services acquired

and the liability incurred are

measured at the fair value of

the liability.

Entities may follow either an

intrinsic value method of a fair

value method. The Guidance

Note prefers fair value method.

Under the intrinsic value

method, the compensation cost is

the difference between the

market price of the share at the

grant date and the exercise price.

The fair value method is based

on the fair value of the option at

the grant date. This is estimated

using an option pricing model. If

an entity follows intrinsic

method, the Guidance note

recommends disclosing the

impact on the net results and

earnings per share as if the fair

value method was applied.

164


Dividends Dividends on ordinary equity

shares are presented as a

deduction in the statement of

changes in shareholders’

equity in the period when

authorized by shareholders.

Dividends are accounted in the

year when declared.

Dividends on ordinary equity

shares are presented as a

appropriation to the income

statement. Dividends are

accounted in the year to which it

pertains.

Derivatives and Hedging

Derivatives

and other

financial

instruments-

cash flow and

fair value

hedges

Derivatives and hedge

instruments are measured at

fair value; changes in fair

value are recognized in income

statement except for effective

portion of cash flow hedges,

where the changes are deferred

in equity until effect of

underlying transaction is

recognized in income

statement. Gains/losses from

hedge instruments that are

used to hedge forecasted

transactions may be included

in cost of non-financial

asset/liability (basis

adjustment).

No comprehensive guidance

except for:

(a) Forward exchange contracts

intended for speculative or

trading are carried at fair

value; whereas those not held

for speculative or trading, the

premium or discount is

amortized over life of the

contract and the exchange

difference is recognized in

income statement.

(b) Equity index futures and

options and equity stock

options are carried at lower

of cost or market;

(c) Forward exchange contract to

hedge the foreign currency

risk of a firm commitment or

a highly probable forecast

transaction would be

accounted similar to foreign

exchange contracts not held

165


for speculation or trading.

Industry specific guidance on

certain instruments, for

example, banking industry

Derivatives

and other

financial

instruments-

net investment

hedges

Effective portion of

gains/losses on hedges on net

investments is recognized in

equity; ineffective portion is

recorded in income statement.

Gains/losses held in equity are

transferred to income

statement on disposal or partial

disposal of investment.

No specific guidance.

Other Accounting and reporting topics

Earnings per

share-diluted

Weighted average potential

dilutive shares are used as

denominator for diluted EPS.

‘Treasury share’ method is

used for share

options/warrants.

Weighted average potential

dilutive shares are used as

denominator for diluted EPS.

‘Treasury share’ method is used

for share options/warrants except

in certain circumstances advance

share application money

received is treated as dilutive

potential equity shares.

Related-party

transactions

Related parties are determined

by the level of direct or

indirect control, joint control

and significant influence of

one party over another or

common control by another

entity.

Related parties are determined

by the level of direct or indirect

control, joint control and

significant influence of one party

over another or common control

by another entity; however the

determination may be based on

legal form rather than substance.

Hence the scope of parties

166


covered under the definition of

related party could be less than

under IFRS or U.S. GAAP.

Name of the parent entity is

disclosed and, if different, the

ultimate controlling party,

regardless of whether

transactions occur is disclosed.

For related-party transactions,

nature of relationship (seven

categories), amount of

transactions, outstanding

balances, terms and types of

transactions are disclosed.

Exemption is given only to

intra-group transactions in

consolidated accounts.

Name of the parent entity is

disclosed and, if different, the

ultimate controlling party,

regardless of whether

transactions occur is disclosed.

For related-party transactions,

nature of relationship (seven

categories), amount of

transactions, outstanding

balances, terms and types of

transactions are disclosed.

Exemption is given only to intra-

group transactions in

consolidated accounts. However,

certain explicit exemptions are

available for disclosures.

Exemption for certain SMEs

having turnover or borrowings

below certain threshold but there

is no exemption for separate

financial statements of

subsidiaries.

Segment

reporting

Applicable to listed entities

and entities in the process of

listing. Non-listed entities may

choose full compliance.

Applicable to listed entities and

entities in the process of listing.

Non-listed entities may choose

full compliance.

Reporting is based on business

and geographical segments-

one as primary format, the

Reporting is based on business

and geographical segments-one

as primary format, the other as

167


other as secondary. Certain

additional disclosure

requirements regarding

enterprise’s share of profit or

loss of associates and joint

ventures regarding restatement

of prior year information.

secondary. The choice will

depend on the impact on

business risks and returns. The

secondary format requires less

disclosure.

A segment identified as a

reportable segment in the

immediately preceding period

on satisfying the relevant 10%

threshold shall be reportable

segment in the current period

also if the management judges

it to be of continuing

significance.

Identification of segment is

based on profile of risks and

returns and internal reporting

structure. This reporting is

mandatory without considering

the management’s judgement.

Segment information should be

prepared in conformity with

the accounting policies

adopted for preparing and

presenting the financial

statements of the enterprise as

a whole.

Same as IFRS.

Overall, the findings in literature are consistent with the view that accounting quality

is determined largely by both accounting standards and reporting incentives and

institutional environments (Kabir et al. 2010) of that particular country.

168

CHAPTER III

RESEARCH DESIGN

AND METHODOLOGY

169

III.0 PURPOSE OF THE STUDY

The basic purpose of the research is to evaluate the impact on economic

activities of Indian companies of disclosing their accounting information under IFRS

voluntarily. It is understood that better disclosures reduce the estimation risks of

future earnings, thus reducing the cost of information asymmetry that occurs due to

adverse selection and risk premium. This in turn reduces the financial risks faced by

the companies and increases the economic activities like investments, diversifications,

mergers and acquisitions and other key functions of finance.

III.1 RESEARCH METHODOLOGY

The research investigates the impact on economic activities due to voluntary

adoption of IFRS by Indian companies. Even though IFRS adoption is still not

mandatory in India, some of the companies have adopted it voluntarily. Normally,

companies adopt IFRS in either of the following two types:

a) Separate reporting: Separate reporting means companies publish two different

accounting statements one in IGAAP and other in IFRS.

b) Reconciliation statements: Reconciliation statements refer reporting which has

separate notes and deferential statements between IGAAP and IFRS.

Therefore, the researcher aims to study and compare the above annual

reportings and statements of the sample Indian companies. The design of study, data

collection and analyses are discussed below.

III.1.i Study Design

Currently, Indian companies follow Indian Generally Accepted Accounting

Principles (IGAAP). It has been proposed to adopt IFRS from April 1, 2012 in a

phased manner. However, there are some companies that have voluntarily adopted

IFRS largely from the financial year 2007. They have done to be on par with

170

international standards, to raise money from abroad and benefit from associated

economic activities with disclosures under IFRS. Hence, the study shows how IFRS

has impacted the various economic benefits of these companies. These companies are

mostly the most actively traded in the exchanges. Therefore, companies with market

capitalization of minimum Rs 500 million are taken as the threshold limit. Further, to

empirically test the hypotheses on economic consequences of IFRS adoption by these

companies, t-test for two sample means differences are used.

III.1.ii Data Collection

For sample selection for the study, the researcher looked at the list of Indian

companies that issued Global Depository Receipts (GDRs) in European Union. There

were a total of 172 Indian companies whose GDRs are listed on Luxembourg Stock

Exchange. These companies were bound to report their financial statements in IFRS

also because European Union has mandated IFRS reporting from 2007.

The researcher then looked at the websites of each of 172 companies to locate

the annual reports in Indian Generally Accepted Accounting Principles and IFRS. The

criteria were to have IFRS reporting for the past four years that is from the year 2007-

08, because European Union had mandated IFRS in 2007. This led to the final sample

size of four Indian companies that reported accounts in IFRS for the past four years

from 2007-08 to 2010-11 along with Indian Generally Accepted Accounting

Principles. Majority of the companies were dropped due to non-availability of IFRS

accounts on their website. Some of the companies assured IFRS commitment once

made mandatory in India. This lead to the final sample size of four Indian companies

with financial accounts in Indian system and voluntarily in IFRS for four years period

from 2007-08 to 2010-11.

171

II.1.iii Companies under Study

Based on the data collection, the researcher looked at the list of Indian

companies that issued Global Depository Receipts (GDRs) in European Union,

leading to the final sample size of four Indian companies that reported accounts in

IFRS for the past four years from 2007-08 to 2010-11 along with Indian Generally

Accepted Accounting Principles. These companies are:

1) Dabur India Ltd,

2) Infosys Ltd,

3) Noida Toll Bridge Co. Ltd, and

4) Rolta India Ltd

III.1.iv Tools for Collecting Data and Information

The researcher has used financial information from annual reports, reporting

statements of the sample companies for data collection. As the IFRS is voluntarily

adopted, companies report their financial statements using both IGAAP and IFRS

accounting principles. This helped in collecting data for two different sets, one for

IGAAP and the other for IFRS for a period of four years each from 2007-08 to 2010-

11. The researcher has hand-picked data from each of the annual reports, both IGAAP

and IFRS, of the four sample companies.

III.1.v Financial Matrix for Data Analysis and Inference

The data for the four companies for four years are collected for each parameter

as under:

a) To test for financial risks, the researcher uses collected data for liquidity (quick

ratio), profitability (return on equity ratio), leverage (gearing ratio) and market

based parameter (price earnings ratio).

172

b) To test for investment activities, the researcher uses collected data for

investment in fixed assets (actual value), cash flows in investments (actual

value) and return on assets (ratio between total assets and net income).

c) To test for mergers and acquisition activities, the researcher uses collected data

for diluted EPS (actual value), equity ratio (ratio between total owners equity

and total assets) and operating risk (fixed asset turnover ratio).

d) To test for diversification activities, the researcher uses collected data for

growth (sales growth) and operating cash flows (actual value).

For certain data in absolute terms, necessary logarithmic transformations were

done. When data on variables are collected, there are two sets of information, one for

IGAAP and other for IFRS for four years each. With the given two samples, t-

statistics is used for hypotheses testing at 5% level of significance.

III.1.vi Graphical Presentation

Based on the t-test, the researcher has diagrammatically depicted the critical

and acceptance areas under normal distribution under one or two-tail test, as relevant,

for testing the null hypotheses during analysis and interpretation.

173

CHAPTER IV

COMPANIES

UNDER STUDY

174

IV.0 ACCOUNTING REGULATIONS AND IFRS REPORTING IN INDIA

The Council of the Institute of Chartered Accountants of India (ICAI)

constituted the Accounting Standards Board (ASB) on April 21, 1977, to formulate

Accounting Standards applicable to Indian enterprises. Initially, the Accounting

Standards (ASs), applicable to Indian enterprises, were recommendatory in nature.

After gaining sufficient experience, the Council of the Institute gradually started

making the Accounting Standards mandatory for its members, that is, requiring the

members to report on whether an enterprise subject to audit had followed the

mandatory ASs or not.

Currently, the ASB of the ICAI endeavours to formulate Indian Accounting

Standards based on the IFRSs. However, while formulating some of the ASs, the ASB

has deviated from IFRS keeping in view the local conditions including legal and

economic environment. The said endeavour has been acknowledged in the Preface to

the Statement of Accounting Standards, issued by the ICAI:

“The ICAI, being a full-fledged member of the International Federation of

Accountants (IFAC), is expected, inter alia, to actively promote the International

Accounting Standards Board’s (IASB) pronouncement in the country with a view to

facilitate global harmonization of accounting standards. Accordingly, while

formulating the Accounting Standards, the ASB will give due consideration to

International Accounting Standards (IASs) issued by the International Accounting

Standards Committee (predecessor body of IASB) or International Financial

Reporting Standards (IFRS) issued by the IASB, as the case may be, and try to

integrate them, to the extent possible, in the light of the conditions and practices

prevailing in India.”

175

Apart from the ICAI ensuring compliance with IFRS to the extent possible,

the National Advisory Committee on Accounting Standards (NACAS) constituted by

the Central Government for recommending Accounting Standards to the Government,

while reviewing the ASs issued by the ICAI, considers the deviations in the ASs, if

any, from the IFRSs and recommends the revisions to the ICAI in the ASs wherever it

considers that the deviations are not appropriate.

In formulating the India Accounting Standards the departure from the IFRSs is

due to unavoidable reasons as discussed below:

1. Maintain consistency with the legal and regulatory requirements: For

example, the definition of “control” in AS-21 ‘Consolidated Financial

Statements’ is in line with the requirements of the Indian Companies Act 1956,

(the “Companies Act”) while the same in IAS-27 ‘Consolidated and Separate

Financial Statements’ is different. However, recent Accounting Standards being

issued by the ICAI are in line with IFRS even though they do not currently

comply with the local regulations. For example, AS-31 ‘Financial Instruments:

Presentation’. However, it is also provided that until law is amended, the existing

legal provisions should comply with.

2. Economic environment: IFRS advocate the use of fair values, but this approach

had found few takers in India due to the fact that Indian markets were not yet

fully geared up to provide reliable fair values on measurement of various assets

and liabilities. This has led to difference between the methods used for

‘Valuation of Investments’ in AS-13 as compared to the valuation of investments

under IAS-39.

3. Level of preparedness: Adopting IFRSs verbatim would have caused

unnecessary hardship to industry. For example, voluntary retirement payments

176

made to as per AS-15 ‘Employee Benefits’ except that the expenditure so

deferred cannot be carried forward to accounting periods commencing on or after

April 1, 2010. This concession was granted keeping in view the fact that the

Indian industry was undergoing a structural change at the time when the standard

was introduced. There is no such provision in IAS-19.

The Guidance Notes are also issued by the ICAI to cover issues that not

covered by the ASs.

IV.1 LEGAL RECOGNITION FOR ACCOUNTING STANDARDS

A. Companies Act

The legal recognition to the ASs was accorded for companies in the

Companies Act, 1956, by the introduction of section 211(3C) though the Companies

(Amendment) Act, 1999, whereby it is required that the companies shall follow the

Accounting Standards notified by the Central Government on a recommendation

made by the NACAS constituted under section 210A of the said Act. The

Government of India, Ministry of Companies Affairs, now Ministry of Corporate

Affairs, has issued a notification recommended by the ICAI, which have come into

effect in respect of accounting periods commencing on or after the aforesaid date with

the publication of these Accounting Standards in the Official Gazette. These

Standards are issued under the Companies (Accounting Standards) Rules, 2006. The

Accounting Standards notified by the Government are virtually identical to the

Accounting Standards issued by ICAI. Certain relaxations have been given to small

and medium sized companies (SMCs) in the aforementioned rules. As per the rules, a

SMC means, a company:

1. whose equity or debt securities are not listed or not in the process of listing on

any stock exchange, whether in India or outside India;

177

2. which is not a bank, financial institution or an insurance company;

3. whose turnover (excluding other income) does not exceed Rs fifty crores in the

immediately preceding accounting year;

4. which does not have borrowing (including public deposits) in excess of Rs ten

crores at any time during the immediately preceding accounting year; and

5. which is not a holding or subsidiary company of a company which is not a small

and medium- sized company.

A company shall qualify as a SMC, if the conditions mentioned therein are

satisfied as at the end of the relevant accounting period. Accounting Standards 30, 31

and 32 issued by the ICAI have not yet been notified by the NACAS.

B. Reserve Bank of India

The Reserve Bank of India (RBI), being the regulator of banks in India,

requires all the banks, through its circulars/guidelines to prepare the financial

statements in compliance with Accounting Standards issued by the ICAI.

C. Insurance Regulatory and Development Authority (IRDA)

The Insurance Regulatory and Development Authority (IRDA), which

regulates the financial reporting practices of Insurance Companies in India under the

Insurance Regulatory and Development Authority Act, 1999, through IRDA

(Preparation of Financial Statements and Auditor’s Report of the Insurance

Companies) Regulations, 2002, requires Insurance Companies to comply with the

Accounting Standards issued by the ICAI.

IV.1.i Presentation of Financial Statements

The format of IGAAP financial statements for corporates is driven by the

requirements of Schedule VI to the Companies Act, 1956 and other regulations like

Schedule III to the Banking Regulation Act, 1949 (for banks), the regulations issued

178

by the IRDA (for Insurance Companies) and the SEBI guidelines for Mutual Funds

together with the ASs notified under the Companies (Accounting Standards) Rules,

2006.

The components of financial statements under IGAAP are: (a) a balance sheet;

(b) a statement of profit and loss; (c) a cash flow statement; and (d) notes to accounts

including a summary of significant accounting policies.

Schedule VI to the Companies Act, 1956 prescribes the format in which the

balance sheet is to be prepared by corporate entities and the disclosures to be made in

the balance sheet and profit and loss account. Additional disclosures specified in the

Accounting Standards are made in the notes to accounts or in the schedules, unless

required to be disclosed on the face of the financial statements.

Keeping in mind the changes in the global accounting scenario and need for

more readable, useful, transparent and user friendly accounts, the Ministry of

Corporate Affairs requested the ICAI to suggest a revised Schedule VI. After

considering the best global practice, the study group of the ICAI recommended the

draft of the Simplified Schedule VI (for Non-SMCs) and Saral Schedule VI (for

SMCs). The Corporate Laws Committee of the ICAI considered the draft of both the

Schedules and finalized the same after the comment of the Ministry of Corporate

Affairs and other specified bodies for comments.

AS-1 ‘Disclosure of Accounting Policies’ is also currently under revision to

bring it in line with IAS-1. The Exposure Draft of the revised AS-1 has already been

released by the ICAI.

179

IV.2 CONVERGENCE WITH IFRS

In October 2007, the Institute of Chartered Accountants of India (ICAI) issued

a concept paper on the convergence with IFRSs in India (the concept paper) where it

has expressed that IFRSs should be adopted for the public interest entities such as

listed entities, banks and insurance entities and large-sized entities from the

accounting periods beginning on or after April 1, 2012. On February 5, 2009, the

Technical Directorate of the Institute of Chartered Accountants of India hosted on its

website an announcement as regards the status of the convergence exercise in terms of

liaisoning with the various regulators for changes in regulations and formulation of

Standards.

The Ministry of Corporate Affairs has issued a press release on January 22,

2010 as per which, the Core Group, constituted by the Ministry of Corporate Affairs

for convergence of Indian ASs with IFRS from April, 2012, agreed that in view of the

roadmap for achieving convergence, there will be two separate sets of Accounting

Standards under section 211(3C) of the Companies Act, 1956.

The first set would comprise the Indian ASs converged with IFRSs which

shall be applicable to the specified class of companies.

The second set would comprise the existing Indian ASs and would be

applicable to other companies, including SMCs.

The first set of Accounting Standards (i.e. converged accounting standards)

will be applied to specified class of companies in phases:

Phase-1: The following categories of companies will convert their opening balance

sheets as on April 1, 2012, if the financial year commences on or after April 1, 2012

in compliance with the notified accounting standards which are convergent with

IFRS. These companies are:

180

a. Companies which are part of the National Stock Exchange (NSE)-Nifty 50

b. Companies which are part of Bombay Stock Exchange (BSE)-Sensex 30

c. Companies whose shares or other securities are listed on stock exchange

outside India

d. Companies, whether listed or not, which have net worth in excess of Rs 1,000

crores.

Phase-2: The companies, whether listed or not, having a net worth exceeding Rs 500

crores but not exceeding Rs 1,000 crores will convert their opening balance sheet as

on April 1, 2013, if the financial year commences on or after April 1, 2013 in

compliance with the notified accounting standards which are convergent with IFRS.

Phase-3: Listed companies, which have a net worth of Rs 500 crores or less will

convert their opening balance sheet as on April 1, 2014, if the financial year

commences on or after April 1, 2014, whichever is later, in compliance with the

notified accounting standards which are not converged with IFRS.

When the accounting year ends on a date other than March 31, the conversion

of the opening Balance Sheet will be made in relation to the first Balance Sheet which

is made on a date after March 31.

Companies which fall in the following categories will not be required to

follow the notified accounting standards which are converged with IFRS (though they

may voluntarily opt to do so) but need to follow only the notified accounting

standards which are not converged with IFRS. These companies are:

a. Non-listed companies which have a net worth of Rs 500 crores or less and

whose shares or other securities are not listed on Stock Exchange outside India.

b. Small and Medium Companies (SMCs).

181

Separate roadmap for banking and insurance companies was submitted by the

Sub-Group 1 in consultation with the regulators concerned on February 28, 2010.

The difference between IFRS and IGAAP, as in Table II.10.i, will continue to

exist even after convergence with IFRS in case of companies which are not required

to follow notified accounting standards converged with IFRS and, therefore, follow

notified accounting standards not converged with IFRS. Hence, wherever it is stated

that difference between IGAAP and IFRS GAAP are eliminated in exposure drafts of

revised standards, such statement is relevant only for companies which are required to

follow notified accounting standards converged with IFRS.

IV.2.i Applicability of IFRS to Small and Medium Size Entities

Once the revised/new Indian Accounting Standards are issued in line with

IFRSs, a question arises regarding the applicability of these Standards to the entities

which are not required to follow the notified accounting standards which are

converged with IFRS. The ICAI has taken a view which is similar to that by the

IASB, i.e. the requirements to comply with IFRS or converged Indian Accounting

Standards would be too voluminous for small and medium sized entities; hence a

separate Standard would be formulated for these entities.

The IASB has issued the IFRS for SMEs in July 2009. The ICAI would

examine whether this IFRS for non-publicly accountable entities should be adopted in

toto or with suitable modifications.

182

IV.3 COMPANIES UNDER STUDY

Based on the methodology mentioned in Chapter III, data is collected from the

sample of four Indian companies. The following table presents concise information

about these four companies.

Table IV.3.i: Information about the Indian companies selected for study

Particulars Dabur India

Ltd

Infosys Ltd Noida Toll

Bridge Co. Ltd

Rolta India

Ltd

Date of

incorporation

September 16,

1975 July 2, 1981 April 8, 1996

June 27,

1989

Public issue 1994 1992 1999 1990

Face value of

equity share Re 1 Rs 5 Rs 10 Rs 10

Listed

mainly at

BSE, NSE,

GDRs at EU

BSE, NSE,

NASDAQ

BSE, NSE,

London

BSE, NSE,

London,

Singapore

Chairman Anand Burman K. V.

Kamath R. K. Bhargava K. K. Singh

Category FMCG Computer-

Software Infrastructure Diverse IFRS also From 2007 From 2007 From 2007 From 2007

A brief description about each company is discussed below to understand

about their history, background, promoters, growth factors, joint ventures,

acquisitions and other activities.

IV.3.i Dabur India Ltd

a) History and background:

Dabur India Limited (DIL) was incorporated on September 16, 1975 for

manufacture of high-grade edible and industrial guar-gum powder and its

sophisticated derivatives. It came with its public issue in 1994. The face value of

183

company’s share was Re. 5. It was listed on BSE, NSE and also raised capital through

Global Depository Receipts (GDRs) from European markets. In addition to IGAAP,

the company is also reporting its financials in International Financial Reporting

Standards from the financial year 2007. CRISIL assigned CRISIL GVC LEVEL 2

rating for governance and value creation practices of the company. As a reflection of

its constant efforts at achieving superior quality standards, Dabur became the first

Ayurvedic products company to get ISO 9002 certification. The Chairman and

Managing Director of the company is Shri Anand Burman. Burman family handed

over the management of the company to professionals in the year 1998.

b) Activities and product-lines:

Today, it is one of the leading FMCG companies in India with a legacy of

quality and experience built over the years. It is India’s most trusted name and the

world’s largest Ayurvedic and Natural Health Care Company. The Company’s FMCG

portfolio includes five flagship brands with distinct brand identities consisting

(1) Dabur as the master brand for natural healthcare product, (2) Vatika for premium

personal care, (3) Hajmola for digestives, (4) Real Fruit for fruit-based drinks and (5)

Anmol for affordable personal care products.

The company’s expansion plans were in a phased manner. In 1978, it launched

its popular Hajmola tablet as a digestive aid. In 1979 Dabur Research Foundation and

commercial production plant at Sahibabad were set up. In 1988, the company

launched pharmaceutical medicines and in 1989 it launched Hajmola Candy-

children’s product. During the year 1992, a new range of coconut oil under the brand

name Anmol was launched. The company developed Dab 10, an intermediate for anti-

cancer drug namely Taxol. In 1994, the company entered into oncology segment.

184

During the year 1995, in addition to the existing products, the company had

exported products like an improved version of Chyawanprash. The company entered

into food business with the launch of Real Fruit Juice in the year 1996, the first local

brand of 100% pure natural fruit juices made as per International standards. In 1997,

the company set up a new manufacturing unit with a high degree of automation at

Baddi (Himachal Pradesh) to produce company’s well-known brands viz.

Chyawanprash, Janma Ghunti, Ayurvedic Oils and Asva-Arishtas.

During the year 2000, Dabur launched Efarelle Comfort, a natural menstrual

pain reliever along with plain isabgol husk under the brand name Nature Care. With

the setting up of Dabur Oncology sterile cytotoxic facility, the company gained entry

into the highly specialized area of cancer therapy in 2001.

c) Investment activities:

The company had entered into a joint venture agreement with M/s

Guldenhorst BV Netherland to form a company for manufacture and marketing of all

types of bubble gum, chewing gum, toffees, chocolate, cocoa related products and

sugar based spreading creams. The company had signed a memorandum of

understanding with Osein International Ltd in 1994 for manufacture of biscuits,

snack, foods and other products in India. In 1998, Dabur signed a joint venture with

Bongrain International SA of France to form a new company under the name of

Dabon International Ltd. After a year, in 1999, the company entered into an

agreement with its Spanish partner Agrolimen to offload its 49 per cent stake in the

joint venture company General De Confiteria India Ltd in favour of an Agrolimen

group company. In the year 2003, the company made its tie up with Free Markets Inc.

for using leading edge technologies to execute online markets for its procurement

185

needs. In 2006, the company incorporated one subsidiary company under the name

Asian Consumer Care Pakistan Ltd. to sell FMCG products in Pakistan.

d) Diversification, mergers and acquisitions activities:

In the year 2003, the company had demerged its pharmaceuticals business

from the FMCG business into separate company as part of plans to provide greater

focus to both the business as. In 2004, it tied up with the Government of Uttaranchal

for cancer drug. It acquired a Nigerian company called African Consumer Care Ltd in

2004. During the year 2005, as part of the inorganic growth strategy, Dabur India

acquired Balsara’s Hygiene and Home products business, a leading provider of Oral

care and household care products in the Indian market for the consideration of Rs 143

crore all cash deal. In the year 2006, Panadensa Foods Ltd was amalgamated with

Dabur Foods Ltd. Besta Cosmetic Ltd was amalgamated with the company with effect

from April 1, 2006. Dabur Foods Ltd was amalgamated with the company with effect

from April 1, 2007 to extract synergies and unlock operational efficiencies. The

integration also helped the company to sharpen focus on the high growth business of

foods and beverages, and enter newer product categories in this space.

e) Other activities:

The company forayed into the organized retail business through its wholly

owned subsidiaries, H&B Stores Ltd during the year 2007. It entered into an

agreement to partner Indian Oil Corporation (IOC), India’s largest commercial

enterprise, in servicing the growing rural market demand for consumer goods through

IOC’s chain of Kisan Seva Kendra. In 2008, H&B Stores Ltd. entered into South

India and subsequently expanded in India. The company also made its foray into the

hard surface cleaning market by launch of disinfectant floor cleaner and anti-bacterial

kitchen cleaner under Dazzl brand.

186

IV.3.ii Infosys Ltd


Infosys Ltd is a public limited company and India’s second largest software

exporter. It was incorporated on July 2, 1981 as Infosys Consultants Private Ltd by N.

R. Narayana Murthy in Karnataka. The company was started by seven people with the

investment of US$ 250. The company became a public limited company in the year

1992. The company was the first Indian company to be listed on the NASDAQ in

1999. Infosys also forms part of the NASDAQ-100 index. It is listed in major stock

exchanges of India as well as abroad, such as NSE, BSE and NASDAQ. The face

value of company per share was Rs 5 in the category of computer-software-large. The

company reports financials in International Financial Reporting Standards also from

financial year 2007 along with IGAAP as well as USGAAP. The name of the

company was changed from Infosys Technologies Ltd to Infosys Ltd with effect from

June 16, 2011.

The current Chairman of the company is K. V. Kamath and Managing

Director and CEO of the company is S. D. Shibulal. Continuously from the years

2001-2003, the company won the National award for Excellence in Corporate

Governance conferred by the Government of India. The company was selected as

‘Best Outsourcing Partner’ by the readers of Waters, a publication covering the needs

of chief information officers in the capital market firms. The company was ranked

among the top 50 most respected companies in the world by Reputation Institute’s

Global Reputation Pulse 2009. It was voted the ‘Most Admired Indian Company’ in

the Wall Street Journal Asia 200 for 10 years in a row since 2000. The company was

also listed in the Most Admired Acknowledge Enterprise 2008 study and Forbes

Asian Fabulous 50 for the fourth consecutive year.

187


Infosys Ltd is a global technology services firm that defines designs and

delivers information technology (IT)-enabled business solutions to their clients. The

company provides end-to-end business solutions that leverage technology for their

clients, including technical consulting, design, development, product engineering,

maintenance, and system integration, packaged-enabled consulting, and

implementation and infrastructure management services. In December 2009, the

company launched Flypp, an application platform which will empower mobile service

providers to delight digital consumers through a host of ready-to-use experiential

applications across the universe of devices. The company also provides software

products to the banking industry. They have developed Finacle, a universal banking

solution to large and medium size banks across India and overseas. In December

2009, they launched Finacle Advisor, an integrated platform which helps banks to

deliver products and services through a fully assisted self-service channel using

existing Internet banking capabilities. In March 2010, the company launched Finacle

Treasury in a Box, a rapid implementation framework for an integrated front, middle

and back office treasury system.


Infosys BPO is a majority owned subsidiary, incorporated in India in April

2002. Through Infosys BPO, the company provides business process management

service, such as offsite customer relationship management, finance and accounting,

and administration and sales order processing. The company is having marketing and

technical alliances with FileNet, IBM, Intel, Microsoft, and Oracle and system

application products. In October 2004, the company set up a wholly owned

subsidiary in People’s Republic of China named Infosys Technology (China) Co. Ltd.

188

In 2005, the company established Infosys Consulting Inc., a wholly owned subsidiary

in Texas, USA to add high-end consulting capabilities to their Global Delivery Model.

In 2009, the company incorporated a wholly owned Brazilian subsidiary,

namely Infosys Technologia Do Brazil Ltda. In December 2009, the company set up a

wholly owned subsidiary Infosys Technologies Inc headquartered in Dallas, Texas,

USA to tap the multibillion dollar opportunities from government projects. During

2009-10, Infosys Consulting Inc incorporated a wholly owned subsidiary, Infosys

Consulting India Ltd. In February 2011, it incorporated a wholly owned subsidiary,

Infosys (Shanghai) Company Ltd.


In 2004, the company acquired 100% equity in Expert Information Services

Private Ltd, Australia for US$ 24.3 million. The acquired company was renamed as

Infosys Technology (Australia) Private Ltd. In 2007 the company increased its stake

in Progeon to 98.9% after acquiring shares from Citicorp International Financial

Company. Infosys had taken over Philip’s finance and administration business

process outsourcing centers spread across India, Poland and Thailand for US$ 28

million. In December 2009, Infosys BPO acquired 100% voting interests in

McCamish System LLC, a business process solutions provider based at Atlanta, USA.

The business acquisition was conducted by entering into membership interest

purchase agreement for cash consideration of Rs 173 crores and a contingent

consideration of Rs 67 crores.


During 2009-10, SET Labs IP cell of the company filed 31 patent applications

in the United States Patent and Trademark office and Indian Patent office. During the

year 2010-11, the company formally launched its new corporate strategy-‘Building

189

Tomorrow’s Enterprise’ to showcase their plans for leading the service industry into

the new era as the next generation global consulting and service company. Infosys

lab’s IP Cell filed 91 patent applications in the United States Patent and Trademark

Office and the Indian Patent Office during this period. The company has also

partnered with ACDI/VOCA to promote broad based economic growth and to

develop information and communication technology enabled applications to improve

efficiencies in the agro supply chain in India. The long term strategy of the company

is to change the business landscape with the help of accessible talent pools and the

adoption of non-linear growth models.

IV.3.iii Noida Toll Bridge Company Ltd


The Noida Toll Bridge Company Limited (NTBCL) is promoted by

Infrastructure Leasing and Financial Services Ltd (IL&FS), as a special purpose

vehicle to develop construct, operate and maintain the Delhi-Noida-Direct Flyway on

a Build-Own-Operate-Transfer basis. NTBCL was incorporated in Uttar Pradesh on

April 8, 1996 and operates only in India. The public issue of the company came in

1999. The face value of the share is Rs 10 per share, company is listed on London

Stock Exchange, BSE as well as NSE. The company is also reporting financials in

International Financial Reporting Standards since 2007 as well in IGAAP. The

Chairman and Managing Director of the company is R. K. Bhargava.


The product revenues of the company are toll revenue, license fees and

contract revenue. A concession agreement was entered into by the Noida, NTBCL and

IL&FS in 1997 to confer to NTBCL, the right to Build-Own-Operate-Transfer the

Toll Bridge and the other project facilities. The land lease agreements comprising

190

Delhi Land Lease Deed, Delhi Lands Sub-Lease Deed and Noida Land Deed were

signed between Government of Nation Council Territory of Delhi, Noida and the

company in October 1998. During the year 1999, the company set up a Fee Review

Committee to monitor the toll charges. The company awarded one of its bridge

contracts in the year 2000 at the Delhi end of the project to Afcons infrastructure Ltd.

The Delhi Noida Toll Bridge became operational in February 2001. The

Company also constructed a further intersection, known as the Ashram Flyover, with

the intention of providing effective dispersal of traffic at the Delhi end of the Delhi

Noida Toll Bridge. The Ashram Flyover was opened to traffic in October 2001. An

entry of the Srinivaspuri Flyover, which became operational in October 2004, had a

positive impact on the traffic on the Delhi Noida Toll Bridge as it reduced congestion.


The company, IL&FS, Itertoll Pvt. Limited, Itertoll Netherlands and Itertoll

India entered into a conditional agreement in February 2006 to vary certain aspects of

the original Operate and Maintain contract, including the fee structure and the share

sale restrictions.

In June 2007, ITNL Toll Management Services Ltd was incorporated as a joint

venture company with IL&FS Transportation Network Ltd to carry out Operate and

Maintain services for Noida Toll Bridge and other similar venture on a pan-India

basis. The Mayur Vihar Link Road Project of the company, which connects Mayur

Vihar, a part of Delhi located across the River Yamuna which comprises essentially of

residential apartment buildings, was completed in two phases, one in June 2007 and

the other in January 2008, respectively.

191

IV.3.iv Rolta India Ltd


Rolta India Limited (Rolta) was incorporated on June 27, 1989 at Mumbai by

K. K. Singh. It obtained the certificate of commencement of business on July 5, 1989.

The public issue of the company was in the year 1990. The face value of the shares is

Rs.10 per share and shares are listed on London, BSE, NSE as well as Singapore

Stock Exchanges. The company also reports its financials in International Financial

Reporting Standards since financial year 2007, along with IGAAP. It is an ISO

9001:2000, SEI CMM Level 5 and BSI 15000 certified company. During 2002, Rolta

ranked amongst Forbes Globe’s 200 best companies in 2000 and it retained its

position in premier league. The company was awarded Geospatial Company of the

year 2005, by Geospatial Today. It also received BS ISO/IEC 27001:2005

certification in the year 2006.


It is an Indian multinational organization in IT based geospatial solutions, and

caters to industries as diverse as infrastructure, telecom, electric, airports, defence,

homeland security, urban development, town planning and environmental protection.

The company serves these markets by providing innovative solutions in geospatial

information system; engineering and design services; and enterprise information and

communication technology, which includes software development, advanced security,

network management, oracle applications, ERP consulting and business intelligence.

The company undertook to augment the state of the art production facility in 1996 at

Mumbai for executing export orders. The company had entered into mapping and data

conversion also in a big way for export markets. During 1999, Rolta had set up

192

engineering and software centers in Mumbai to support projects. The company

launched new dial-up Internet packages in 2003 with a range of features and options.


Rolta, through its joint venture with the Shaw Group Inc USA-Stone and

Webster Rolta Ltd, provides comprehensive engineering, procurement and

construction management services to meet turnkey project requirements of power, oil,

gas and petrochemical sectors. Rolta has executed projects in over 40 countries.

The Company set up a joint venture in Saudi Arabia to cater to the vast

markets in the Middle East. During the year 1995, Rolta had entered into a

collaboration agreement with M/s. Intergraph Corporation, USA, for transfer of

technology, thereby giving the benefit of Research and Development Investment of

Intergraph and also covering all new products launched by Intergraph. In 1998, Rolta

had collaboration with Intergraph Corp Inc, a company that had 90 percent share in

the global business of CAD/CAM.

In 1997, Rolta had set up a wholly owned subsidiary-Rolta International Inc

with headquarters in the USA and also a subsidiary in Saudi Arabia. The company

had signed a strategic tie up with one of the Fortune 500 list of most admired

companies, DELL Computer Corporation. The company made collaboration with

ALLTE-a US- based Telecom Company to convert telephone exchange records into

Unix/Oracle database. Rolta and Parametric Technology Corporation had entered into

a strategic alliance to promote advanced solutions in mechanical design automation in

the country.

In 2000, IBM India Ltd had entered in a strategic alliance with the company to

pursue the e-business market in India and also to provide customized e-business

solutions to domestic customers. The company launched its operation in the UK,

193

through a wholly owned subsidiary Rolta UK Ltd. In 2003 the company signed the

Memorandum of Understanding with the Department of Science and Technology to

jointly showcase the contribution made by the Indian mapping community.


During 2005-06, the company acquired technology and established long term

business strategic partnership with world leaders in this field-Intergraph and Z/I

Imaging for end-to-end mapping, photogrammetric and GIS solutions. During 2007,

the company inked a purchase agreement to buy Orion Technology, a Canadian

software and integration company. Orion specializes in enterprise web geographical

information system solutions.

In January 2008, the company announced the acquisition of Broech

Corporation, doing business as TUSC, an IT consulting company specializing in ERP

applications as well as database and business intelligence solutions based on Oracle

technologies. The consideration for this transaction was about US$ 45 million,

including escrows and earn-outs. In July 2008, the company signed an agreement to

acquire WhittmanHart Consulting, the consulting division of WhittmanHart, a

premier Chicago-based company providing value driven solutions in digital

communications, and enabling technologies.


In 2006-07, the company launched ERP services, in partnership with Oracle,

to specialized markets like utilities, engineering division and oil and others.

194

CHAPTER V

ANALYSIS AND

INTERPRETATION

195

V.0 DATA ANALYSIS AND MEASUREMENT

The hypotheses on four economic activities and their variables as stated in

Chapter III are based on the extensive literature review done in Chapter II. Here the

researcher presents, statistically analyses and interprets the data to answer the research

questions raised in Chapter I. The statistical analysis and discussion would enable the

researcher to either reject or accept the formulated hypotheses. As mentioned in the

statement of problem in Chapter III, the data analysis and interpretation would help to

understand the impact on economic activities on Indian companies by voluntarily

adopting IFRS.

V.1 MEASUREMENT OF VARIABLES

Data for each variable as specified in Chapter I was collected from each of the

four companies-(1) Dabur India Ltd (2) Infosys Ltd (3) Noida Toll Bridge Co. Ltd

and (4) Rolta India Ltd, annual reports from the years 2007-2008 to 2010-2011. This

gave the researcher two sets of data-one on the basis of Indian Generally Accepted

Accounting Principles (IGAAP) and other on the basis of IFRS.

The computed variables are compiled in financial matrix form. The ratios for

each variable are calculated as per formulae used in accounting parlance (Williams et

al. 2009). For absolute terms, necessary logarithmic transformations are made. In

order to test the impact of IFRS voluntary adoption on financial risks, investment

activities, mergers and acquisitions and diversification activities, the value of the

economic activities are determined by finding standard deviation of each related

variable for each economic activity.

Once, the values of each economic activity are derived, the researcher has two

sets of sample data, one related to IFRS and the other to IGAAP. Now the researcher

needs to statistically test whether IFRS has improved/increased each of the economic

196

activities. In this case, since the population variances are unknown and the sample

sizes are less than 30, assuming the populations to be normal, the researcher tests each

of the hypotheses using t-test for two sample means differences at 5% level of

significance.

V.2 DATA ANALYSIS

In order to test each hypothesis, the researcher has operationalized the relevant

variables as specified in Chapter I. Each financial variable is measured using the

Balance Sheets, Profit and Loss Statements and Cash Flow Statements of each

company under study. To determine the value of each variable, the researcher uses

accounting formulae as specified in Williams et al. (2009).

V.2.i Hypothesis 1-Financial risk and IFRS

Hypothesis 1 aims to test the impact on financial risk after voluntary IFRS

adoption by Indian companies. Financial risk of the company is associated with level

of liquidity, profitability, leverage and the earnings ratio of the company. So, the data

is collected for each of the parameters to determine the financial risk of the company

under study. The variables used to study hypothesis 1 are defined as under:

1) Liquidity: Liquidity refers to a company’s ability to meet its continuing

obligations as they arise. To evaluate liquidity of the company, quick ratio

(considering most liquid current assets) is used. This ratio is a more stringent

measure of liquidity than current ratio because inventories are removed from

current assets as they take several months to convert into cash or liquidate.

Therefore, the quick ratio (QR) (Lantto & Shalstrom, 2009; Padrtova &

Vochozka, 2011) is measured using the formula=Quick assets (cash, marketable

securities and receivables)/Current liabilities

197

2) Profitability: The profitability of the company determines the net income

available to the equity investors of the company. It determines the risk associated

with equity shareholder investments with the company. For this, return on equity

is calculated that looks at returns earned on shareholders’ investments. The return

on equity (ROE) (Lantto & Shalstrom, 2009; Padrtova & Vochozka, 2011) is

calculated using the formula=Net profit/Shareholders equity

3) Leverage: Leverage determines the stability of the company and measures the

ability of the company to retire debts. In case, the company cannot retire debts at

short notice, the risks increase for equity shareholders. For this, gearing ratio is

used to ascertain the level of debts financed by equity shareholders’ funds. The

gearing ratio (GR) (Lantto & Shalstrom, 2009; Padrtova & Vochozka, 2011) is

calculated using the formula=Total debts (long and short term)/Shareholders

equity.

4) Market based ratio: The market based ratio determines the market perception of

the company and hence the level of risk associated with the company. For this,

price earnings ratio is used to determine the relationship between market price of

equity share and earnings per share (EPS) of the company. The price earnings

ratio (PE) (Lantto & Shalstrom, 2009) is calculated using the formula=Market

price per share/EPS

Thus, the variables for financial risks are defined and accordingly calculated.

The same are tabulated as under:

198

Table V.2.i.a: Hypothesis 1 variables

Variables Equations

(1) Liquidity-Quick ratio Quick assets (cash, marketable securities

and receivables)/Current liabilities

(2) Profitability-Return on equity Net profit /Shareholders equity

(3) Leverage-Gearing ratio Total debts (long and short

term)/Shareholders equity

(4) Market based ratio-price

earnings ratio

Market price per share/EPS

V.2.i.a Financial Matrix-Hypothesis 1

(a) The above defined variables are used to build a financial matrix for

Hypothesis 1 to bring out financial indicators and economic activity-financial

risk under IFRS-based financial statements. The financial matrix is as under:

Table V.2.i.a.ai: Financial Matrix under IFRS-Hypothesis 1

Year

Name of

company

Financial Indicators Under IFRS Economic

activity under

Hypothesis 1-

Financial risk

QR ROE GR PE

2007-08 Dabur India 1.1985 0.4731 0.1469 29.3122 14.3597

2008-09 Dabur India 0.9724 0.4088 0.2361 22.0935 10.7818

2009-10 Dabur India 2.0821 0.3946 0.1382 28.1062 13.6445

2010-11 Dabur India 2.0134 0.3447 0.6418 29.8447 14.4407

2007-08 Infosys Ltd 5.4765 0.2954 0.0000 17.5932 8.2284

2008-09 Infosys Ltd 5.8077 0.3096 0.0000 12.6237 5.9267

2009-10 Infosys Ltd 6.5543 0.2617 0.0000 23.9873 11.2725

2010-11 Infosys Ltd 6.5062 0.2513 0.0000 27.0971 12.7817

2007-08 NTBL 3.3347 0.0728 0.6014 26.5000 12.6628

2008-09 NTBL 0.9031 0.0667 0.5493 13.2222 6.3672

2009-10 NTBL 1.1954 0.0342 0.4742 22.2109 10.8321

2010-11 NTBL 0.5874 0.0492 0.3980 13.1841 6.4235

199

Year

Name of

company


activity under

Hypothesis 1-

Financial risk

QR ROE GR PE

2007-08 Rolta India 5.6139 0.1347 0.4965 22.4248 10.4748

2008-09 Rolta India 4.5843 0.1338 0.6928 10.6822 4.8606

2009-10 Rolta India 3.2116 0.1448 0.7840 11.6875 5.3203

2010-11 Rolta India 1.1493 0.1796 0.4311 5.9028 2.6897

Mean 3.1994 0.2222 0.3494 19.7795 9.4417

Standard Deviation 2.2193 0.1397 0.2743 7.6572 3.7636

(b) The above defined variables are also used to build a financial matrix for

Hypothesis 1 to bring out financial indicators and economic activity-financial

risk under IGAAP-based financial statements. The financial matrix is as

under:

Table V.2.i.a.aii: Financial Matrix under IGAAP-Hypothesis 1

Year Name of

company

Financial Indicators Under

IGAAP

Economic

activity under

Hypothesis 1-

Financial risk QR ROE GR PE

2007-08 Dabur India 0.6440 0.5366 0.1593 28.7792 14.1678

2008-09 Dabur India 0.7124 0.4751 0.2764 21.8985 10.7067

2009-10 Dabur India 0.7385 0.5337 0.1909 27.3793 13.4477

2010-11 Dabur India 0.7849 0.4075 0.7533 29.3884 14.3709

2007-08 Infosys Ltd 3.1062 0.3377 0.0000 17.5414 8.3140

2008-09 Infosys Ltd 4.2991 0.3280 0.0000 12.6587 5.8916

2009-10 Infosys Ltd 4.0923 0.2719 0.0000 23.8083 11.3319

2010-11 Infosys Ltd 4.7147 0.2631 0.0000 27.0496 12.8781

2007-08 NTBL 0.3575 0.0561 0.4370 26.5000 13.1092

2008-09 NTBL 0.4388 0.0859 0.5076 13.2222 6.4417

2009-10 NTBL 0.6880 0.0657 0.4046 22.2109 10.9154

200

Year Name of

company


IGAAP

Economic

activity under

Hypothesis 1-

Financial risk QR ROE GR PE

2010-11 NTBL 0.6767 0.0843 0.3121 13.1841 6.4178

2007-08 Rolta India 3.0908 0.1945 0.5851 17.1190 8.0178

2008-09 Rolta India 3.1500 0.2037 0.6910 6.9068 3.0639

2009-10 Rolta India 3.7359 0.1585 0.7821 10.6029 4.7836

2010-11 Rolta India 3.7861 0.2115 0.7707 5.1727 2.3822

Mean 2.1885 0.2634 0.3669 18.9639 9.1400


(c) On the basis of the above two financial matrices-one on the basis of IFRS and

other on the basis of IGAAP, financial matrix comprising of difference

between the two sets is made for Hypothesis 1 to bring out the difference

between the different ratios and also the difference between means for further

analysis. The financial matrix is as under:

Table V.2.i.a.aiii: Financial Matrix of Difference between IFRS and IGAAP

for Hypothesis 1

Year Name of

company

Difference in financial Indicators

Under IFRS and IGAAP (IFRS-

IGAAP)

Difference

(IFRS-

IGAAP)

Financial

risk QR ROE GR PE

2007-08 Dabur India 0.5546 -0.0635 -0.0125 0.5329 0.1919

2008-09 Dabur India 0.2600 -0.0664 -0.0403 0.1951 0.0751

2009-10 Dabur India 1.3437 -0.1391 -0.0527 0.7269 0.1968

2010-11 Dabur India 1.2286 -0.0628 -0.1115 0.4563 0.0697

2007-08 Infosys Ltd 2.3703 -0.0424 0.0000 0.0518 -0.0856

2008-09 Infosys Ltd 1.5086 -0.0184 0.0000 -0.0350 0.0351

2009-10 Infosys Ltd 2.4621 -0.0102 0.0000 0.1791 -0.0593

201

Year Name of

company



IGAAP)

Difference

(IFRS-

IGAAP)

Financial

risk QR ROE GR PE

2010-11 Infosys Ltd 1.7915 -0.0119 0.0000 0.0476 -0.0964

2007-08 NTBL 2.9772 0.0167 0.1644 0.0000 -0.4465

2008-09 NTBL 0.4643 -0.0192 0.0417 0.0000 -0.0746

2009-10 NTBL 0.5074 -0.0316 0.0696 0.0000 -0.0833

2010-11 NTBL -0.0893 -0.0351 0.0859 0.0000 0.0056

2007-08 Rolta India 2.5231 -0.0598 -0.0886 5.3058 2.4570

2008-09 Rolta India 1.4343 -0.0699 0.0018 3.7754 1.7967

2009-10 Rolta India -0.5243 -0.0137 0.0019 1.0846 0.5367

2010-11 Rolta India -2.6368 -0.0318 -0.3396 0.7302 0.3075

Mean 1.0109 -0.0412 -0.0175 0.8157 0.3017


From the above financial matrix, in assessing the changes in accounting

figures due to IFRS and IGAAP, the following table presents summary statistics for

these four ratios and also the differences between IFRS-based and IGAAP-based

financial ratios for Hypothesis 1.

Table V.2.i.a.aiv: Descriptive Statistics of Financial Ratios (Hypothesis 1)

Ratio IFRS IGAAP Difference (IFRS-IGAAP)

Mean SD Mean SD Mean SD

QR 3.1994 2.2193 2.1885 1.6649 1.0109 1.4024

ROE 0.2222 0.1397 0.2634 0.1614 -0.0412 0.0361

GR 0.3494 0.2743 0.3669 0.2929 -0.0175 0.1084

PE 19.7795 7.6572 18.9639 7.9902 0.8157 1.5180

From the table above, it is observed that in absolute terms, mean of quick ratio

and mean of price earnings ratio have improved under IFRS as compared to IGAAP.

202

This means that the absolute values of quick assets, current liabilities, EPS under

IFRS are better compared to IGAAP. However, mean of return on equity and mean of

gearing ratio is better in IGAAP as compared to IFRS given the negative differences

between these two sets of ratios.

Based on each ratio, financial risk is calculated as the standard deviation of the

four parameters for each company for each of the four years. There are two sets of

financial risks-one IFRS based and the other IGAAP based. The table presents the

descriptive details for the economic activity of financial risk as under:

Table V.2.i.a.av: Descriptive Statistics of Financial Risks (Hypothesis 1)

Economic

activity

IFRS IGAAP Difference (IFRS-IGAAP)


Financial

risk 9.4417 3.7636 9.1400 4.0007 0.3017 0.7533

From the above table, it is observed that in absolute terms, mean of financial

risk is more in IFRS as compared to IGAAP. Even though the financial risk increases

in IFRS as compared to IGAAP in absolute terms, the testing of hypothesis of impact

on financial risk is done using the t-test statistic at 5% level of significance.

V.2.i.b Testing of Hypothesis 1

Hypothesis 1:

H0: Financial risks did not improve after the adoption of IFRS voluntarily, that is, there

is no change in the mean values of µ1 Financial risk under IFRS and µ2 Financial risk

under IGAAP, therefore, H0 : µ1 = µ2

H1: Financial risks improved after the adoption of IFRS voluntarily, that is, mean

financial risks under IFRS (µ1) decreased as compared to mean financial risks under

IGAAP (µ2), therefore, H1: µ1 < µ2

So, the hypotheses are as under:

203

H0 : µ1 = µ2 (1 = IFRS, 2 = IGAAP)

H1: µ1 < µ2 (left one-tailed)

Signifcance level, α = 0.05

Degrees of freedom, v = 16+16-2 = 30

Critical region is t < -1.697

Graph V.2.i.b.bi: Hpothesis 1 testing-left tail with critical region

Under H0, the test statistic is :

� = ��̅1-�̅2)-(µ1-µ2�p � 1 1

� + � 1 2�

Where �̅1 = sample mean value of financial risk under IFRS = 9.442,

�̅2 = sample mean value of financial risk under IGAAP = 9.140,

µ1-µ2 = 0 as µ1= µ2

1 = sample size under IFRS = 16

2 = sample size under IGAAP = 16

σp = pooled standard deviation of the sample

where, σp = (n1-1) (σ1)2 + (n2-1) (σ2)

2 n1+n2-2

with σ1 = sample standard deviation of financial risk under IFRS = 3.764,

σ2 = sample standard deviation of financial risk under IGAAP = 4.001

Therefore, given the above values,

Critical region

reject H0 at 5%

Accept H0

-1.697 0 t

204

σp = (n1-1) (σ1)2 + (n2-1) (σ2)

2 n1+n2-2

= [15 x (3.764)2] + [15 x (4.001)2] 16+16-2

= (14.168 + 16.008) (mean where n1=n2) 2

= 15.088

Thus, inserting all the values for calculating t :

t = (9.442-9.140)

(15.088) � �� + � �

��

= 0.057

This value does not lie in the critical region, but lies in the acceptance region

and so H0 gets accepted. Thus, there is no statistical evidence at 5% level of

significance, to prove that financial risk decreases under IFRS voluntary adoption as

compared to IGAAP. Therefore, even though differences can be observed in financial

risk in absolute terms, there is not enough evidence to prove the same statistically.

V.2.ii Hypothesis 2-Investment activities and IFRS

Hypothesis 2 aims to test the impact on investment activities after voluntary

IFRS adoption by Indian companies. Investment activities of the company are

associated with level of investment in fixed assets as they would reap return in the

long term, investing activities through cash flows of the company and returns on

assets, that is, ratio of net income to investment in fixed assets of the company. So,

the data is collected for each of the parameters to determine the investment activities

of the company under study. The variables used to study hypothesis 2 are defined as

under:

205

1) Investment in fixed assets: Level of investment in fixed assets by company

reflects its ability to reap returns in the long run. The investments in fixed assets

could also be for expansion purposes in future. To evaluate investments in fixed

assets, gross value of additions made to fixed assets (InvFA) (Aubert &

Grudnitski, 2011) is taken. Since these are gross values and vary in size,

necessary logarithmic transformations are made for data normality.

2) Investing cash flow: The level of cash flow from investing activities reflects the

net cash flows made for investing in the overall business of the company. The

cash flow from investing activities would usually be negative in balance. But in

case, this is positive, it means that the company had either sold off large part of

its assets or was efficient enough to collect loans and advances. To evaluate

investing cash flows, the value as reported in cash flow statements (InvCF)

(Aubert & Grudnitski, 2011) is taken. Since these are actual values and vary in

size, necessary logarithmic transformations are made for data normality.

3) Return on assets: The return on assets determines the ability of management to

earn reasonable return on its assets. This helps to understand whether investments

made in assets of the company were well-managed and have good future

prospects. This enables to determine whether management is able to earn a return

on assets that is higher than company’s cost of borrowings. For this, return on

assets ratio is used to ascertain the ratio between returns and the total assets of the

company. The return on assets (ROA) (Kabir et al. 2010; Padrtova & Vochozka,

2011) is calculated using the formula=Returns/Total Assets.

Thus, the variables for investment activities are defined and accordingly

calculated. The same are tabulated as under:

206

Table V.2.ii.a: Hypothesis 2 variables

Variables Equations

(1) Investments in fixed assets Gross value of additions made-

Logarithmic transformation done

(2) Investing cash flows Actual value of cash flow from

investment activities -Logarithmic

transformation done

(3) Return on assets Returns /Total assets

V.2.ii.a Financial Matrix-Hypothesis 2


Hypothesis 2 to bring out financial indicators and economic activity-

investment activities under IFRS-based financial statements. The financial

matrix is as under:

Table V.2.ii.a.ai: Financial Matrix under IFRS-Hypothesis 2

Year

Name of

company


activity under

Hypothesis 2-

Investment

activities

InvFA InvCF ROA

2007-08 Dabur India 2.8574 3.6200 0.2271 1.7801

2008-09 Dabur India 2.9273 3.6174 0.2091 1.8019

2009-10 Dabur India 3.0873 3.6143 0.2161 1.8289

2010-11 Dabur India 3.3328 3.5209 0.1398 1.9001

2007-08 Infosys Ltd 3.6804 3.5167 0.2571 1.9309

2008-09 Infosys Ltd 3.8919 3.4850 0.2682 1.9852

2009-10 Infosys Ltd 3.9141 0.0000 0.2281 2.1969

2010-11 Infosys Ltd 3.9540 3.3485 0.2194 2.0043

2007-08 NTBL 2.7429 3.6306 0.0434 1.8683

2008-09 NTBL 2.7433 3.6438 0.0403 1.8754

2009-10 NTBL 2.7393 -0.0494 0.0213 1.5900

207

Year

Name of

company


activity under

Hypothesis 2-

Investment

activities

InvFA InvCF ROA

2010-11 NTBL 2.7362 -0.0315 0.0319 1.5800

2007-08 Rolta India 3.1377 3.5698 0.0792 1.9029

2008-09 Rolta India 3.3196 3.5762 0.0714 1.9536

2009-10 Rolta India 3.4063 3.5732 0.0758 1.9728

2010-11 Rolta India 3.4871 3.5608 0.0948 1.9801

Mean 3.2473 2.8873 0.1389 1.8845

Standard Deviation 0.4444 1.4476 0.0902 0.1521



investment activities under IGAAP-based financial statements. The financial

matrix is as under:

Table V.2.ii.a.aii: Financial Matrix under IGAAP-Hypothesis 2

Year

Name of

company


IGAAP

Economic

activity under

Hypothesis 2-

Investment

activities

InvFA InvCF ROA

2007-08 Dabur India 2.8631 3.5294 0.2314 1.7439

2008-09 Dabur India 2.9337 3.5275 0.2107 1.7687

2009-10 Dabur India 3.0068 3.5292 0.2449 1.7648

2010-11 Dabur India 3.2960 3.4077 0.1488 1.8501

2007-08 Infosys Ltd 3.8301 3.3981 0.2608 1.9481

2008-09 Infosys Ltd 3.8904 3.5325 0.2722 1.9937

2009-10 Infosys Ltd 3.9163 0.0000 0.2295 2.1979

2010-11 Infosys Ltd 3.9555 3.8463 0.8094 1.7857

208

Year

Name of

company


IGAAP

Economic

activity under

Hypothesis 2-

Investment

activities

InvFA InvCF ROA

2007-08 NTBL 2.7701 3.5424 0.0491 1.8350

2008-09 NTBL 2.7896 3.5585 0.0536 1.8422

2009-10 NTBL 2.7892 3.5589 0.0430 1.8482

2010-11 NTBL 2.7894 3.5589 0.0597 1.8388

2007-08 Rolta India 3.1557 3.4671 0.1047 1.8580

2008-09 Rolta India 3.3487 3.4743 0.1074 1.9087

2009-10 Rolta India 3.4311 3.4710 0.1090 1.9296

2010-11 Rolta India 3.5139 3.4585 0.1103 1.9493

Mean 3.2675 3.3038 0.1903 1.8789



other on the basis of IGAAP, financial matrix comprising of difference




Table V.2.ii.a.aiii: Financial Matrix of Difference between IFRS and IGAAP

for Hypothesis 2

Year

Name of

company

Difference in financial

Indicators Under IFRS and

IGAAP (IFRS-IGAAP)

Difference

(IFRS-IGAAP)

Investment

activities InvFA InvCF ROA

2007-08 Dabur India -0.0057 0.0906 -0.0043 0.0362

2008-09 Dabur India -0.0064 0.0899 -0.0016 0.0332

2009-10 Dabur India 0.0805 0.0851 -0.0288 0.0641

2010-11 Dabur India 0.0369 0.1131 -0.0089 0.0499

209

Year

Name of

company



IGAAP (IFRS-IGAAP)

Difference

(IFRS-IGAAP)

Investment

activities InvFA InvCF ROA

2007-08 Infosys Ltd -0.1498 0.1186 -0.0037 -0.0172

2008-09 Infosys Ltd 0.0015 -0.0475 -0.0040 -0.0086

2009-10 Infosys Ltd -0.0023 0.0000 -0.0014 -0.0010

2010-11 Infosys Ltd -0.0015 -0.4978 -0.5899 0.2186

2007-08 NTBL -0.0272 0.0882 -0.0058 0.0333

2008-09 NTBL -0.0463 0.0853 -0.0133 0.0332

2009-10 NTBL -0.0499 -3.6083 -0.0217 -0.2582

2010-11 NTBL -0.0532 -3.5905 -0.0278 -0.2589

2007-08 Rolta India -0.0180 0.1027 -0.0255 0.0449

2008-09 Rolta India -0.0292 0.1019 -0.0360 0.0450

2009-10 Rolta India -0.0248 0.1021 -0.0332 0.0432

2010-11 Rolta India -0.0269 0.1023 -0.0154 0.0308

Mean -0.0202 -0.4165 -0.0514 0.0055




these three ratios and also the differences between IFRS-based and IGAAP-based


Table V.2.ii.a.aiv: Descriptive Statistics of Financial Ratios (Hypothesis 2)



InvFA 3.2473 0.4444 3.2675 0.4459 -0.0202 0.0480

InvCF 2.8873 1.4476 3.3038 0.8867 -0.4165 1.2515

ROA 0.1389 0.0902 0.1903 0.1840 -0.0514 0.1441

210

From the table above, it is observed that in absolute terms, means of all the

three variables have not improved under IFRS as compared to IGAAP given the

negative differences between these two sets of ratios.

Based on each ratio, investment activities are calculated as the standard

deviation of the three parameters for each company for each of the four years. There

are two sets of investment activities–one IFRS-based and the other IGAAP-based.

The table presents the descriptive details for the economic activity of investment

activities as under:

Table V.2.ii.a.av: Descriptive Statistics of Investment Activities (Hypothesis 2)

Economic

activity



Investment

activities 1.8845 0.1521 1.8789 0.1117 0.0055 0.1153

From the above table, it is observed that in absolute terms, mean of investment

activities is more in IFRS as compared to IGAAP. Even though there is marginal

improvement in investment activities in IFRS as compared to IGAAP in absolute

terms, the testing of hypothesis of impact on investment activities is done using the t-

test statistic at 5% level of significance.

V.2.ii.b Testing of Hypothesis 2

Hypothesis 2:

H0: Investment activities did not increase after the adoption of IFRS voluntarily, that is,

there is no change in the mean values of µ1 Investment activities under IFRS and µ2

Investment activities under IGAAP, therefore, H0 : µ1 = µ2

H1: Investment activities increased after the adoption of IFRS voluntarily, that is, mean

of investment activities under IFRS (µ1) increased as compared to mean of investment

activities under IGAAP (µ2), therefore, H1: µ1 > µ2

211


H0 : µ1 = µ2 (1 = IFRS, 2 = IGAAP)

H1: µ1 > µ2 (right one-tailed)



Critical region is t > 1.697

Graph V.2.ii.b.bi: Hpothesis 2 testing-right tail with critical region

Under H0, the test statistic is :

� = ��̅1-�̅2)-(µ1-µ2�p � 1 1

� + � 1 2�

Where �̅1 = sample mean value of investment activities under IFRS = 1.8845,

�̅2 = sample mean value of investment activities under IGAAP = 1.8789,

µ1-µ2 = 0 as µ1= µ2




where, σp = (n1-1) (σ1)2 + (n2-1) (σ2)

2 n1+n2-2

with σ1 = sample standard deviation of investment activities under IFRS = 0.152,

σ2 = sample standard deviation of investment activities under IGAAP = 0.112

Critical region

reject H0 at 5%

Accept H0

0 1.697 t

212


σp = (n1-1) (σ1)2 + (n2-1) (σ2)

2 n1+n2-2

= [15 x (0.152)2] + [15 x (0.112)2] 16+16-2

= (0.023 + 0.013) (mean where n1=n2) 2

= 0.018


t = (1.8845-1.8789)

(0.018) � �� + � �

��

= 0.881



significance, to prove that investment activities increase under IFRS voluntary

adoption as compared to IGAAP. Therefore, even though positive differences can be

observed in investment activities in absolute terms, there is not enough evidence to

prove the same statistically.

V.2.iii Hypothesis 3-Mergers and acquisitions activities and IFRS

Hypothesis 3 aims to test the impact on mergers and acquisitions activities

after voluntary IFRS adoption by Indian companies. Mergers and acquisitions

activities of the company are associated with diluted earnings per share (EPS), equity

ratio and operating risk measured by fixed asset turnover ratio because when any

company undergoes mergers and acquisitions activities, the impact of the same is

reflected on these variables. So, the data is collected for each of the parameters to

determine the mergers and acquisitions activities of the company under study. The

variables used to study hypothesis 3 are defined as under:

213

1) Diluted earnings per share: When mergers and acquisitions activities happen in

any company, the same is reflected in the earnings per share (EPS) level of the

company because the EPS will undergo change due to increase in the stock of the

company and there would be reduction in the per share value of the company.

The trend in EPS is one of the major factors affecting the market value of

company’s shares. Diluted EPS is the most conservative approach because it is

assumed that all other convertible stocks have been converted into common

stock. This value is to alert equity shareholders to recognize the level of

uncertainty associated with future EPS due to additional conversion of shares. To

evaluate diluted EPS (DEPS) (Aubert & Grudnitski, 2011), reported figure from

Balance Sheet is taken. Since these are actual values and vary in size, necessary

logarithmic transformations are made for data normality.

2) Equity ratio: The equity ratio helps to know the proportion of equity used to

finance company’s assets. In case of mergers and acquisitions activities, there is

increase in equity as well as assets of the company. Therefore, this ratio will help

to determine the impact of mergers and acquisitions on the company’s proportion

of equity used to finance its assets. For this, equity ratio is used to ascertain the

ratio between total owners’ equity and total assets of the company. The equity

ratio (ER) (Lantto & Shalstrom, 2009; Padrtova & Vochozka, 2011) is calculated

using the formula=Total owners equity/Total Assets.

3) Operating risk: The operating risk determines the risk associated with

company’s operations due to mergers and acquisitions. For this, fixed asset

turnover ratio is used to determine the relationship between net sales and net

fixed assets of the company because post-mergers and acquisitions the impact is

felt on net sales (revenues) and fixed assets of any company. The fixed asset

214

turnover ratio (FAT) (Aubert & Grudnitski, 2011; Padrtova & Vochozka, 2011)

is calculated using the formula=Net sales/Net fixed assets



Table V.2.iii.a: Hypothesis 3 variables

Variables Equations

(1) Diluted EPS Actual value as reported-

Logarithmic transformation done

(2) Equity ratio Total owners equity/Total assets

(3) Operating risk-Fixed asset

turnover ratio

Net sales/Net fixed assets

V.2.iii.a Financial Matrix-Hypothesis 3


Hypothesis 3 to bring out financial indicators and economic activity-mergers

and acquisitions activities under IFRS-based financial statements. The

financial matrix is as under:

Table V.2.iii.a.ai: Financial Matrix under IFRS-Hypothesis 3

Year

Name of

company

Financial Indicators Under IFRS

Economic

activity under

Hypothesis 3-

Mergers and

acquisitions

activities

DEPS ER FAT

2007-08 Dabur India 0.5752 0.4801 5.1068 2.6442

2008-09 Dabur India 0.6493 0.5116 5.0931 2.6063

2009-10 Dabur India 0.7505 0.5476 3.8444 1.8476

2010-11 Dabur India 0.5065 0.4057 2.3539 1.0968

2007-08 Infosys Ltd 1.9087 0.8704 3.4870 1.3175

2008-09 Infosys Ltd 2.0200 0.8661 4.0232 1.5975

215

Year

Name of

company

Financial Indicators Under IFRS

Economic

activity under

Hypothesis 3-

Mergers and

acquisitions

activities

DEPS ER FAT

2009-10 Infosys Ltd 2.0370 0.8718 4.2716 1.7277

2010-11 Infosys Ltd 2.0770 0.8733 4.7911 2.0068

2007-08 NTBL 0.1761 0.5957 0.1892 0.2386

2008-09 NTBL 0.2553 0.6041 0.1600 0.2338

2009-10 NTBL 0.1673 0.6224 0.1456 0.2693

2010-11 NTBL 0.3032 0.6472 0.1544 0.2528

2007-08 Rolta India 1.0342 0.5879 1.0465 0.2613

2008-09 Rolta India 1.0708 0.5335 0.7932 0.2687

2009-10 Rolta India 1.1544 0.5235 0.7329 0.3213

2010-11 Rolta India 1.3377 0.5280 0.7146 0.4240

Mean 1.0015 0.6293 2.3067 1.0696



Hypothesis 3 to bring out financial indicators and economic activity-mergers

and acquisitions activities under IGAAP-based financial statements. The


216

Table V.2.iii.a.aii: Financial Matrix under IGAAP-Hypothesis 3

Year Name of

company


IGAAP

Economic

activity under

Hypothesis 3-

Mergers and

acquisitions

activities

DEPS ER FAT

2007-08 Dabur India 0.5832 0.4313 5.0748 2.6381

2008-09 Dabur India 0.6542 0.4434 5.0171 2.5820

2009-10 Dabur India 0.7619 0.4589 5.0114 2.5454

2010-11 Dabur India 0.5119 0.3651 2.6447 1.2759

2007-08 Infosys Ltd 1.9099 0.7721 3.4942 1.3672

2008-09 Infosys Ltd 2.0188 0.8297 4.0517 1.6293

2009-10 Infosys Ltd 2.0403 0.8442 4.2469 1.7262

2010-11 Infosys Ltd 2.0778 0.8387 4.7745 2.0124

2007-08 NTBL 0.1761 0.8756 0.1205 0.4208

2008-09 NTBL 0.2553 0.6237 0.1351 0.2546

2009-10 NTBL 0.1673 0.6543 0.1433 0.2883

2010-11 NTBL 0.3032 0.7083 0.1477 0.2894

2007-08 Rolta India 1.1520 0.5382 1.0489 0.3287

2008-09 Rolta India 1.2603 0.5271 0.7513 0.3757

2009-10 Rolta India 1.1965 0.6877 0.6977 0.2909

2010-11 Rolta India 1.3950 0.5215 0.6860 0.4641

Mean 1.0290 0.6325 2.3779 1.1556



other on the basis of IGAAP, financial matrix comprising of the difference




217

Table V.2.iii.a.aiii: Financial Matrix of Difference between IFRS and IGAAP

for Hypothesis 3

Year Name of

company



IGAAP)

Difference

(IFRS-

IGAAP)

Mergers and

acquisitions

activities

DEPS ER FAT

2007-08 Dabur India -0.0080 0.0488 0.0321 0.0061

2008-09 Dabur India -0.0048 0.0682 0.0760 0.0244

2009-10 Dabur India -0.0114 0.0887 -1.1670 -0.6978

2010-11 Dabur India -0.0054 0.0406 -0.2909 -0.1791

2007-08 Infosys Ltd -0.0012 0.0983 -0.0073 -0.0496

2008-09 Infosys Ltd 0.0012 0.0363 -0.0286 -0.0318

2009-10 Infosys Ltd -0.0033 0.0277 0.0247 0.0015

2010-11 Infosys Ltd -0.0008 0.0346 0.0166 -0.0055

2007-08 NTBL 0.0000 -0.2799 0.0686 -0.1822

2008-09 NTBL 0.0000 -0.0197 0.0249 -0.0208

2009-10 NTBL 0.0000 -0.0319 0.0023 -0.0191

2010-11 NTBL 0.0000 -0.0611 0.0067 -0.0366

2007-08 Rolta India -0.1178 0.0497 -0.0024 -0.0674

2008-09 Rolta India -0.1895 0.0064 0.0420 -0.1070

2009-10 Rolta India -0.0420 -0.1642 0.0353 0.0304

2010-11 Rolta India -0.0573 0.0065 0.0285 -0.0402

Mean -0.0275 -0.0032 -0.0712 -0.0859




these three ratios and also the differences between IFRS-based and IGAAP-based


218

Table V.2.iii.a.aiv: Descriptive Statistics of Financial Ratios (Hypothesis 3)



DEPS 1.0015 0.6960 1.0290 0.7015 -0.0275 0.0535

ER 0.6293 0.1549 0.6325 0.1682 -0.0032 0.0974

FAT 2.3067 1.9938 2.3779 2.0772 -0.0712 0.3037

From the table above, it is observed that in absolute terms, means of all the

three variables have not improved under IFRS as compared to IGAAP given the

negative differences between these two sets of ratios.

Based on each ratio, mergers and acquisitions activities are calculated as the

standard deviation of the three parameters for each company for each of the four

years. There are two sets of investment activities–one IFRS-based and the other

IGAAP-based. The table presents the descriptive details for the economic activity of

mergers and acquisitions activities as under:

Table V.2.iii.a.av: Descriptive Statistics of Mergers and Acquisitions Activities

(Hypothesis 3)

Economic

activity



Mergers &

acquisitions 1.0696 0.8969 1.1556 0.9266 -0.0859 0.1749

From the above table, it is observed that in absolute terms, mean of mergers

and acquisitions activities is lower for IFRS as compared to IGAAP. This would mean

that the impact on mergers and acquisitions activities due to IFRS is lower as

compared to IGAAP in absolute terms. The testing of hypothesis of impact on

mergers and acquisitions is done using the t-test statistic at 5% level of significance.

219

V.2.iii.b Testing of Hypothesis 3

Hypothesis 3:

H0: Mergers and acquisitions activities did not improve after the adoption of IFRS

voluntarily, that is, there is no change in the mean values of µ1 mergers and

acquisitions activities under IFRS and µ2 mergers and acquisitions activities under

IGAAP, therefore, H0 : µ1 = µ2

H1: Mergers and acquisitions activities improved after the adoption of IFRS

voluntarily, that is, mean of mergers and acquisitions activities under IFRS (µ1)

increased as compared to mean of mergers and acquisitions activities under IGAAP

(µ2), therefore, H1: µ1 > µ2


H0 : µ1 = µ2 (1 = IFRS, 2 = IGAAP)





Graph V.2.iii.b.bi: Hpothesis 3 testing-right tail with critical region

Under H0, the test statistic is

0 1.697 t

Critical region

reject H0 at 5%

Accept H0

220

� = ��̅1-�̅2)-(µ1-µ2�p � 1 1

� + � 1 2�

Where �̅1 = sample mean value of mergers and acquisitons activities under IFRS =

1.0696,

�̅2 = sample mean value of mergers and acquistions activities under IGAAP = 1.1556

µ1-µ2 = 0 as µ1= µ2




where, σp = (n1-1) (σ1)2 + (n2-1) (σ2)

2 n1+n2-2

with σ1 = sample standard deviation of mergers and acquistions activities under IFRS

= 0.897,

σ2 = sample standard deviation of mergers and acquistions activities under IGAAP =

0.927


σp = (n1-1) (σ1)2 + (n2-1) (σ2)

2 n1+n2-2

= [15 x (0.897)2] + [15 x (0.927)2] 16+16-2

= (0.8046 + 0.8593) (mean where n1=n2) 2

= 0.8319


t = (1.0696-1.1556)

(0.8319) � �� + � �

��

= -0.2924

221



significance, to prove that mergers and acquistions activities increase under IFRS

voluntary adoption as compared to IGAAP. There were negative differences observed

in mergers and acquisitons activities in absolute terms, but there is not enough

evidence to prove the increase in these activities statistically.

V.2.iv Hypothesis 4-Diversification activities and IFRS

Hypothesis 4 aims to test the impact on diversification activities after

voluntary IFRS adoption by Indian companies. Diversification activities of the

company are associated with growth of sales over previous years and operating cash

flows because when any company undergoes diversification activities, the impact of

the same is reflected on these variables. So the data is collected for each of the

parameters to determine the diversification activities of the company under study. The

variables used to study hypothesis 4 are defined as under:

1) Growth: When diversification activities happen in any company, the same is

reflected in the sales growth of the company because the sales variation over

previous year will undergo change due to increase in the diversified activities of

the company. The sales growth can be either negative or positive in nature

depending upon related factors to diversification. To evaluate growth, sales

variation over previous year is taken. The sales growth (SAGR) (Byard et al.

2010) is calculated using the formula=(Current year sales-Previous year

sales)/Previous year sales.

2) Operating cash flow: The level of cash flow from operating activities reflects

the net cash flows made for operations of all the businesses/segments of the

company. The cash flow from operations activities would usually be positive in

222

balance. But in case this is negative or very low in nature, it means that the

company is either inefficient in collecting accounts receivable and inventories or

there has been substantial reduction in accrued liabilities. In short, there have

been certain issues in financial position, especially short-term liquidity of the

company. One of the reasons could also be that more time is required for the

diversification activities of the company to settle down for proper reflection in

operating cash flows. To evaluate cash flows from operations, the value as

reported in cash flow statements (OpCF) (Aubert & Grudnitski, 2011) is taken.

Since these are actual values and vary in size, necessary logarithmic

transformations are made for data normality.



Table V.2.iv.a: Hypothesis 4 variables

Variables Equations

(1) Growth-sales variation over

years

(Current year sales-Previous year

sales)/Previous year sales

(2) Operating cash flows Actual value of cash flow from operations

-Logarithmic transformation done

V.2.iv.a Financial Matrix-Hypothesis 4



diversification activities under IFRS-based financial statements. The financial

matrix is as under:

223

Table V.2.iv.a.ai: Financial Matrix under IFRS-Hypothesis 4

Year

Name of

company


IFRS

Economic

activity under

Hypothesis 4-

Diversification

activities

SAGR OpCF

2007-08 Dabur India 0.1576 2.5805 1.7132

2008-09 Dabur India 0.1893 2.5327 1.6570

2009-10 Dabur India 0.2087 2.7402 1.7900

2010-11 Dabur India 0.1959 2.6930 1.7657

2007-08 Infosys Ltd 0.1997 3.6110 2.4121

2008-09 Infosys Ltd 0.2987 3.8181 2.4886

2009-10 Infosys Ltd 0.0484 3.8382 2.6798

2010-11 Infosys Ltd 0.2093 3.7714 2.5188

2007-08 NTBL 0.6087 2.1989 1.1244

2008-09 NTBL -0.3358 1.6986 1.4385

2009-10 NTBL 0.0176 1.7094 1.1963

2010-11 NTBL 0.0645 1.7748 1.2094

2007-08 Rolta India 0.5072 2.5385 1.4364

2008-09 Rolta India 0.2803 2.5565 1.6095

2009-10 Rolta India 0.1164 2.6066 1.7608

2010-11 Rolta India 0.1781 2.8481 1.8880

Mean 0.1840 2.7198 1.7930

Standard Deviation 0.2073 0.7179 0.4930



diversification activities under IGAAP-based financial statements. The


224

Table V.2.iv.a.aii: Financial Matrix under IGAAP-Hypothesis 4

Year Name of

company


IGAAP

Economic

activity under

Hypothesis 4-

Diversification

activities

SAGR OpCF

2007-08 Dabur India 0.1519 2.5822 1.7184

2008-09 Dabur India 0.1827 2.5082 1.6444

2009-10 Dabur India 0.2056 2.6819 1.7510

2010-11 Dabur India 0.2029 2.6999 1.7657

2007-08 Infosys Ltd 0.2015 3.6110 2.4109

2008-09 Infosys Ltd 0.2996 3.7263 2.4231

2009-10 Infosys Ltd 0.0484 3.7927 2.6476

2010-11 Infosys Ltd 0.2093 3.6769 2.4520

2007-08 NTBL 0.4199 2.1989 1.2579

2008-09 NTBL 0.1933 1.6986 1.0644

2009-10 NTBL 0.0511 1.7094 1.1726

2010-11 NTBL 0.0232 1.7748 1.2386

2007-08 Rolta India 0.5072 2.5553 1.4483

2008-09 Rolta India 0.2804 2.5566 1.6096

2009-10 Rolta India 0.1164 2.6073 1.7613

2010-11 Rolta India 0.1781 2.8405 1.8826

Mean 0.2045 2.7013 1.7655



other on the basis of IGAAP, financial matrix comprising of the difference


between the different ratios and also difference between means for further


225

Table V.2.iv.a.aiii: Financial Matrix of Difference between IFRS and IGAAP

for Hypothesis 4

Year Name of

company



IGAAP (IFRS-IGAAP)

Difference

(IFRS-IGAAP)

Diversification

activities SAGR OpCF

2007-08 Dabur India 0.0057 -0.0017 -0.0052

2008-09 Dabur India 0.0066 0.0246 0.0127

2009-10 Dabur India 0.0031 0.0583 0.0390

2010-11 Dabur India -0.0069 -0.0070 0.0000

2007-08 Infosys Ltd -0.0018 0.0000 0.0013

2008-09 Infosys Ltd -0.0009 0.0918 0.0656

2009-10 Infosys Ltd 0.0000 0.0455 0.0322

2010-11 Infosys Ltd 0.0000 0.0945 0.0668

2007-08 NTBL 0.1887 0.0000 -0.1335

2008-09 NTBL -0.5291 0.0000 0.3741

2009-10 NTBL -0.0335 0.0000 0.0237

2010-11 NTBL 0.0413 0.0000 -0.0292

2007-08 Rolta India 0.0000 -0.0168 -0.0119

2008-09 Rolta India 0.0000 -0.0001 -0.0001

2009-10 Rolta India 0.0000 -0.0007 -0.0005

2010-11 Rolta India 0.0000 0.0076 0.0053

Mean -0.0205 0.0185 0.0275




these two ratios and also the differences between IFRS-based and IGAAP-based


226

Table V.2.iv.a.aiv: Descriptive Statistics of Financial Ratios (Hypothesis 4)



SAGR 0.1840 0.2073 0.2045 0.1279 -0.0205 0.1442

OpCF 2.7198 0.7179 2.7013 0.6949 0.0185 0.0350

From the table above, it is observed that in absolute terms, mean of sales

growth has not improved under IFRS as compared to IGAAP given the negative

difference between these two sets of ratios. The mean of operating cash flows has

improved under IFRS as compared to IGAAP.

Based on each ratio, diversification activities are calculated as the standard

deviation of the two parameters for each company for each of the four years. There

are two sets of investment activities–one IFRS-based and the other IGAAP-based.

The table presents the descriptive details for the economic activity of diversification

activities as under:

Table V.2.iv.a.av: Descriptive Statistics of Diversification Activities

(Hypothesis 4)

Economic

activity



Diversification 1.7930 0.4930 1.7655 0.4921 0.0275 0.1029

From the above table, it is observed that in absolute terms, mean of

diversification activities is more in IFRS as compared to IGAAP. Even though there is

marginal improvement in impact of diversification activities in IFRS as compared to

IGAAP in absolute terms, the testing of hypothesis of impact on diversification

activities is done using the t-test statistic at 5% level of significance.

227

V.2.iv.b Testing of Hypothesis 4

Hypothesis 4:

H0: Diversification activities did not increase after the adoption of IFRS voluntarily,

that is, there is no change in the mean values of µ1 diversification activities under IFRS

and µ2 diversification activities under IGAAP, therefore, H0 : µ1 = µ2

H1: Diversification activities improved after the adoption of IFRS voluntarily, that is,

mean of diversification activities under IFRS (µ1) increased as compared to mean of

diversification activities under IGAAP (µ2), therefore, H1: µ1 > µ2


H0 : µ1 = µ2 (1 = IFRS, 2 = IGAAP)





Graph V.2.iv.b.bi: Hpothesis 4 testing-right tail with critical region

Under H0, the test statistic is

� = ��̅1-�̅2)-(µ1-µ2�p � 1 1

� + � 1 2�

Where �̅1 = sample mean value of diversification activities under IFRS = 1.793

Critical region

reject H0 at 5%

Accept H0

0 1.697 t

228

�̅2 = sample mean value of diversification activities under IGAAP = 1.766

µ1-µ2 = 0 as µ1= µ2




where, σp = (n1-1) (σ1)2 + (n2-1) (σ2)

2 n1+n2-2

with σ1 = sample standard deviation of diversificaiton activities under IFRS = 0.493,

σ2 = sample standard deviation of diversification activities under IGAAP = 0.492


σp = (n1-1) (σ1)2 + (n2-1) (σ2)

2 n1+n2-2

= [15 x (0.493)2] + [15 x (0.492)2] 16+16-2

= (0.243 + 0.242) (mean where n1=n2) 2

= 0.2425


t = (1.793-1.766)

(0.2425 � �� + � �

��

= 0.321



significance, to prove that diversification activities increase under IFRS voluntary

adoption as compared to IGAAP. Therefore, even though positive differences can be

observed in diversification activities in absolute terms, there is not enough evidence to

prove the same statistically.

229

V.3 INTERPRETATION OF RESULTS

The study provides evidence of the impact of IFRS voluntary adoption on

accounting numbers and on the key financial ratios used by financial analysts,

investors and other financial institutions as key perforamnce indicators. The study

shows how key finanical ratios change when companies adopt IFRS, even though on

voluntary basis.

The results of the study indicate that financial statements in IFRS change the

magnitude of key accounting ratios of Indian companies for each economic activity.

These are interpreted as under:

1) Finanical risks: The results indicate increase in quick ratio and price earning

ratios and slightly decreasing the return on equity and gearing ratios. Since

financial risk is derived from these parameters, the results indicate increase in the

financial risk, in absolute numbers.

2) Investment activities: The results indicate decrease in investment in fixed assets,

cash flows through investing activities and return on assets. Since investment

activities is derived from these parameters, results indicate marginal increase in

the investment activites, in absolute numbers.

3) Mergers and acquisitions activities: The results indicate decrease in diluted

earnings per share, equity ratio and fixed asset turnover. Since mergers and

acquistions activities is derived from these parameters, results indicate decrease

in the mergers and acquisitions activites, in absolute numbers.

4) Diversification activities: The results indicate decrease in sales growth and

increase in cash flow from operations. Since diversification activities is derived

from these parameters, the results indicate increase in the diversification

activities, in absolute numbers.

230

From the above, it is observed that there are greater and lesser, positive and

negative, differences in the individual analysis of each financial indicator of each of

the companies. This suggests that the divergence in measurement and accounting

disclosure result from the accounting norms affecting the economic avtivity-financial

indicators calculated based on IFRS and IGAAP. However, the greater or lesser

impact of each indicator in each company depends on the existence of elements that

register the assets variations that possess differences in the applicable norms and also

in their amounts.

The changes in key accounting ratios in absolute numbers are due to adoption

of IFRS concerning fair value accounting, lease accounting, income tax accounting,

accounting for finanical instruments, as well as rules concerning treatment of different

items in balance sheet, profit and loss statement and cash flow statement. These items

include goodwill, deferred taxes, investments, leases, revenue recognition, inventory

valuations, cost of goods sold and many other items.

The results of hypotheses testing are tabulated below. The results using t-value

at 5% significance for differences in means suggest that there is no statistically

significant difference in the mean of each of the economic activities at 5% level of

significance.

Table V.3.i: Hypotheses Testing with t-test Results

Economic activity

Mean

under

IFRS

Mean

under

IGAAP

t-value for

differnece

in means

1-tail

sign

Financial risk 9.4417 9.1400 0.057 -1.697

Investment activities 1.8845 1.8789 0.881 1.697

Mergers and acquisiton

activities

1.0696 1.1556 -0.2924 1.697

Diversification activities 1.7930 1.7655 0.321 1.697

231

In the results tabulated above, it is interesting to note that none of the

economic activities were statistically significant with IFRS-based ratios as compared

to IGAAP-based ratios. This suggests that even though divergence existed between

IFRS and IGAAP, this did not affect the economic activities of the companies in a

statistically significant way.

The results of this research support the findings of various studies as in

(a) Auer (1996) where the empirical results suggested no statistically significant

differences in the information between IFRS-based and Swiss GAAP-based

statements; (b) Tendeloo & Vanstralen (2005) where there was no significant

differences in earnings management between companies using adopted IFRS and

others using German GAAP. (c) Daske (2006) where risk for IFRS companies was

found to have increased. (d) Kabir et al. (2010) where there was no statistical support

for information based on IFRS and New Zealand GAAP.

The results of this research find support from various studies cited in the

literature review. The results are important because the potential investors and

external evaluators must appreciate the impact of IFRS adoption. Certain financial

ratios may go down impacting the image of the company after IFRS application. The

shareholders and other stakeholders of the company would be disappointed by the loss

of value due to different treatment of items under IFRS accounting. It would look like

loss of money but it is important to understand that IFRS accounting is only a way of

putting the same numbers in different manner that would bring out the workings and

activities of the company in greater detail. It is an instrument of evidence and has no

influence on economic results of any company. It only describes financial and

economic situation of an entity. So even though, the profitability becomes lower

under IFRS, the new standards would help create higher credibility and transparency

232

to all the users of financial statements.

Therefore, even though differences exist in absolute numbers between

indicators based on IFRS and IGAAP, there is no statistical evidence of economic

activities being improved/increased under IFRS. The users in India should understand

that IFRS is a method of treating numbers in different ways as compared to IGAAP.

This brings greater transparency to the international investors as well. As IFRS is

principles-based approach as compared to IGAAP being standards-based approach,

this would require future accountants and auditors to exercise professional judgment

more often and to a greater degree than before.

233

CHAPTER VI

CONCLUSION,

SUGGESTIONS,

AND SCOPE FOR

FURTHER RESEARCH

234

VI.0 CONCLUSION

Data analysis and interpretation discussed in Chapter V bring out interesting

results related to the impact on economic activities of Indian companies due to

voluntary IFRS adoption. There were positive and negative differences, some greater,

some lesser, in each financial indicator of economic activity. These changes in

financial ratios existed in absolute numbers or magnitude, calculated based on IFRS

and IGAAP. This suggests that the adoption of stricter accounting rules under IFRS

could be the reasons for the changes observed in accounting figures and financial

ratios. However, there was no statistical evidence at 5% level of significance to prove

that any of the economic activities improved/increased under IFRS voluntary adoption

by Indian companies.

The research is important as it studies the impact of IFRS adoption on various

economic activities of Indian companies, especially when the adoption of IFRS is

still voluntary in India. Till date, there is only one study in India as sample country in

relation to banking industry (Firoz et al. 2011) but being descriptive in nature, the

study does not empirically test IFRS implications on the banking industry. The

current research, therefore, has great relevance to the Indian scenario.

This research is important because it empirically tests the impact of economic

activities due to IFRS voluntary adoption by Indian companies. In the first hypothesis,

the research provides no statistical evidence that corporate disclosure via IFRS

adoption had any improvement in financial risks when financial indicators for this

economic activity are tested in detail using both IFRS-based and IGAAP-based data.

Literature shows that IFRS adopters benefit with low cost of equity and hence

more investment opportunities, irrespective of country’s infrastructure. However, in

235

the second hypothesis, the research does not find any statistical support for increase in

investment activities after IFRS adoption by Indian companies.

The third hypothesis investigates IFRS impact on mergers and acquisitions

activities as the economic activity. Here also, similar to earlier two hypotheses, the

research finds no statistical improvement in mergers and acquisition after adoption of

IFRS voluntarily.

The fourth hypothesis studies the impact on diversification activities. The

literature supports the view that IFRS adoption helps to improve the information

environment and hence various economic activities of the companies. But, in the

fourth hypothesis too, the research finds no empirical evidence to support that

diversification activities increased after the adoption of IFRS voluntarily.

The research concludes that even though positive and negative differences

were observed in absolute numbers of each financial indicator of each economic

activity on the data calculated as per IFRS and IGAAP-basis, there was no statistical

significance of IFRS impacting any economic activity of Indian companies. This

research finds support in earlier works of Auer (1996), Tendeloo & Vanstralen

(2005), Daske (2006), Kabir et al. (2010) and many others. Despite these empirical

results, the disclosures under IFRS by Indian companies should meet the information

needs of international investors and should reduce the possible negative impacts in

international portfolios.

VI.1 CONTRIBUTIONS

The main contribution of this research is to provide comprehensive evidence

on the impact on economic activities by adoption of IFRS by Indian companies, even

though voluntary in nature. Given the well-developed literature from western

countries and not-so-well-developed literature from developing economies like India,

236

this thesis certainly helps in understanding the different perspectives of IFRS

adoption. It also helps to know why there is an increasing trend of accounting

standards harmonization via IFRS throughout the globe.

The present research contributes to the literature investigating the economic

impacts of IFRS adoption in two aspects. First, the research extends the literature by

showing how key financial ratios change under IFRS as compared to IGAAP. Second,

by examining the changes in financial statement items, the research shows that there

is no empirical statistical evidence for improvement in economic activities of Indian

companies. For this, the researcher creates financial matrix from published financial

statements prepared under IGAAP and IFRS. The research thus contributes to

literature on the consequences of IFRS adoption and provides evidence on the impact

of IFRS adoption on economic activities as traced from the items in financial

statements.

The research contributes to the accounting literature as it uses India as its

sample country, as studies on emerging countries, especially India are negligible. This

helps to examine whether economic activities improve with the adoption of IFRS,

even though voluntary in nature. The research also aims to contribute to policy

making. This research also attempts to inform to international accounting standard

setters and accounting regulators facing issues similar to those in India. Further, this

research also helps to understand why certain countries are impending adoption of

IFRS on mandatory basis. The research aims to understand whether the delay in IFRS

adoption is due to continued fear of market reaction to IFRS adoption or the belief of

negative impact of IFRS adoption. This would help policy makers in formulating

more appropriate rules and regulations towards IFRS harmonization.

237

The important contribution of this research is that it investigates the impact of

IFRS adoption on economic activities of Indian companies. The advantages that

Indian companies can experience with IFRS adoption are as under:

a) It would benefit the economy by increasing growth of international business.

b) It would encourage international investing and thereby lead to more foreign

capital inflows into the country.

c) With quality standards, consistently applied, investor understanding and

confidence will increase. With quality reporting, investors would not need to

compensate for a lack of understanding by demanding a risk premium. With

consistent application and the resulting comparability, investors and analysts

have an easier time knowing how to best allocate capital.

d) Having one financial language reduces preparation and audit costs.

e) The industry would be able to raise capital from foreign markets at lower cost if

it can create confidence in the minds of foreign investors that their financial

statements comply with globally accepted accounting standards. Lower cost of

capital leads to higher firm valuation.

f) It would provide professionals, opportunities to serve international clients.

g) It would increase their mobility to work in different parts of the world, either in

industry or practice.

h) IFRS adoption has positive informational consequences and improves investors’

information environment.

238

VI.2 SUGGESTIONS

The IFRS regulations have significant implications not only for financial

statement preparers and users but also for entire financial reporting institutional

infrastructure (Jermakowicz, 2004) as well as the level of accounting harmonization

across the globe. The need towards conformity in international accounting results

from the globalization of business and the need for a common set of accounting

standards to facilitate international trade and investment (Mintz, 2010). However,

there are problems associated with the transition from locally accepted general

accounting practices to IFRS. These transition problems are as under:

a) During the transition to IFRS, companies face intense pressure on resources,

particularly if there is a period where two reporting systems are required, and the

increased disclosure requirements and information needs often overwhelm the

existing accounting information system. Moreover, the extent of the impact on

systems is often underestimated. So, a planned approach is required before

adoption of IFRS.

b) Unlike several other countries, the accounting framework in India will be deeply

affected by laws and regulations. Therefore, changes are required to various

regulatory requirements under The Companies Act, 1956, Income Tax Act, 1961,

SEBI, and RBI so that IFRS financial statements are accepted generally.

c) Increase in cost initially due to dual reporting requirement, which the entity might

have to meet till full convergence is achieved. This can be amortized and borne by

the corporates.

d) An entity would need to incur additional cost for modifying their information

technology systems and procedures to enable it to collate data necessary for

239

meeting the new disclosures and reporting requirements. This needs to be planned

and borne.

e) If IFRS has to be uniformly understood and consistently applied by all

stakeholders such as, employees, auditors, regulators and tax authorities, then it

has to be achieved through training.

f) Differences between IGAAP and IFRS may impact business decision/financial

performance of an entity. This impact needs to be assessed and phase-wise

implementation may be taken up.

g) Limited pool of trained resource and persons having expert knowledge on IFRS,

can be addressed through the adoption of IFRS course in social science related

subjects or disciplines from graduation, post graduation as well as professional

programmes.

h) The lack of auditors with IFRS know-how implies that the audit cost will be

higher, so more research-based training is required to bridge this gap.

It is essential to understand that the transition to IFRS is much more than a

technical accounting exercise. IFRS also have tax, internal reporting and system

implications. The change is profound, especially when seen in the broader context of

current financial reporting environment, including an ever-intensifying movement

towards fair value accounting (Tomaszewski & Showerman, 2010).

Padrtova & Vochozka (2011) mention accounting to be only an instrument of

recording. So the change of accounting method does not represent the change of real

economic situation of the company. The volume of fixed or current assets as well as

the volume of equity or debt remains physically the same as before the change of

method. The only difference is in the method of their evaluation and definition under

IFRS. This is not an attempt to depreciate the importance of accounting standards.

240

There is definitely high informative value of financial statements prepared under both

standards. The stakeholders of the business should not be misguided by the change in

ratios under the two sets of reporting.

The Indian corporates feel that the Indian accounting standards present the

economic situation in better light than IFRS, which is preferable image for company

management and present stakeholders. On the contrary, the potential international

investor or external evaluator would logically prefer the IFRS point of view as they

are more prudent in company evaluation especially in its profitability. Therefore, it is

of utmost importance to understand the intricacies of IFRS and the benefits that it

would add in the future.

The Indian national accounting rules and standards need to be changed/altered

in order to achieve the desired goal of convergence with IFRS and comparability of

financial statements. This task is being carried out by ICAI. The adoption of IFRS

will increase comparability of consolidated accounts as well as levels of transparency

for many companies, for example, through expanded segment disclosures, reporting

unfunded pension obligations and the recognition of derivatives on balance sheets at

fair value (Jermakowicz, 2004). It is therefore to be understood that, the

implementation of IFRS is not only about different accounting standards and policies,

it is the adoption of an entirely different system of performance measurement and

communication with the markets.

One of the key challenges in the adoption of IFRS is its use of fair values

which may bring increased volatility in the reported values of assets as well as

earnings. Especially banks and insurance companies experience significant

implementation problems in a movement towards fair value accounting. Management

will have an opportunity to reshape how company performance is communicated to,

241

and evaluated by the markets, and how the markets evaluate the company against its

competitors.

The cost aspect of the adoption of IFRS is significant. A training programme

for staff across the company which would let them adopt the new way in which a

business is operated is among the most important issues of the IFRS conversion

process. Other key challenges in the process of adopting IFRS include the complex

nature of some of the IASBs’ standards and the lack of adequate implementation

guidance. The lack of guidance creates risks for different local and national

interpretations of IFRS. It is believed that the change in accounting regime will have a

positive impact on the competitiveness and the growth of not only Indian companies

but also companies across the globe.

It is therefore suggested that the IFRS proponents should consider the

concurrent changes in the institutional environment with respect to enforcement,

governance or auditing, that applies to all firms.

VI.3 SCOPE FOR FURTHER RESEARCH

The study in IFRS literature offers great scope for further research.

Considering the limitations of this study, one can study the impact of IFRS adoption

by Indian companies with a larger sample size. This is possible when more and more

companies adopt IFRS voluntarily or when the IFRS adoption becomes mandatory

post April 1, 2012 or thereafter. IFRS adoption can be further studied with Indian

companies in the context of various other concepts like corporate governance. IFRS

adoption would also have impact on fair value accounting, lease accounting, income

tax accounting. Impact of IFRS adoption can be tested with various other statistical

tools to validate the results.

242

The researcher has looked only at the positive aspects of IFRS adoption, that

is, whether the economic activities increased/improved after IFRS voluntary adoption.

Though the results did not statistically support the hypotheses, future research could

aim to look at whether there is negative or no impact on economic activities due to

IFRS voluntary adoption by Indian companies.

A comparison between mandatory adoption and voluntary adoption should be

of interest for future studies. Another extension of the study is to include firms from

other countries that have adopted IFRS for their financial statements. Such a cross-

country study would clearly be interesting and increase the sample substantially. This

would also help to intensify control problems because many institutional

arrangements could be accounted for explicitly (Leuz & Verrecchia, 2000) and also

help in understanding benefits of IFRS adoption (Kabir et al. 2010). Cross-country

studies would also help to identify and measure differences in events resulting from

diversity in accounting norms of these countries that subsequently affect economic-

financial indicators (Beuren et al. 2008).

Another aspect of future research could be to compare how managerial

incentives influence decisions to elect optional exemptions, differ across countries

that mandatorily adopt IFRS. It would also be interesting to investigate whether the

value-relevance of mandatory and optional equity adjustments is influenced by

country-specific factors. (Cormier et al. 2009).

Further research could benefit from examining the relationship between IFRS

adoption and other aspects of earnings quality such as timeliness, earnings

conservatism and value relevance (Tendeloo & Vanstraelen, 2005).

The researcher has examined IGAAP and IFRS difference and documented its

impacts. Differences do exist in magnitude even though no support was found

243

statistically. The methodology could have introduced measurement errors, but these

gaps can be filled by future research as and when data of Indian companies becomes

available under mandatory IFRS. It is also the researcher’s expectations that the

association between accounting numbers under IFRS and the impact on economic

activities and the market outcomes would happen over time. There is still time to

reach a comfort level with confidence and reliance on the information produced by

IFRS. This maturation process would offer future researchers numerous and exciting

opportunities in the years to come.

244

REFERENCES

Adukia, R. (2009). Encyclopedia of IFRS, (1st edition). Mumbai: Snow White

Publications Pvt. Ltd.

Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of

Financial Economics 17(2), 223-249.

Amir, E., Harris, T., & Venuti, E. (1993). A comparison of the value relevance of US

versus non USGAAP Accounting measures using form F-20 reconciliations,

Journal of Accounting Research Studies on International Accounting, 31

(Supplement), 230-264.

Armstrong, C., Barth, M., Jagolinzer, A., & Riedl, E. (2008). Market reaction to the

adoption of IFRS in Europe, Working Paper 09-032, Available at

http://www.hbs.edu/research/pdf/09-032.pdf.

Aubert, F., & Grudnitski, G. (2011). The impact and importance of mandatory adoption

of International Financial Reporting Standards in Europe, Journal of

International Financial Management and Accounting, 22(1), 1-26.

Auer, K. (1996). Capital market reactions to earnings announcements: Empirical

evidence on the difference in the information content of IAS-based earnings and

EC-Directives based earnings. The European Accounting Review 5(4), 587-623.

Barry, C., & Brown, S. (1985). Differential information and security market equilibrium,

Journal of Financial and Quantitative Analysis 20(4), 407-422.

Barth, M., Landsman, W., & Lang, M. (2008). International accounting standards and

accounting quality, Journal of Accounting Research, 46(3), 467-498.

245

Bartov, E., Goldberg, S., & Kim, M. (2005). Comparative value relevance among

German, US, and International Accounting Standards: A German stock market

perspective, Journal of Accounting, Auditing & Finance, 20(2), 95-119.

Beckman, J., Brandes, C., & Eierle, B. (2007). German reporting practices: An analysis

of reconciliation from German Commercial Code to IFRS or USGAAP,

Advances in International Accounting, 20, 253-294.

Beuren, I., Hein, N., & Klann, R. (2008). Impact of the IFRS and USGAAP on

economic-financial indicators, Managerial Auditing Journal, 23(7), 632-649.

Botoson, C. (1997) Disclosure level and cost of equity capital, The Accounting Review,

72(3), 323-349.

Byard, D., Li, Y., & Lu, Y. (2011). The effect of mandatory IFRS adoption on financial

analysts’ information environment, Journal of Accounting Research, 49(1), 69-

96.

Chalmers, K., Clinch, G., & Godfrey, J. (2008). Adoption of International Financial

Reporting Standards: Impact on the value relevance of intangible assets,

Australian Accounting Review, 20(3), 237-247.

Clarkson, P., Hanna, J., Richardson, G., & Thompson, R. (2011). The impact of IFRS

adoption on the value relevance of book value and earnings, Journal of

Contemporary Accounting and Economics, 7, 1-7.

Coopers & Lybrand. (1993). International Accounting Summaries: A guide for

interpretation and comparison, (2nd edition). New York: Wiley.

246

Cordeiro, R., Couto, G., & Silva, F. (2007), Measuring the impact of International

Financial Reporting Standards (IFRS) in firm reporting: The case of Portugal,

Working Paper Series, Available at SSRN: http://ssrn.com/abstract=969972.

Cormier, D., Demaria, S., Lapointe-Antunes, P., & Teller, R. (2009). First-time adoption

of IFRS, managerial incentives and value-relevance: Some French evidence,

Journal of International Accounting Research, 8(2), 1-22.

Cuijpers, R., & Buijink, W. (2005). Voluntary adoption of non-local GAAP in the

European Union: A study of determinants and consequences, European

Accounting Review, 14(3), 487-524.

Daske, H. (2006). Economic benefits of adopting IFRS or USGAAP-Have the

expected cost of equity capital really decreased? Journal of Business Finance

and Accounting, 33(3 and 4), 329-373.

Daske, H., Hail, L., Leuz, C., & Verdi, R. (2008). Mandatory IFRS reporting around the

world: Early evidence on the economic consequences, Journal of Accounting

Research, 46(5), 1085-1142.

Diamond, D., & Verrecchia, R. (1991). Disclosure, liquidity, and the cost of capital,

Journal of Finance, 46(4), 1325–1359.

Dick, W., & Piera, F. (2010). Financial Reporting under IFRS: A topic based

approached, (1st edition). New York: Wiley-John Wiley & Sons, Inc.

Ding, Y., Hope, O., Jeanjean, T., & Stolowy, H. (2005). Differences between domestic

accounting standards and IAS: Measurement, determinants and implications,

Journal of Accounting and Public Policy, 26(1), 1-38.

247

Dumontier, P., & Raffounier, B. (1998). Why firms comply voluntarily with IAS: An

empirical analysis with Swiss data, Journal of International Financial

Management and Accounting, 9(3), 216-245.

Epstein, B., & Jermakowicz, E. (2010-11). Interpretation and Application of

International Financial Reporting Standards for Indian Companies¸ Delhi:

Deloitte Wiley India-Times Group Book.

Ferrer, R., Salle, D., & Ferrer, G. (2011). Liquidity and financial leverage ratios: Their

impact on compliance with International Financial Reporting Standards (IFRS),

Academy of Accounting and Financial Studies Journal, 15(Special Issue), 135-

150.

Firoz, M., Ansari, A., & Akhtar, K. (2011). IFRS-impact on Indian banking industry,

International Journal of Business and Management, 6(3), 277-283.

Gassen, J., & Sellhorn, T. (2006). Applying IFRS in Germany: Determinants and

consequences, Working Paper Series, Available at SSRN:

http://ssrn.com/abstract=906802.

Goodwin, J., Ahmed, K., & Heaney, R. (2008). The effects of International Financial

Reporting Standards on the accounts and accounting quality of Australian firms:

A retrospective study, Journal of Contemporary Accounting & Economics, 4(2),

89-119.

Grevning, H. (2009). International Financial Reporting Standards: A Practical Guide,

(5th edition). Washington DC: World Bank.

248

Haina, S. (2008). Economic and informational consequences of voluntary adoption of

International Financial Reporting Standards, Retrieved from ProQuest

Dissertation and Theses. (UMI 3341122).

Hellman, N. (2011). Soft adoption and reporting incentives-A study of the impact of

IFRS on financial statements in Sweden, Journal of International Accounting

Research, 10(1), 61-83.

Holthausen, R. (2009). Accounting standards, financial reporting outcomes and

enforcement, Journal of Accounting Research, 47(2), 447-458.

Hung, M., & Subramanyan, K. (2007). Financial statement effects of adopting

International Accounting Standards: The case of Germany, Review of Accounting

Studies, 12(4), 623-657.

International Accounting Standards Board (IASB) (2002), International Accounting

Standards Committee Foundation, Annual Report 2002, London.

Jermakowicz, E. (2004). Effects of adoption of International Financial Reporting

Standards in Belgium-The evidence from BEL-20 companies, Accounting in

Europe, 1(1), 51-70.

Kabir, M., Laswad, F., & Islam, M. (2010). Impact of IFRS in New Zealand on accounts

and earnings quality, Australian Accounting Review, 55(20), 343-357.

Kalpesh, A., Ghosh, T., & Alkafaji, Y. (2010). Understanding IFRS Fundamentals, New

York: Wiley-John Wiley & Sons, Inc.

249

Kent, P., & Stewart, J. (2008). Corporate governance and disclosures on the transition to

International Financial Reporting Standards, Accounting & Finance, 48(4), 649-

671.

KPMG. (2009-10). KPMG’s Practical Guide to International Financial Reporting

Standards, (6th edition). New York: Sweet & Maxwell-Thomson Reuters.

Lantto, A., & Sahlstrom, P. (2009). Impact of International Financial Reporting Standard

adoption on key financial ratios, Accounting and Finance, 49(2), 341-361.

Leuz, C., & Verrecchia, R. (2000). The economic consequences of increased disclosure,

Journal of Accounting Research 38(Supplement), 91-124.

Levitt, A. (1998). The importance of high quality accounting standards, Accounting

Horizons, 12 (1), 79–82.

Liu, C., & O’Farrell, G. (2011). Comparability and convergence between IASB-IFRS

and regional-IFRS, International Journal of Business, Accounting and Finance,

5(1), 27-42.

Liu, C., Yao, L., Hu, N., & Liu, L. (2011). The impact of IFRS on accounting quality in

a regulated market: An empirical study of China, Journal of Accounting, Auditing

& Finance, 26(4), 659-676.

Major E., & Marques, A. (2009). IFRS introduction, corporate governance and firm

performance: Evidence from Portugal, Journal of Applied Management

Accounting Research, 7(2), 55-70.

250

McAnally, M., McGuire, S., & Weaver, C. (2010). Assessing the financial reporting

consequences of conversion of IFRS: The case of equity-based compensation,

Accounting Horizons, 24(4), 589-621.

Mintz, S. (2010). Implementation concerns about IFRS adoption in U.S., Journal of

International Business Education, 5, 97-116.

Morais, A., & Fialho, A. (2008). Do harmonised accounting standards lead to

harmonised accounting practices? An empirical study of IAS 39 Measurement

requirements in some European Union countries, Australian Accounting Review,

20(3), 224-236.

Nobes, C. (Ed.) (2000). GAAP: A survey of national accounting rules in 53 countries,

Arthur Anderson BDO, Deloitte Touche Tohmatsu, Ernst & Young International,

Grant Thornton, KPMG, PricewaterhouseCoopers.

Nobes, C. (2008). Accounting classification in the IFRS era, Australian Accounting

Review, 20(3), 191-198.

Padrtova, M., & Vochozka, M. (2011). The value statements according to IFRS in

comparison with the financial statements in accordance with Czech accounting

standards, Economics and Management, 16, 80-85.

Palmer, P. (2008). Disclosure of the impacts of adopting Australian equivalents of

International Financial Reporting Standards, Accounting and Finance, 48(5),

847-870.

Paul, A., & Burke, E. (2010). Preparing for international financial reporting standards,

Journal of Finance and Accountancy, 1-8.

251

Saini, A. (2011). A Complete Guide for converged Indian Accounting Standards and

IFRS, (6th edition). Mumbai: Snow White Publications Pvt. Ltd.

Singhal, S. & Tulsian, K. (2009). Practical Guide to International Financial Reporting

Standards, (1st edition). New Delhi: Bharat Law House Pvt. Ltd.

Schipper, K. (2005). The introduction of International Accounting Standards in Europe:

Implications for international convergence, European Accounting Review, 14(1),

101-126.

Tendeloo, B., & Vanstralen, A. (2005). Earnings management under German GAAP

versus IFRS, European Accounting Review, 14(1), 155-180.

Tomaszewski, S., & Showerman, S. (2010). IFRS in United States: Challenges and

opportunities, Review of Business, 59-71.

Tweedie, D. (2006). Prepared statement of Sir David Tweedie, Chairman of the

International Accounting Standards Board before the Economic and Monetary

Affairs Committee of the European Parliament. Retrieved April 10, 2010 Web

site: http://www.iasplus.com/resource/0601tweedieeuspeech.pdf.

Watson, P. (2011). An Executive Guide to IFRS: Content, Costs and Benefits to Business,

New York: John Wiley & Sons Ltd.

Williams, J., Haka, S., Bettner, M., & Carcello, J. (2009). Financial & Management

Accounting: The basis for business decisions, (14th edition). Singapore: McGraw

Hill International Edition.

Wright, C., & Hobbs, S. (2010). Impact and implications of IFRS conversion or

convergence, Bank Accounting & Finance, 17-24.

252

Zhou, H., Xiong, Y., & Ganguli, G. (2009). Does the adoption of International Financial

Reporting Standards restrain earnings management? Evidence from an emerging

market, Academy of Accounting and Financial Studies Journal, 13 (Special

Issue), 43-56.

http://www.bourse.lu/Accueil.jsp, Last accessed on December 10, 2011.

www.capitaline.org, Last accessed on February 21, 2012.

www.dabur.com, Last accessed on February 20, 2012.

www.deloitte.com, Last accessed on January 30, 2012.

www.iasplus.com, Last accessed on February 1, 2012.

www.icai.com, Last accessed on April 10, 2011.

www.ifrs.com, Last accessed on April 9, 2011.

www.infosys.com, Last accessed on February 20, 2012.

www.kpmgindia/ifrs.com, Last accessed on April 12, 2011.

www.mca.gov.in, Last accessed on January 19, 2012.

www.ntbcl.com, Last accessed on February 20, 2012.

www.rolta.com, Last accessed on February 20, 2012.

www.sebi.gov.in Last accessed on February 15, 2012.

www.worldbank, Last accessed on February 13, 2012.