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

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
Financial Reporting Standards 204
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
Financial Reporting Standards 44
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
and IGAAP for Hypothesis 2 208
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
and IGAAP for Hypothesis 3 217
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
and IGAAP for Hypothesis 4 225
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 USSECs 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
SECs 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 firms 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
firms 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:
H
o
: Financial risk did not improve after the adoption of IFRS voluntarily.
H
1
: Financial risk improved after the adoption of IFRS voluntarily.
Hypothesis 2:
H
o
: Investment activities did not increase after the adoption of IFRS
voluntarily.
H
1
: Investment activities increased after the adoption of IFRS voluntarily.
Hypothesis 3:
H
o
: Merger and acquisitions activities did not improve after the adoption of
IFRS voluntarily.
H
1
: Mergers and acquisitions activities improved after the adoption of IFRS
voluntarily.
Hypothesis 4:
H
o
: Diversification activities did not increase after the adoption of IFRS
voluntarily.
H
1
: 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, IASCs 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 worlds 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 IASCs 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 anothers 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 IASBs 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 IASBs 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 OFarrell (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 firms 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 firms
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 Germanys 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 Swedens voluntary adoptions
of IFRS during 1991-2004. With regard to the EUs 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-Members 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

Indian Accounting Standards IAS/IFRS
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

Indian Accounting Standards IAS/IFRS
31
Financial Instrument:
Presentation
32
Financial Instrument:
Presentation
32
Financial Instrument:
Disclosure
IFRS 7
Financial Instrument:
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

Topic IFRS 1 Para No. Main Contents







(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

Topic IFRS 1 Para No. Main Contents



(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.
Topic IFRS 2 Para No. Main Contents
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

Topic IFRS 2 Para No. Main Contents
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

Topic IFRS 2 Para No. Main Contents





(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

Topic IFRS 2 Para No. Main Contents
The effect of share-based payment
transactions on the entitys 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.
Topic IFRS 3 Para No. Main Contents
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

Topic IFRS 3 Para No. Main Contents
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 interests
proportionate share of the acquirees
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

Topic IFRS 3 Para No. Main Contents













(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 acquirers 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

Topic IFRS 3 Para No. Main Contents
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.
Topic IFRS 4 Para No. Main Contents
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

Topic IFRS 4 Para No. Main Contents



- 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
Employees 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 lessees 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

Topic IFRS 4 Para No. Main Contents
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.
Topic IFRS 5 Para No. Main Contents
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

Topic IFRS 5 Para No. Main Contents
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

Topic IFRS 5 Para No. Main Contents
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.
Topic IFRS 6 Para No. Main Contents
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

Topic IFRS 6 Para No. Main Contents
(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 entitys 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

Topics IFRS 7 Para No. Main Contents
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
- Employers 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 entitys 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 entitys 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

Topics IFRS 7 Para No. Main Contents
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.
Topic IFRS 8 Para No. Main Contents
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

Topic IFRS 8 Para No. Main Contents
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 entitys 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

Topic IFRS 8 Para No. Main Contents













- 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 entitys 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 entitys financial
statements of previous periods and with the financial statements of other entities.
Topic IAS 1 Para No. Main Contents
1. Objective 1 To prescribe
(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

Topic IAS 1 Para No. Main Contents
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

Topic IAS 1 Para No. Main Contents
(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

Topic IAS 1 Para No. Main Contents
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
financial statements
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.
Topic IAS 2 Para No. Main Contents
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

Topic IAS 2 Para No. Main Contents
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

Topic IAS 2 Para No. Main Contents


(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

Topic IAS 2 Para No. Main Contents
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 entitys
ability to generate and utilize its cash.
Topic IAS 7 Para No. Main Contents
1. Objective - Presentation of information about
historical changes in an entitys 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

Topic IAS 7 Para No. Main Contents
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 entitys
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

Topic IAS 7 Para No. Main Contents
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
entitys 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.
Topic IAS 8 Para No. Main Contents
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

Topic IAS 8 Para No. Main Contents
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

Topic IAS 8 Para No. Main Contents
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 pronouncements 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

Topic IAS 8 Para No. Main Contents
(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.
Topic IAS 10 Para No. Main Contents
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

Topic IAS 10 Para No. Main Contents
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

Topic IAS 10 Para No. Main Contents
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 contractors financial
statements. In other words, this standard does not apply to the customer (contractee).
Topic IAS 11 Para No. Main Contents
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

Topic IAS 11 Para No. Main Contents
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.
Topic IAS 12 Para No. Main Contents
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 entitys
statement of financial position, and
transactions and other events of the
current period that are recognized in
an entitys 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

Topic IAS 12 Para No. Main Contents





(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

Topic IAS 12 Para No. Main Contents
(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

Topic IAS 12 Para No. Main Contents
(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 entitys
investment in its property, plant and equipment and the changes in that investment.
Topic IAS 16 Para No. Main Contents
1. Objective 1 To prescribe
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

Topic IAS 16 Para No. Main Contents
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

Topic IAS 16 Para No. Main Contents
(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

Topic IAS 16 Para No. Main Contents
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.
Topic IAS 17 Para No. Main Contents
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

Topic IAS 17 Para No. Main Contents
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

Topic IAS 17 Para No. Main Contents
- 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 lessors 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

Topic IAS 17 Para No. Main Contents
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 entitys 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

Topic IAS 18 Para No. Main Contents
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

Topic IAS 18 Para No. Main Contents











(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

Topic IAS 18 Para No. Main Contents
- 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.
Topic IAS 19 Para No. Main Contents
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

Topic IAS 19 Para No. Main Contents
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

Topic IAS 19 Para No. Main Contents
(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

Topic IAS 19 Para No. Main Contents
- 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

Topic IAS 19 Para No. Main Contents



(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.
Topic IAS 20 Para No. Main Contents
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

Topic IAS 20 Para No. Main Contents



(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

Topic IAS 20 Para No. Main Contents
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.
Topic IAS 21 Para No. Main Contents
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

Topic IAS 21 Para No. Main Contents
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 entitys
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

Topic IAS 21 Para No. Main Contents
However, differences arising on
monetary items that form part of the
reporting entitys 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

Topic IAS 21 Para No. Main Contents





(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

Topic IAS 23 Para No. Main Contents
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

Topic IAS 23 Para No. Main Contents

(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 entitys 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.
Topic IAS 24 Para No. Main Contents
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.
3. Key terms defined
(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

Topic IAS 24 Para No. Main Contents




















(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.
Individuals domestic partner and
children
Children of the individuals
domestic partner
Dependants of the individual or the
individuals 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

Topic IAS 24 Para No. Main Contents
(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.
Topic IAS 26 Para No. Main Contents
1. Scope

1 To be applied in the financial
statements of retirement benefit plans
where such financial statements are
presented
2. Key terms defined
(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

Topic IAS 26 Para No. Main Contents
(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 employers 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

Topic IAS 26 Para No. Main Contents
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

Topic IAS 27 Para No. Main Contents
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
financial statements
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

Topic IAS 27 Para No. Main Contents




(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.
Topic IAS 28 Para No. Main Contents
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.
2. Key terms defined
(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

Topic IAS 28 Para No. Main Contents
(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
investors share of net assets of the
investee.
- Investors share of profit or loss of
the investee is recognized in the
investors 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

Topic IAS 28 Para No. Main Contents
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.
Topic IAS 29 Para No. Main Contents
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

Topic IAS 29 Para No. Main Contents



(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
financial statements
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

Topic IAS 31 Para No. Main Contents
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.
2. Key terms defined
(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
venturers share of assets, liabilities,
incomes and expenses is combined line
by line with similar items in the
venturers financial statements or
reported as separate line item in the
venturers 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

Topic IAS 31 Para No. Main Contents



(iii) Jointly
controlled assets



and its share of income earned, in
both its separate and consolidated
financial statements
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

Topic IAS 31 Para No. Main Contents
(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.
Topic IAS 32 Para No. Main Contents
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
Employees rights and obligations
under employee benefit plans

119

Topic IAS 32 Para No. Main Contents
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.
3. Key terms defined
(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 entitys own equity
instruments and is:
a non-derivative for which the
entity is or may be obliged to
receive a variable number of the
entitys own equity instruments; or
120

Topic IAS 32 Para No. Main Contents
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 entitys own equity
instruments. For this purpose the
entitys own equity instruments do
not include instruments that are
themselves contracts for the future
receipt or delivery of the entitys
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 entitys own equity
instruments and is
a non-derivative for which the
entity is or may be obliged to
receive a variable number of the
entitys 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 entitys own equity
121

Topic IAS 32 Para No. Main Contents






(iv) Equity
instrument






11

instruments. For this purpose the
entitys own equity instruments do
not include instruments that are
themselves contracts for the future
receipt or delivery of the entitys
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 entitys
own equity instruments
Considered paid or received to be
recognized directly in equity.
122

Topic IAS 32 Para No. Main Contents
(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.
Topic IAS 33 Para No. Main Contents
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

Topic IAS 33 Para No. Main Contents
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.
3. Key terms defined
(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

Topic IAS 33 Para No. Main Contents
(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

Topic IAS 33 Para No. Main Contents





(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.
Topic IAS 34 Para No. Main Contents
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

Topic IAS 34 Para No. Main Contents


(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
financial statements.
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 entitys 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.
Topic IAS 36 Para No. Main Contents
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
3. Key terms defined
(i) Impairment loss


6


Carrying amount
(-) Recoverable amount
129

Topic IAS 36 Para No. Main Contents
(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 assets
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

Topic IAS 36 Para No. Main Contents
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
financial statements.


131

Topic IAS 37 Para No. Main Contents
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

Topic IAS 37 Para No. Main Contents
(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

Topic IAS 37 Para No. Main Contents
(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

Topic IAS 38 Para No. Main Contents
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

Topic IAS 38 Para No. Main Contents
(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

Topic IAS 38 Para No. Main Contents
(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 entitys 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

Topic IAS 38 Para No. Main Contents
(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

Topic IAS 38 Para No. Main Contents
(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.
Topic IAS 39 Para No. Main Contents
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

Topic IAS 39 Para No. Main Contents
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

Topic IAS 39 Para No. Main Contents






(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

Topic IAS 39 Para No. Main Contents
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.
Topic IAS 40 Para No. Main Contents
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

Topic IAS 40 Para No. Main Contents
- Does not apply
to
3, 4 Matters covered in IAS 17 on Leases
Biological assets related to agricultural
activity
Mineral rights and mineral reserves
3. Key terms defined
(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

Topic IAS 40 Para No. Main Contents







(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, propertys 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

Topic IAS 40 Para No. Main Contents




(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.
Topic IAS 41 Para No. Main Contents
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

Topic IAS 41 Para No. Main Contents



- 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 entitys
biological assets
Living animals and plants
Detachment of produce from a
biological asset or the cessation of
biological assets 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

Topic IAS 41 Para No. Main Contents
- 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

Topic IAS 41 Para No. Main Contents
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

Subject IFRS/IAS IGAAP
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
financial statements.
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
shareholders equity is not
presented. Alternatively it may
Not Required
150

Subject IFRS/IAS IGAAP
Other
comprehensive
income and
Statement of
accumulated
other
comprehensive
income
be disclosed separately in the
primary statement of changes
in shareholders equity.
Statement of
changes in
share (stock)
holders 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
Shareholders 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

Subject IFRS/IAS IGAAP
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 parents
Consolidated financials are
mandatory for public listed
companies, whereas optional for
other entities.
152

Subject IFRS/IAS IGAAP
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

Subject IFRS/IAS IGAAP
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

Subject IFRS/IAS IGAAP
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
investors balance sheet at the
minoritys 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

Subject IFRS/IAS IGAAP
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 acquirees
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

Subject IFRS/IAS IGAAP
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

Subject IFRS/IAS IGAAP
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

Subject IFRS/IAS IGAAP
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

Subject IFRS/IAS IGAAP
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.
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Subject IFRS/IAS IGAAP
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

Subject IFRS/IAS IGAAP
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.
Deferred tax assets and
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.
Deferred tax assets and
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

Subject IFRS/IAS IGAAP
pattern in which the entity
consumes the assets benefits.
in which the entity consumes the
assets 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
compensated absences is
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
compensated absences is
recognized on accrual basis.
Liability for long-term
compensated absences is
measured using Projected unit
credit method.

163

Subject IFRS/IAS IGAAP
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.
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Subject IFRS/IAS IGAAP
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

Subject IFRS/IAS IGAAP
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

Subject IFRS/IAS IGAAP
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

Subject IFRS/IAS IGAAP
other as secondary. Certain
additional disclosure
requirements regarding
enterprises 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 managements 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 Boards (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 Auditors 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
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companys 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 Indias most trusted name and the
worlds largest Ayurvedic and Natural Health Care Company. The Companys 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 companys 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-
childrens 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.
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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 companys 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
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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 Balsaras 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), Indias largest commercial
enterprise, in servicing the growing rural market demand for consumer goods through
IOCs 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.
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IV.3.ii Infosys Ltd
a) History and background:
Infosys Ltd is a public limited company and Indias 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 Institutes
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.
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b) Activities and product-lines:
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.
c) Investment activities:
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 Peoples Republic of China named Infosys Technology (China) Co. Ltd.
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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.
d) Diversification, mergers and acquisitions activities:
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 Philips 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.
e) Other activities:
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
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Tomorrows Enterprise to showcase their plans for leading the service industry into
the new era as the next generation global consulting and service company. Infosys
labs 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
a) History and background:
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.
b) Activities and product-lines:
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
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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.
c) Investment activities:
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.


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IV.3.iv Rolta India Ltd
a) History and background:
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 Globes 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.
b) Activities and product-lines:
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
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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.
c) Investment activities:
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,
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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.
d) Diversification, mergers and acquisitions activities:
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.
e) Other activities:
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 companys 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
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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:




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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
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Year
Name of
company
Financial Indicators Under IFRS
Economic
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
Financial Indicators Under
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
Standard Deviation 1.6649 0.1614 0.2929 7.9902 4.0007
(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
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Year
Name of
company
Difference in financial Indicators
Under IFRS and IGAAP (IFRS-
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
Standard Deviation 1.4024 0.0361 0.1084 1.5180 0.7533
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)
Mean SD Mean SD Mean SD
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:
H
0
: Financial risks did not improve after the adoption of IFRS voluntarily, that is, there
is no change in the mean values of
1
Financial risk under IFRS and
2
Financial risk
under IGAAP, therefore, H
0
:
1
=
2

H
1
: Financial risks improved after the adoption of IFRS voluntarily, that is, mean
financial risks under IFRS (
1
) decreased as compared to mean financial risks under
IGAAP (
2
), therefore, H
1
:
1
<
2

So, the hypotheses are as under:
203

H
0
:
1
=
2
(1 = IFRS, 2 = IGAAP)
H
1
:
1
<
2
(left one-tailed)
Signifcance level, = 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 H
0
, the test statistic is :
=

1
-
2
)-(
1
-
2

1
+
1

Where
1
= sample mean value of financial risk under IFRS = 9.442,

2
= sample mean value of financial risk under IGAAP = 9.140,

1
-
2
= 0 as
1
=
2

1
= sample size under IFRS = 16

2
= sample size under IGAAP = 16

p
= pooled standard deviation of the sample
where,
p
= (n
1
-1) (
1
)
2
+ (n
2
-1) (
2
)
2

n
1
+n
2
-2
with
1
= sample standard deviation of financial risk under IFRS = 3.764,

2
= sample standard deviation of financial risk under IGAAP = 4.001
Therefore, given the above values,
Critical region
reject H
0
at 5%
Accept H
0

-1.697 0 t
204


p
= (n
1
-1) (
1
)
2
+ (n
2
-1) (
2
)
2

n
1
+n
2
-2
= [15 x (3.764)
2
] + [15 x (4.001)
2
]
16+16-2
= (14.168 + 16.008) (mean where n
1
=n
2
)
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 H
0
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 companys 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
(a) The above defined variables are used to build a financial matrix for
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
Financial Indicators Under IFRS
Economic
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
Financial Indicators Under IFRS
Economic
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
(b) The above defined variables are also used to build a financial matrix for
Hypothesis 2 to bring out financial indicators and economic activity-
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
Financial Indicators Under
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
Financial Indicators Under
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
Standard Deviation 0.4459 0.8867 0.1840 0.1117
(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 2 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.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
Difference in financial
Indicators Under IFRS and
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
Standard Deviation 0.0480 1.2515 0.1441 0.1153
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 three ratios and also the differences between IFRS-based and IGAAP-based
financial ratios for Hypothesis 2.
Table V.2.ii.a.aiv: Descriptive Statistics of Financial Ratios (Hypothesis 2)
Ratio
IFRS IGAAP Difference (IFRS-IGAAP)
Mean SD Mean SD Mean SD
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 activitiesone 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
IFRS IGAAP Difference (IFRS-IGAAP)
Mean SD Mean SD Mean SD
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:
H
0
: Investment activities did not increase after the adoption of IFRS voluntarily, that is,
there is no change in the mean values of
1
Investment activities under IFRS and
2
Investment activities under IGAAP, therefore, H
0
:
1
=
2

H
1
: Investment activities increased after the adoption of IFRS voluntarily, that is, mean
of investment activities under IFRS (
1
) increased as compared to mean of investment
activities under IGAAP (
2
), therefore, H
1
:
1
>
2

211

So, the hypotheses are as under:
H
0
:
1
=
2
(1 = IFRS, 2 = IGAAP)
H
1
:
1
>
2
(right one-tailed)
Signifcance level, = 0.05
Degrees of freedom, v = 16+16-2 = 30
Critical region is t > 1.697




Graph V.2.ii.b.bi: Hpothesis 2 testing-right tail with critical region
Under H
0
, the test statistic is :
=

1
-
2
)-(
1
-
2

1
+
1

Where
1
= sample mean value of investment activities under IFRS = 1.8845,

2
= sample mean value of investment activities under IGAAP = 1.8789,

1
-
2
= 0 as
1
=
2

1
= sample size under IFRS = 16

2
= sample size under IGAAP = 16

p
= pooled standard deviation of the sample
where,
p
= (n
1
-1) (
1
)
2
+ (n
2
-1) (
2
)
2

n
1
+n
2
-2
with
1
= sample standard deviation of investment activities under IFRS = 0.152,

2
= sample standard deviation of investment activities under IGAAP = 0.112
Critical region
reject H
0
at 5%
Accept H
0

0 1.697 t
212

Therefore, given the above values,

p
= (n
1
-1) (
1
)
2
+ (n
2
-1) (
2
)
2

n
1
+n
2
-2
= [15 x (0.152)
2
] + [15 x (0.112)
2
]
16+16-2
= (0.023 + 0.013) (mean where n
1
=n
2
)
2
= 0.018
Thus, inserting all the values for calculating t :
t = (1.8845-1.8789)
(0.018)

= 0.881
This value does not lie in the critical region, but lies in the acceptance region
and so H
0
gets accepted. Thus, there is no statistical evidence at 5% level of
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
companys 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 companys 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 companys 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
companys 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
Thus, the variables for investment activities are defined and accordingly
calculated. The same are tabulated as under:
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
(a) The above defined variables are used to build a financial matrix for
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
Standard Deviation 0.6960 0.1549 1.9938 0.8969
(b) The above defined variables are also used to build a financial matrix for
Hypothesis 3 to bring out financial indicators and economic activity-mergers
and acquisitions activities under IGAAP-based financial statements. The
financial matrix is as under:





216

Table V.2.iii.a.aii: Financial Matrix under IGAAP-Hypothesis 3
Year
Name of
company
Financial Indicators Under
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
Standard Deviation 0.7015 0.1682 2.0772 0.9266
(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 the difference
between the two sets is made for Hypothesis 3 to bring out the difference
between the different ratios and also the difference between means for further
analysis. The financial matrix is as under:
217

Table V.2.iii.a.aiii: Financial Matrix of Difference between IFRS and IGAAP
for Hypothesis 3
Year
Name of
company
Difference in financial Indicators
Under IFRS and IGAAP (IFRS-
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
Standard Deviation 0.0535 0.0974 0.3037 0.1749
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 three ratios and also the differences between IFRS-based and IGAAP-based
financial ratios for Hypothesis 3.
218

Table V.2.iii.a.aiv: Descriptive Statistics of Financial Ratios (Hypothesis 3)
Ratio
IFRS IGAAP Difference (IFRS-IGAAP)
Mean SD Mean SD Mean SD
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 activitiesone 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
IFRS IGAAP Difference (IFRS-IGAAP)
Mean SD Mean SD Mean SD
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:
H
0
: Mergers and acquisitions activities did not improve after the adoption of IFRS
voluntarily, that is, there is no change in the mean values of
1
mergers and
acquisitions activities under IFRS and
2
mergers and acquisitions activities under
IGAAP, therefore, H
0
:
1
=
2

H
1
: Mergers and acquisitions activities improved after the adoption of IFRS
voluntarily, that is, mean of mergers and acquisitions activities under IFRS (
1
)
increased as compared to mean of mergers and acquisitions activities under IGAAP
(
2
), therefore, H
1
:
1
>
2

So, the hypotheses are as under:
H
0
:
1
=
2
(1 = IFRS, 2 = IGAAP)
H
1
:
1
>
2
(right one-tailed)
Signifcance level, = 0.05
Degrees of freedom, v = 16+16-2 = 30
Critical region is t > 1.697





Graph V.2.iii.b.bi: Hpothesis 3 testing-right tail with critical region
Under H
0
, the test statistic is
0 1.697 t
Critical region
reject H
0
at 5%
Accept H
0

220

=

1
-
2
)-(
1
-
2

1
+
1

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

1
-
2
= 0 as
1
=
2

1
= sample size under IFRS = 16

2
= sample size under IGAAP = 16

p
= pooled standard deviation of the sample
where,
p
= (n
1
-1) (
1
)
2
+ (n
2
-1) (
2
)
2

n
1
+n
2
-2
with
1
= sample standard deviation of mergers and acquistions activities under IFRS
= 0.897,

2
= sample standard deviation of mergers and acquistions activities under IGAAP =
0.927
Therefore, given the above values,

p
= (n
1
-1) (
1
)
2
+ (n
2
-1) (
2
)
2

n
1
+n
2
-2
= [15 x (0.897)
2
] + [15 x (0.927)
2
]
16+16-2
= (0.8046 + 0.8593) (mean where n
1
=n
2
)
2
= 0.8319
Thus, inserting all the values for calculating t :
t = (1.0696-1.1556)
(0.8319)

= -0.2924
221

This value does not lie in the critical region, but lies in the acceptance region
and so H
0
gets accepted. Thus, there is no statistical evidence at 5% level of
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.
Thus, the variables for investment activities are defined and accordingly
calculated. The same are tabulated as under:
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
(a) The above defined variables are used to build a financial matrix for
Hypothesis 4 to bring out financial indicators and economic activity-
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
Financial Indicators Under
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
(b) The above defined variables are also used to build a financial matrix for
Hypothesis 4 to bring out financial indicators and economic activity-
diversification activities under IGAAP-based financial statements. The
financial matrix is as under:


224

Table V.2.iv.a.aii: Financial Matrix under IGAAP-Hypothesis 4
Year
Name of
company
Financial Indicators Under
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
Standard Deviation 0.1279 0.6949 0.4921
(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 the difference
between the two sets is made for Hypothesis 4 to bring out the difference
between the different ratios and also difference between means for further
analysis. The financial matrix is as under:
225

Table V.2.iv.a.aiii: Financial Matrix of Difference between IFRS and IGAAP
for Hypothesis 4
Year
Name of
company
Difference in financial
Indicators Under IFRS and
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
Standard Deviation 0.1442 0.0350 0.1029
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 two ratios and also the differences between IFRS-based and IGAAP-based
financial ratios for Hypothesis 4.

226

Table V.2.iv.a.aiv: Descriptive Statistics of Financial Ratios (Hypothesis 4)
Ratio
IFRS IGAAP Difference (IFRS-IGAAP)
Mean SD Mean SD Mean SD
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 activitiesone 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
IFRS IGAAP Difference (IFRS-IGAAP)
Mean SD Mean SD Mean SD
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:
H
0
: Diversification activities did not increase after the adoption of IFRS voluntarily,
that is, there is no change in the mean values of
1
diversification activities under IFRS
and
2
diversification activities under IGAAP, therefore, H
0
:
1
=
2

H
1
: Diversification activities improved after the adoption of IFRS voluntarily, that is,
mean of diversification activities under IFRS (
1
) increased as compared to mean of
diversification activities under IGAAP (
2
), therefore, H
1
:
1
>
2

So, the hypotheses are as under:
H
0
:
1
=
2
(1 = IFRS, 2 = IGAAP)
H
1
:
1
>
2
(right one-tailed)
Signifcance level, = 0.05
Degrees of freedom, v = 16+16-2 = 30
Critical region is t > 1.697




Graph V.2.iv.b.bi: Hpothesis 4 testing-right tail with critical region
Under H
0
, the test statistic is
=

1
-
2
)-(
1
-
2

1
+
1

Where
1
= sample mean value of diversification activities under IFRS = 1.793
Critical region
reject H
0
at 5%
Accept H
0

0 1.697 t
228

2
= sample mean value of diversification activities under IGAAP = 1.766

1
-
2
= 0 as
1
=
2

1
= sample size under IFRS = 16

2
= sample size under IGAAP = 16

p
= pooled standard deviation of the sample
where,
p
= (n
1
-1) (
1
)
2
+ (n
2
-1) (
2
)
2

n
1
+n
2
-2
with
1
= sample standard deviation of diversificaiton activities under IFRS = 0.493,

2
= sample standard deviation of diversification activities under IGAAP = 0.492
Therefore, given the above values,

p
= (n
1
-1) (
1
)
2
+ (n
2
-1) (
2
)
2

n
1
+n
2
-2
= [15 x (0.493)
2
] + [15 x (0.492)
2
]
16+16-2
= (0.243 + 0.242) (mean where n
1
=n
2
)
2
= 0.2425
Thus, inserting all the values for calculating t :
t = (1.793-1.766)
(0.2425

= 0.321
This value does not lie in the critical region, but lies in the acceptance region
and so H
0
gets accepted. Thus, there is no statistical evidence at 5% level of
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 countrys 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 researchers 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

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