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1.1 Introduction

Accounting being regarded as the language of business is as old as the business itself (Gupta and Mehra,
2002). It is a social phenomenon, the primary object of which is to let the management know the
economic activity of the corporate enterprises (Mehrotra and Kulshrestha, 1990). Accounting has two
fold phases, first measuring and arraying the economic data and second communicating the results of
this process to the interested parties (Gupta, 1977). American Accounting Association (AAA, 1966)
describes it as the process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of information. Accounting Principles Board (APB) of the
American Institute of Certified Public Accountants (AICPA) defined accounting as a service activity. Its
function is to provide quantitative information financial in nature and intended to be useful in making
economic decisions and making reasoned choices among alternative courses of action. Accounting
includes branches i.e. financial accounting, managerial accounting and government accounting (Singh,
2005). In 1975, the American Accounting Association redefined accounting in broader sense as to
provide information which is potentially useful for making economic decisions and which if provided will
enhance social welfare.

The primary function of accounting is recording the economic data of a business enterprise and to
facilitate the administration of its financial activities. It has to measure the economic activity i.e.
employment of its assets for profit; and disclose it in the financial statements and reports of the
financial aspects of the activities of the enterprise for a particular period (Saeed, 1990). Thus all the
activities of a business enterprise have to be disclosed to the shareholders and other users so that they
can develop their own attitude towards the firm and know that how efficiently the limited resources of
the organization are being utilized through sound decisions.

Financial accounting was formerly concerned with reporting from office managers to principals
conveying that all was well with the book-keeping of the business. But times now have changed with an
increasing control by the corporate sector over the economic activity; these financial reports have
assumed greater importance. They are now considered a corner stone in the trading structure helping to

bridge the gap between the producer and the user, the owner and the manager and commerce and the
government. Further, these reports are consulted by a large sector of people, including the government,
who have a wide range of interests in them as owners, tax-receivers, workers, employees,
administrators, producers, creditors, debenture-holder and the like, besides labour-unions and
shareholder’s associations (Gupta, 1977)

1.2 Concept of Corporate Financial Reporting

The concept of corporate financial reporting has gained much significance due to the expansion and
growth of company form of organization, increased competition and increase in the information needs
of the users (Singh, 2005) The corporate financial reporting is a system of communication between the
management and the user-groups of the financial statements; in order to report the results of the
business activities of a corporate enterprise and also to demonstrate the credibility, accountability and
reliability of its working (Saeed,1990) Kohler’s dictionary for accountants defines it as an explanation or
exhibit attached to a financial statement, or embodied in a report containing a fact, opinion or detail
required or helpful in the interpretation of the statement or report (Cooper and Ijiri, 1984). As per
American Accounting Association the financial reporting is the movement of information from the
private domain (i.e. inside information) into the public domain. It is a process through which an entity
communicates with the outside world (Chandra, 1974).

The subject of financial reporting has gained significance during the recent years because of various
compelling factors, such as the expansion and growth of the company form of organization; shift in the
emphasis from the concept of ‘shareholders’ to ‘stakeholders’ and increase in their informational needs;
the enactments and amendments in disclosure laws in various countries; professionalism of
management; emergence of accounting as a recognized profession; and the pronouncements on
disclosure made by various professional accounting bodies in India and abroad (Chander,1992). A series
of scandals that have rocked the financial markets and shaken investor confidence have further
increased the importance of financial reporting.

There is a general consensus among professionals that a disclosure should be full, fair and adequate. Full
disclosure requires that financial statements should be designed and prepared to portray accurately the
economic events that affected the firm for the period and to contain information sufficient to make
them useful and not

misleading to the average investor (Porwal, 1989). The need for adequate, fair and full disclosure is
irrefutable in a free enterprise economy. One can’t over-emphasize the importance of availability of
information in investment decisions. It assists the investors in selecting the best portfolio for their
investment (Lal, 1985). In the absence of adequate information investors would not be in a position to
make wise investment decisions, because it will be difficult to distinguish between potentially successful
and unsuccessful business. (Chander, 1992)

Besides investors, disclosure is significant from the point of view of large number of other potential
users. Such potential users include, present and prospective investors, lenders, suppliers, creditors,
employees, management, customers, financial analysts and advisors, brokers, underwriters, stock
exchange authorities, legislators, financial press and reporting agencies, labour unions, trade
associations, business researchers, academicians and above all the public at large. Disclosure has
behavioral implications for such a wide range of users. There is an obvious need for reliable information
which they can use to acquire an essential knowledge of the way in which business enterprises are
behaving in relation to the public interest. By perceiving enterprise behavior through communicated
information, interested parties can use this knowledge to amend or adopt their own behavior vis-à-vis.
the enterprise concerned (Lee, 1976). Thus financial reporting in fact is an effective communication of
accounting information.

The concept of fair disclosure implies that the accounting and other information should be unbiased and
impartial. Its objective is to provide equal treatment to all potential financial statement readers (Chahal,
1990). The task of defining the term ‘adequate disclosure’ is more difficult because the adequacy of
disclosure cannot be tested accurately and precisely since no definite test exists in financial reporting to
measure it and moreover, it is a subjective term. In very comprehensive terms a disclosure can be an
‘adequate disclosure’ when it entails the answers of “to whom, why, how much, what and when the
information to be disclosed” (Chahal, 1990).

1.3. Objectives of Financial Reporting

Corporate financial reporting is not an end in itself but is a means to certain objectives (Devarajan,
2008). The fundamental objective of corporate financial reporting is to communicate economic
measurements of information about the resources and performance of the reporting entity useful to
those having reasonable rights to such

information and interest in the entity (Oza, 1990). The annual financial statements of a company not
only aid its management to regulate the prices of its goods and services but also help its external users
in different ways such as existing and potential investors in evaluating their past decisions and making
changes in their investment policies, creditors in assessing company’s worthiness, profitability and
liquidity, and government in administering the system of taxing the companies (Bhattar, 1995).

Various agencies and professional bodies involved in promoting corporate financial reporting have
attempted to formulate objective of financial reporting as to make accounting information relevant and
useful (Singh, 2005). The Accounting Principle Board of America in 1970, True Blood Report in 1973,
Corporate Report London in 1975, Financial Accounting Standard Board (FASB) 1978 and The Stamp
Report 1980, Accounting Standard Board (ASB of U.K.) in 1991, Institute of Chartered Accountant of
India (ICAI) in 2000, FASB in 2006 and IASB and FASB jointly in 2007 have contributed in the formulation
of the objectives of financial reporting. The objectives of financial reporting given by these bodies have
been summarized below:

1.3.1 Accounting Principle Board (APB) 1970

The Accounting Principle Board of America issued its Statement (4), Basic Concepts and Accounting
Principles Underlying Financial Statement of Business Enterprises, in 1970. This statement states 1
particular, 5 general and 7 qualitative objectives. The particular objective of financial statements is to
present fairly and in conformity with Generally Accepted Accounting Principles (GAAP), the financial
position, the results of operations and other changes in the financial position of an enterprise.

The general objectives of financial statements are:

1. To provide reliable information about economic resources and obligations of a business enterprise in
order to (a) evaluate its strengths and weaknesses, (b) show its financing and investments, (c) evaluate
its ability to meet its commitment and (d) show its resource base for growth.

2. To provide reliable information about changes in net resources resulting from a business enterprise’s
profit-directed activities in order to (a) show the investors the expected dividend return; (b) show the
organization’s ability to pay its creditors and suppliers, provide jobs for employees, pay taxes, and
generate funds for expansion;

(c) provide the management with information for planning and control (d) show the long-term
profitability of the enterprise.

3. To provide financial information useful for estimating the earning potential of the firm.

4. To provide other needed information about changes in its economic resources and obligations.

5. To disclose other information relevant to the needs of the users.

The qualitative objectives of financial reporting are:

1. Relevance, which means selecting the information most likely to aid the users in their economic

2. Understandability, which implies not only that the selected information must be intelligible but also
that the users can understand it.

3. Verifiability, which implies that the accounting results may be corroborated by independent
measurers using the same measurement methods.

4. Neutrality, which implies that the accounting information is directed towards the common needs of
the users rather than the particular needs of specific users.

5. Timeliness, which implies an early communication of information to avoid delays in economic


6. Comparability, which implies that differences should not be the result of different financial accounting
7. Completeness, which implies that all the information that is “reasonably” needed to fulfill the
requirement of the other qualitative objectives should be reported.

The above general objectives fail to identify the information needs of the owners and the creditors. The
main objective was to provide general purpose financial reporting, which provides information for
unknown users having multiple decision objectives. Providing information for specific user groups having
known decision objectives was not found operational.

1.3.2 The True Blood Report-1973

In view of the criticism of corporate financial reporting, the American Institute of Certified Public
Accountants appointed a study group in 1971 under the

chairmanship of Robert M. True-blood. The study group visited various places, interviewed executives,
held meetings with institutional and professional groups and submitted its report in 1973. The True-
blood committee recommended 12 objectives of financial reporting. The main objective is stated as

“The basic objective of financial statements is to provide information useful for making economic
decisions.” The other eleven objectives are stated below:

1. To serve primarily those users who have limited authority, ability or resources to obtain information
and who rely on financial statements as their principal source of information about an enterprise’s
economic activity.

2. To provide information useful to investors and creditors for predicting, comparing, and evaluating
potential cash flow to them in terms of amount, timing, and related uncertainty.

3. To provide users with information for predicting, comparing, and evaluating enterprise’s earning

4. To supply information useful in judging management’s ability to utilize enterprise’s resources

effectively in achieving the enterprise’s primary goal.

5. To provide factual and interpretative information about transactions and other events, which is useful
for predicting, comparing, and evaluating enterprise’s earning power. Basic underlying assumption with
respect to matters subject to interpretation, evaluation, prediction, or estimation should be disclosed.

6. To provide a statement of financial position useful for predicting, comparing, and evaluating
enterprise’s earning power. The statement should provide information concerning enterprise’s
transactions and other events that are part of incomplete earning cycles. Current values should also be
reported when they differ significantly from historical cost. Assets and liabilities should be grouped or
segregated by the relative uncertainty of the amount and timing of prospective realization or
7. To provide a statement of periodic earnings useful for predicting, and evaluating enterprise-earning
power. The net result of completed earning cycles and enterprise activities resulting in recognizable
progress towards the completion of incomplete cycles should be reported. Changes in the values
reflected in successive statements

of financial position should also be reported, but separately, since they differ in terms of their certainty
of realization.

8. To provide a statement of financial activities useful for predicting, comparing, and evaluating
enterprise-earning power. This statement should report mainly on the factual aspects of enterprise
transactions having or expected to have significant cash consequences. This statement should report
data that requires minimal judgment and interpretation by the preparer.

9. To provide information useful for the predictive process. Financial forecasts should be provided when
they will enhance the reliability or user’s predictions.

10. For government and not-for-profit organizations, an objective of financial statements is to provide
information useful for evaluating the effectiveness of the management of resources in achieving the
organization’s goals.

11. To report on those activities of the enterprise affecting society which can be determined and
described or measured and which are important to the role of the enterprise in its social environment.

The True Blood Report also presented 7 qualitative characteristics which financial statement information
should possess in order to satisfy needs of the users. These are:

1. Relevance and Materiality

2. Substance rather than Form

3. Reliability

4. Freedom from Bias

5. Comparability

6. Consistency

7. Understandability

This study group considered the needs of the investors and the creditors but there are other users of
financial statements whose needs were not given proper weight.

1.3.3 The Corporate Report, London 1975

The Accounting Standards Steering Committee of the Institute of Chartered Accountants in England and
Wales published the Corporate Report as a discussion paper to review the list of users, purposes and
methods of modern financial reporting in

the United Kingdom. The basic philosophy of the report was that financial statements should be
appropriate to their expected use by the potential users. The report emphasized seven characteristics
viz, relevance, understandability, reliability, completeness, objectivity, consistency and timeliness in
addition to the other fundamental objectives of annual reports. The Corporate Report suggested the
need for the following additional statements:

1. A statement of Value Added to show how the wealth was produced, and how it has been distributed
among the employees, the state, the providers of capital and its reinvestment for maintenance and

2. An employee report dealing with the size and composition of the work force, efficiency, productivity,
industrial relations, the benefits earned, personnel policies, etc.

3. A statement of money exchanges with the government showing sales tax, corporation tax, rates,
royalties and other taxes paid to the government, i.e., financial relationship between the enterprise and
the state.

4. A statement of transactions in foreign currency showing overseas borrowings and repayment,

dividends received and paid by the government to other countries.

5. A statement of future prospects showing forecasts of profits, employment and investment.

6. A statement of corporate objectives showing management policy and strategies.

1.3.4 Financial Accounting Standard Board (FASB)-1978

The financial Accounting Standard Board laid down the following objectives in November 1978 after
considering the True blood Committee Report.

(i) Financial reporting should provide information that is useful to the present and potential investors
and creditors and other users in making rational investment, credit and similar decisions. The
information should be comprehensible to those who have a reasonable understanding of business and
economic activities and are willing to study the information with reasonable diligence.

(ii) Financial reporting should provide information to help the present and potential investors and
creditors and other users in assessing the amounts, timing and uncertainty of prospective cash receipts
from dividends or interest and the proceeds

from the sale, redemption or maturity of securities or loans. Since ‘investors’ and ‘creditors’ cash flows
are related to enterprise’s cash flows, financial reporting should provide information to help investors,
creditors, and others, assess the amounts, timing and uncertainty of prospective net cash inflows to the
related enterprises.

(iii) Financial reporting should provide information about the economic resources of an enterprise, the
claim to those resources (obligations of the enterprise to transfer resources to other entities and
owner’s equity), and the effects of transactions, events and circumstances that change its resources and
claim to those resources.

(iv) Financial reporting should provide information about an enterprise’s financial performance during a
period. Investors and creditors often use information about the past in assessing the prospects of an
enterprise. Thus, although investment and credit decision reflect investors’ and creditors’ expectations
about future enterprise performance, these expectations are commonly based at least partly on the
evaluation of past performance.

(v) Financial reporting should provide information about how an enterprise obtains and spends cash,
about its borrowing and repayment of borrowings, about its capital transactions, including cash dividend
and other distributions of enterprises resources to the owners, and about other factors that may affect
an enterprise’s liquidity or solvency.

(vi) Financial reporting should provide information about how the management of an enterprise has
discharged its stewardship responsibilities to the owners (shareholders) for the use of enterprise
resources entrusted to it.

(vii)Financial reporting should provide information that is useful to the management and the directors in
making decisions in the interests of the owners.

The FASB emphasized the use of financial reporting for different classes of users and not for the
creditors and the investors only. Predictability was also included as an element of the objectives of
accounting information. The intention was to provide useful information for making business and
economic decisions by the parties having an interest in the organization.


1.3.5 The Stamp Report-1980

The Canadian Institute of Chartered Accountants published report in June 1980 on “Corporate
Reporting-Its Future Evolution,” written by Edward Stamp and popularly known as Stamp Report. It
states the following as the objectives of financial accounting:-

1. One of the primary objectives of published corporate financial reports is to provide an accounting by
the management to both equity and debt investors, not only for the management’s exercise of its
stewardship function but also for its success (or otherwise) in achieving the goal of producing a
satisfactory economic performance by the enterprise and maintaining it in a strong and healthy financial

In short important objective of financial reporting is the provision of useful information to all of the
potential users of such information in a form and in a time frame that is relevant to their various needs.

2. It is an objective of good financial reporting to provide such information in such a form as to minimize
uncertainty about the validity of the information, and to enable the user to make its own assessment of
the risks associated with the enterprise.

3. It is therefore necessary that the standards governing financial reporting should have ample scope for
innovation and evolution as improvements become feasible.

4. The objectives of financial reporting should be taken to be directed towards the needs of the users
who are capable of comprehending a complete (and necessarily sophisticated) set of financial
statements or alternatively, to the needs of experts who will be called on by the unsophisticated users
to advise them.

The Stamp Report stressed the accountability of the management to equity and debt investors. It also
emphasized that information should be given in such a manner as to minimize uncertainty about the
validity of the information. The report should also include information on innovations and evolution of
the enterprise. It should be useful for both sophisticated and unsophisticated users.

1.3.6 The International Accounting Standards Committee (IASC)-1989

The IASC issued a framework for the preparation and presentation of financial statements in the year
1989. According to this framework the objectives of the financial statements is to provide information
about the financial position, performance and


changes in financial position of an enterprise that is useful to a wide range of users in making economic
decisions ( Porwal,2007).

1.3.7 Accounting Standards Board- 1991

The Accounting Standards Board of the U.K. issued a “Statement of Principles” in July 1991.It states that
the objective of financial statements is to provide information about the financial position, performance
and financial adaptability of an enterprise that is useful to a wide range of users in making economic
decisions (Porwal, 2007).

The above statement shows that the objectives of financial statements issued by the IASC and ASB are
almost similar. The ASB also stated that to meet the informational needs of the users is the basic
objective of financial statements, which can be fulfilled by preparing and presenting the general purpose
financial statements (Singh, 2009).
1.3.8 Institute of Chartered Accountants of India (ICAI) - 2000

Institute of Chartered Accountant of India (ICAI) have also contributed in the formulation of the
objectives of financial reporting. The Accounting Standard Board (ASB) of Institute of Chartered
Accountants of India (ICAI) issued a framework for the preparation and presentation of financial
statements in July 2000. Following are the objectives of financial statements given in the framework for
preparation and presentation of financial statements by ICAI:

The objective of financial statements is to provide information about the financial position,
performance and cash flows of an enterprise that is useful to a wide range of users in making economic

Financial statements prepared for this purpose meet the common needs of most users. However,
financial statements do not provide all the information that users may need to make economic decisions
since (a) they largely portray the financial effects of past events, and (b) do not necessarily provide non-
financial information.

Financial statements also show the results of the stewardship of management, or the accountability of
management for the resources entrusted to it. Those users who wish to assess the stewardship or
accountability of management do so in order that they may make economic decisions; these decisions
may include, for example, whether to


hold or sell their investment in the enterprise or whether to re-appoint or replace the management.

ICAI has also stated four qualitative characteristics in its framework for preparation and presentation of
financial statements i.e.





According to the Institute of Chartered Accountants of India, there are three constraints on relevant and
reliable information i.e. timeliness, balance between benefit and cost and balance between qualitative
characteristics. These are explained in detail under the head qualitative aspect of financial reporting.

1.3.9 Financial Accounting Standards Board (FASB)-2006

According to the preliminary views on conceptual framework for financial reporting issued by Financial
Accounting Standards Board (FASB) of the Financial Accounting Foundation, the proposed objectives of
financial reporting are as under:
Providing information useful in making investment and credit decisions.

Providing information useful in assessing cash flow prospects

Providing information about an entity’s resources claims to those resources, and changes in resources
and claims.

Besides these objectives FASB has also mentioned various qualitative characteristics of decision- useful
financial reporting information in the conceptual framework i.e.






These characteristics are defined within the two constraints of materiality and benefit and costs.


1.4 Annual Report-The Most Useful Source of Financial Reporting

There are many media adopted by the companies for dissemination of information to outsiders. These
include prospectus, press releases, statutory reports, interim reports, financial dailies and magazines,
interviews between management representatives and the professional financial analysts and the
published accounts i.e. the ‘annual report’ (Chander, 1992). Of all these media, annual report is the most
significant channel of disclosure. It is the prime medium for projecting a company at its audience and is
the most effective voice in corporate communication (Haggie, 1984). Annual report is generally related
with the performance of the company during a particular accounting year. The Companies Act, 1956
provides the guidelines in connection with the preparation and presentation of the statutory part of
annual reports through its various sections leaving a vital zone of information to the discretion and
culture the companies may prefer to use (Datta, 1990).

Annual report is the end product of the accounting information process and set of accounting
measurement rules. It reflects a combination of recorded facts, accounting conventions and personal
judgments of those who write up the accounts (Jiloka and Verma, 2006). Annual repot is really directed
to the community at large to whomsoever it may have been formally addressed. All groups have access
to it; their attitude may be influenced by it. It is the single most important document in corporate
reporting. It is a benchmark for measuring performance, a periodic summary of progress and an auditing
checkpoint (Bhattar, 1995). There are several important reasons for treating the annual report as a
valuable source of information to the shareholders and other users. Firstly, annual report, being the
audited document, provides authenticated information about the issuing entity and thus creates
confidence among the public. Secondly, it is relatively more and easily accessible than any other source
of information. Thirdly, annual report is the single document, which contains besides financial
statements, some other valuable information such as highlights of the year, historical data, significant
performance ratios, accounting policies, price level adjusted statements, human resource accounting,
segmental information, company’s present and future policies, etc., which is not provided by any other
single medium (Chander,1992). Thus, annual report is the communication tool that is the reflection of
corporate performance, accomplishments, objectives and mission.


1.5 Qualitative Characteristics of Financial Reporting

Information which is reported to facilitate economic decisions should possess certain qualitative
characteristics. Qualitative characteristics are the attributes that make the information provided in the
financial statements useful to the users (Devarajan, 2008). One of the basic qualities of published
accounting information is that it should be credible or it should be believed by its users. If it does not
possess the quality of credibility, it will not be used (Bhattar, 1995).The Accounting Principles Board of
U.S.A suggested seven qualitative characteristics of published accounting information i.e. relevance,
understandability, verifiability, neutrality, timeliness, comparability and completeness. Similarly the
Trueblood Report also suggested seven qualitative characteristics which financial statement information
should possess: these are relevance and materiality, substance rather than form, reliability, freedom
from bias, comparability, consistency and understandability. FASB (1980) in SFAC No.2 on ‘Qualitative
Characteristics of Accounting Information’ has described these attributes as the ingredients that make
the information useful and the qualities to be sought when accounting choices are made. These
attributes can be viewed as a hierarchy of qualities, with usefulness for decision making of most
importance. Without usefulness, there would be no benefits from information to set against its costs
(Chander,1992). The various qualitative aspects of financial reporting are discussed as under:

1.5.1 Relevance

Relevance is a dominant criterion in taking decision regarding disclosures of information (Gupta and
Mehra, 2002). Relevant information is that which satisfies the informational needs of the users and
helps them in evaluating the management and its policies for the purpose of their decisions (Jiloka and
Verma, 2006).It implies that all those items of information should be reported that may aid the users in
making economic decisions. (Saeed, 1990) information is relevant if it has the capacity to confirm or
change a decision maker’s expectations. First of all, purpose for which the information is sought, should
be identified, only when the information is purpose oriented and it becomes useful in making rational
decisions (Bhattar,1995) The Accounting Principle Board has described relevance as the primary
qualitative objective of financial accounting information.FASB in its concept No.1 has stated that
relevant accounting information must be capable of making a difference in a decision by helping

users to form predictions about the outcomes of past, present and future events or correct
expectations. The True Blood Report, the Corporate Report London and the Financial Accounting
Standards Board in its conceptual framework 2006 have also mentioned relevance as the qualitative
characteristic of decision-useful financial reporting information. The whole of the exercise of corporate
disclosure is futile, if the information disclosed is not relevant to the needs of the users (Chander,1992).
Thus the information, which is not relevant, is useless for the users.

1.5.2 Reliability

Reliability implies that information communicated should represent what it purports to represents and
further being free from error and bias also (Bhattar,1995). The True Blood Report and the Corporate
Report London also emphasized reliability as one of the qualitative features of financial reporting.
Reliability helps in decision making process. Reliable information can create confidence in the minds of
the users. It is need for reliable information that underlies the requirement that financial reports be
audited by independent auditors (Jiloka and Verma, 2006).Information has the quality of reliability when
it is free from material error and bias and can be depended upon by users to represent faithfully that
which it either purports to represent or could reasonably be expected to represent (Chander, 1992). For
information to be reliable; it must be verifiable to some degree, and it must be free from bias, i.e.
objectivity or neutrality. The AAA committee says that ‘verifiability requires that essentially similar
measures or conclusions would be reached if two or more qualified persons examine the same data’.
Freedom from bias means that facts have been impartially determined and reported. It also implies, that
the events or results should be reported in the financial statements without the bias or prejudice of the
persons concerned with reporting such information (Chander, 1992).Thus financial reporting should
provide information that is useful to the present and the potential investors and creditors and other
users in making rational investment, credit and similar decisions.

1.5.3 Understandability

The Accounting Principles Board of America in its statement No.4 stated understandability as the
qualitative objective of financial reporting. It implies not only that the selected information must be
intelligible but also that the users can understand it. The True Blood Report, the Corporate Report
London and the conceptual framework


issued by FASB have also suggested understandability as an important characteristic which financial
information should possess.

The information must be understandable, so that one can make use of it without any specific knowledge
of the subject (Bhattar, 1995). The information should be presented in reports in such a way that it can
be understood by reasonably well informed as well as by sophisticated readers (Chander, 1992).
Accounting information is more understandable if it is quantifiable, is consistent, is comparable with
similar information, and is simple. So consistency and comparability are the two significant attributes of
information which make it understandable and hence useful to the users. Consistency refers to use of
identical accounting practices, procedures and concept by the enterprise from one period to another.
Consistency is an important criterion in disclosure mechanism. It makes the information comparable and
thus helps the users in decision making. However, it should not prove a bottleneck in bringing
improvements in accounting practices and policies. Whenever users; needs change over a period of time
and require improvements in accounting policies and practices, the new practices or procedures should
be adopted and followed. Thus consistency is desirable until a need arises to improve practices, policies
and procedures (Bhattar, 1995).

Comparability is an outcome of consistency. It can be viewed from two angles, i.e. comparability of
information between periods in case of a single firm and comparability between firms (Chander,
1992).To make the information comparable an enterprise should adopt the generally accepted
accounting principles and accounting standards, make disclosure of changes in accounting policies and
explain about company’s accounting policies. Understandability does not necessarily mean simplicity or
using elementary terminology. It means the presentation of information in clearest form so as to help in
making best use of information by the users and avoid confusion in their minds (Bhattar, 1995).

1.5.4 Materiality

Concept of materiality is a basic accounting concept. The True Blood Committee in its report has also
suggested this as an attribute of financial reporting. This concept implies that not all financial
information should be reported, immaterial information may be ignored while doing financial reporting
(Gupta and Mehra, 2002). Information is said to be material if its omission or misstatement would
influence the economic decisions of users on the basis of the financial statements (Chander,1992).


Kohler’s dictionary defines materiality as the characteristics attaching to a statement, fact or item
whereby its disclosure or the method giving it expression would likely to influence the judgment of a
reasonable person (Singh, 2005). Materiality involves the use of judgment. No generally accepted
guidelines have been established for judging materiality. These judgments should be made considering
the significance of information and its impact on user’ economic decisions (Saeed, 1990).It is significant
to note that some items though very smaller in size and quantity, may be material because the
materiality of an item not only depends on its relative size but also on its nature or combination of both
(Saeed, 1990). Thus information is material if it is relevant to the decisions of the users, as materiality
and relevance both are defined by reference to the needs of users in making economic decisions.

1.5.5 Timeliness

Timeliness which is an ancillary aspect of relevance means having information available to decision
makers before it loses its capacity to influence decisions. (Anonymous,2006).The Accounting Principle
Board (APB) in its Statement No.4 (1970) “Basic Concepts and Accounting Principles Underlying Financial
Statements of Business Enterprises” has mentioned ‘timeliness’ as one of the qualitative objectives of
financial reporting. According to this statement, “timely financial accounting information is
communicated early enough to be used for economic decisions which it might influence and to avoid
delays in the making of these decisions” (Kohli, 1998). Similarly the Corporate Report London (1975)
issued by the Accounting Standards Steering Committee (ASSC ) of the Institute of Chartered
Accountants in England and Wales observed that if the reports are to be useful and to fulfill their
fundamental objectives, they must possess timeliness as one of the characteristics. Further Financial
Accounting Standards Board (FASB) in its conceptual framework in the year 2006 has also mentioned
timeliness as one of the qualitative features of financial reporting. Timeliness means having information
available to decision makers before it loses its capacity to influence decisions (Meena, 1995). Timeliness
alone cannot make information relevant but a lack of timeliness can rob information of relevance it
might otherwise have had (Singh, 2005). Timely disclosure is fundamental to good investors relations. If
information would be disclosed timely, decisions could be taken by the users promptly and exactly
(Jiloka and Verma, 2006). Thus the accounting information must be communicated before its usefulness
is lost or when its decision is due, it should be available to its users. Information has its time value
(Bhattar, 1995).


1.5.6 Completeness

The Accounting Principle Board of America in its Statement No. 4 mentioned completeness as the
qualitative objective of financial accounting, According to this statement ‘completeness’ implies that all
the information that is reasonably needed to fulfill the requirement of the other qualitative objectives
should be reported. The True Blood Study Group in its report stated, “The qualitative characteristics of
financial statements, like objective, should be based largely upon the needs of users of the statements.
Information is useless unless it is relevant and material to user’s decision. Information should be as free
as possible from any biases of the preparer. In making decisions user should not only understand the
information presented, but also should be able to assess its reliability and compare it with information
about alternative opportunities and previous experience. In all cases information is more useful if it
stresses economic substance rather than technical form” (Bhattar, 1995). Similarly, Corporate Report
London has suggested ‘completeness’ as an essential feature of financial reporting. The accounting
information must be complete from the point of view of statutory requirements and materiality. The
users of accounting must be provided with full information so that they may take right decisions at right
time (Bhattar, 1995). However; completeness is relative because financial statements cannot show
everything. To try to include in financial reporting everything that any potential user might want would
not be cost beneficial and might conflict with other desirable characteristics, such as understandability.
(Anonymous, 2006) Thus information disclosed through financial reporting must be complete within the
bounds of materiality and cost (Gupta and Mehra, 2002). An omission can cause information to be false
or misleading and thus unreliable and different in terms of its relevance.

1.5.7 Neutrality

According to Accounting Principle Board (APB), Neutrality means that the accounting information is
directed towards the common needs of the users rather than the particular needs of specific users. The
accounting information must be fair; it must be measurable and reported with as much objectivity and
neutrality as possible. The information must be based on firm verifiable evidence and it must not tend to
benefit a particular user at the cost of other users (Bhattar, 1995). Financial Statements are not neutral
if, by the selection or presentation of information; they influence the making of a decision or judgment
in order to achieve a predetermined result or outcome.


1.6 Constraints on Relevant and Reliable Information

1.6.1 Timeliness

If there is undue delay in the reporting of relevant information it may lose its relevance. To provide
information on a timely basis it may often be necessary to report before all aspects of a transaction or
other event are known thus impairing the reliability. Conversely, if reporting is delayed until all aspects
are known, the information may be highly reliable but of little use to users who have to make decisions
in the interim. In achieving a balance between relevance and reliability, the overriding consideration is
how best to satisfy the information needs of users (Anonymous, 2000).

1.6.2 Balance between Benefit and Costs

The balance between benefit and cost is a pervasive constraint rather than a qualitative characteristic
(Anonymous, 2000). The benefits derived from any information should exceed the cost of providing it.
FASB says in its conceptual framework, “the benefits and costs from financial information are usually
difficult or impossible to measure objectively. Different persons will honestly disagree about whether
the benefits of the information justify its costs.” Furthermore, the costs do not fall on those users who
enjoy the benefits. Benefits may also be enjoyed by users other than those for whom the information is
prepared. For these reasons it is difficult to apply cost-benefit test in any particular case. According to
Singh (2005), the major benefits of the financial reporting to the investors are the reduction of the
likelihood that they will misallocate their capital. As far as costs are concerned he has classified them
into three parts: The cost of developing and disseminating information, the cost of litigation attributable
to informative disclosure, and the cost of competitive disadvantage attributable to disclosure.

1.6.3 Balance between Qualitative Characteristics

A trade-off between various qualitative characteristics is very much necessary. The relative importance
of different characteristics varies from case to case. Generally the aim is to achieve an appropriate
balance between the characteristics in order to achieve the objective of financial reporting (Anonymous,



AAA (1966). A Statement of Basic Accounting Theory (ASOBAT) Evanston, Illinois, USA.
Accounting Priniciples Board (1970). Statement of Accounting Principles, No.4: Basic Concepts and
Accounting Priniciples Underlying Financial Statements of Business Enterprises, AICPA, New York.

ASSC (1975). The Corporate Report, Accounting Standards Steering Committee, ICAEW, London.

AICPA (1973). Report of the Study Group on Objectives of Financial Statements-The Trueblood Report,
New York.

Anonymous (2000). Framework for the Preparation and Presentation of Financial Statements, issued by
the Accounting Standards Board (ASB) of ICAI, p. 19-23.

Anonymous (2006). Conceptual Framework for financial reporting: Preliminary Views, Financial
Accounting Standards Board (FASB) of the Financial Accounting Foundation, No. 1260-001.

Bhattar, M.M. (1995). Corporate Published Accounting Information and Investors, ISBN-81-900422-9-7,
Books Treasure Jodhpur, India. p.6.

Chahal, S.S. (1990). New Prespectives in Corporate Financial Reporting-Adequate Disclosure in Financial
Reporting, in M. Saeed (Ed.), Corporate Financial Reporting, ISBN 81-7041-348-6, Anmol Publications,
New Delhi, p. 22.

Chander, Subhash (1992), “Corporate Reporting Practices”, ISBN 81-7100-411-5, Deep and Deep
Publications, New Delhi, p. 1-2.

Chandra, Gyan (1974). A Study of the Consensus on Disclosure among Public Accountants and Security
Analysts. The Accounting Review, p. 733-742.

Cooper, W.W., Ijiri and Yuji (1984.) Kohler’s Dictionary for Accountants, Prentice Hall of India Pvt. Ltd.,
New Delhi.

Datta, Manipadma (1990). Corporate Financial Reporting in India-The Changing Prespective, in M. Saeed
(Ed.) Corporate Financial Reporting, Anmol Publications, New Delhi, p.75-92.

Devarajan, R. (2008). Financial Reporting. ISBN No. 978-81-8441-070-9.Vol. I, p. 3.3, A Book by Board of
Studies, Institute of Chartered Accountants of India.

FASB (1978). Statement of Financial Accounting Concepts No.1: Objectives of Financial Reporting by
Business enterprises, Financial Accounting Standards Board, in The Journal of Acountancy,Feb.1979, p.

Gupta, S.K. and Mehra, Arun (2002). Contemporary Issues in Accounting, ISBN- 81-272-0389-0, p.1.

Gupta, N. Das (1977). Financial Reporting in India, Sultan Chand and Sons, New Delhi, p. 3.

Haggie, David (1984). The Annual Report as an Aid to Communication Accountancy, p. 66-67.

IASC (1989). International Accounting Standards Committee, Framework for the Preparation and
Presentation of Financial Statements, The Chartered Accountant, Aug. pp.124-132.

Jiloka, S.K. and Verma S. (2006). Corporate Financial Disclosure. The Management Accountant, 41(11):

Kohli, Pooja (1998). Corporate Disclosure Practices- A comparative Study of the Indian and The U.S.
Companies., A Ph.D thesis submitted to the University Business School, Punjab University Chandigarh.

Lal, Jawahar (1985). Financial Reporting by Diversified Companies. Vision Books, Delhi, p. 7.

Lee, T.A. (1976). Company Financial Reporting-Issues and Analyses.Thomas Nelson and Sons. p. XV.

Meena, D.D (1995), “Corporate Reporting Practices in Public Enterprises”, ISBN-81-7000-189-7, Ess Ess
Publications. P. 52.

Mehrotra, H. C. and Kulshrestha, D.K. (1990). Financial Reporting Practices in Public enterprises in India.
In M.Saeed (Ed), Corporate Financial Reporting, Anmol Publications, New Delhi, p. 7.

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Financial Reporting, Anmol Publications, New Delhi, p. 30.

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Edition, p. 81 and 136-137.

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A Ph.D. Thesis submitted to the Faculty of Business Studies of the Punjabi University, Patiala





1. Introduction

Modern enterprises operate in multilingual accounting world Not only the reporting

languages but also the reporting requirements differ per country As seen in Chapter-

1, contents of the financial reports are different, terms used m financial statements

are different and the underlying principles used in the preparation of the financial

reports are different all over the world This results in producing totally noncomparable

financial figures under each set of accounting assumptions Indian

companies report different amounts of profits for the same year under different

accounting regimes (refer Table 1 I), UK or British companies also report large

variations in shareholders' equity for the same years under domestic GAAP and USGAAP

(refer Table 1 2) French insurer AXA reported Net profit of 949 million

euros under French GAAP and Net loss of 2,588 million Euros under US-GAAP for

the year 2002

One thing proved from these illustrations is that there are major differences in

financial reporting around the world, resulting into different figures of profits or

shareholders' equity for the same years but under different accounting regimes All

companies registered in India follow accounting standaids issued by the Institute of

Chartered Accountants of India (ICAI) while preparing financial statements

Companies registered at US stock exchanges piepare their financial statements using

US Generally Accepted Accounting Principles (GAAP) and those registered at

London stock exchange (LSE) aie using International Financial Reporting Standards

(IFRS) fiom the yeai 2006 An Indian company legisteied at New Yoik and London

stock exchanges will have to piepaie its hnancial statements using Indian accounting

standaids. US-GAAP and IFRS

This variety leads to gieat complications for those preparing, consolidating, auditing

and interpreting published Financial Statements lASB's Leisenrmg acknowledges

that, "It is investors who pay the greatest price, trying to compare investment

alternatives while using financial infoimation that is not comparable " To combat

this, an attempt has been made in this study to understand these differences The

number and magnitude of the differences make clear the scope for utility of this


A global comparative study should involve comparison of all domestic GAAP, USGAAP

and IFRS This is also required for another reason and that reason is, now

companies have choices about where they do their transactions, list their shares and

keep their staff There is talk of "regulatory arbitrage" meaning that companies look

for the most favourable environments to opeiate in According to Choi and Meek

(2007, p. 23), advances in information technology are causing a radical change in

The economics of production and distribution Typically, a global company would

have Its manufacturing plant in China, its IT seivices will be outsourced to India,

finances will be managed from London and sales will be to the whole woild


However this study is planned keeping Indian situation at the center Ken Livingston,

Mayor of London, calls India as the greatest sources of world growth and capital '

The Economist, in its special issue on business in India, dated 3-06-2006 wutes m

Editorial 'Can India Fly '^' - 'Indian business has secured a niche in the world economy
that can only grow in importance ' The question is no longer whether India can fly,

but how high


In 2006. India mcoipoiations' 147 cioss boidei acquisitions aggiegated to $ 20

billion' - Raghu Dayal in Times ot India, Mumbai - dated 3-4-2008 Indian companies

aie now expanding abioad TATA Motois Ltd bought Land Rovei and Jaguar fiom

Fold Motor Company foi $ 2 3 billion, Tata Steel Ltd acquued Anglo-Dutch Corns

Gioup Pic Steel Co for $ 12 billion, Bharat Forge, now the world's second largest

foiging company, used meigei and acquisition activities to obtain vital technologies

Foi these international mergers and acquisitions to succeed it is necessary for Indian

managers to understand international financial reporting before taking a decision to

buy or sell They have to offer proper valuations for the assets to successfully sell

our financial plans to international clients Comparative study of financial reporting

IS therefore very impoitant in modern Indian context An attempt has been made in

this thesis to compare Indian Accounting Standards AS-1, AS-3, AS-20 and AS-25

with their counteipaits of US-GAAP and IFRS I GAAP, IFRS and US-GAAP as on

31-12-2006 have been compaied in this thesis

2. Statement of the Problem

To reap the benefits of Globalisation 3 0, Indian managers must understand

international financial lepoiting practices and must use the lules that aie clear to

international investors Present study is important in this context

This compaiative study examines financial lepoiting under this title

Financial Reporting ~ Comparatne Study of Indian Accounting Standards U S A -

GAAP and International Accounting Standards

3. Hypothesis

This comparative study examines financial reporting under I-GAAP, under US-GAAP

and under IFRS by focusing on three important aspects of comparison.

1) Standards setters and standard setting process is compared

The Accounting Standards Board (ASB) of the ICAI is responsible for setting

standards in India. The Financial Accounting Standards Board (EASE) of US is in

charge of setting US-GAAP and the International Accounting Standards Board (lASB)

is in charge of setting IFRS. ASB of India and FASB of US work at national level

whereas lASB works at international level. Standard setting has been undertaken in

US since 1936, whereas ASB and lASB started functioning only after 1970s. FASB

has a long history of accounting standard setting. FASB has produced too much of

accounting literature (which includes 163 accounting standards) and ASB has

produced too little (31 accounting standards). Indian standard setters are working

through a backlog of accounting issues.

Probable reason for this could be that ASB does not have permanent staff. On an

average the ASB consists of 21 members, including 13 members of the central council

of the ICAI and 8 other co-opted members. None of the members are full time

members. FASB and lASB have full time staff members to work for them. The ASB

cannot carry on any accounting research for want of staff. FASB and lASB members

are selected primarily for their technical expertise. By the very nature of its

constitution, the ASB membership would find it difficult to satisfy this test.

Composition of these standard setting institutions does affect the quality of the

standards set. Without the help from any technical staff to carry on accounting

research, the Indian standard setting body cannot work efficiently.

This study proposes to compare standard setting process adopted by the ASB, the

FASB and the lASB. Porwal H. (2003) in his work titled 'Financial Accounting

Standards : A Comparative Study' studied standard setting in India in 1992. Based

on users' views, he summed up that Users (which included preparers, auditors,

academics and others) were of the view that public hearing should be done before

finalisation of standards. When a standard is being developed, the concerned parties

viz. users, investors, auditors have to know what is happening at every step. It has to

be an open and a consultative process as at lASB and FASB. In India, public comments

are invited on an exposure draft of the proposed standard only after it has been

approved by the regulatory bodies and these comments are not made public.

Compliance with the standards set is the highest if it is set through an open and

transparent standard setting process.

These lines of reasoning provide strong grounds for predicating that:

HI: Improvement in financial reporting in India is possible by improving

standard setting process in India.

2) Prescriptions under AS-1, disclosure of accounting policies; AS-3, cash flow

statements; AS-20, earnings per share and AS-25, interim financial reporting vis-avis

US-GAAP and IFRS are compared;

Prior research confirms that IFRS adoption leads to increased disclosure and / or

restricted set of measurement methods, improves analysts' forecast accuracy and

reduces information asymmetry.

Lang and Lundholm (1996) had documented that analysts' forecast accuracy

improves as firms adopt IAS because adopting IAS restricts firms' choices of

accounting measurement methods and expands its disclosures. Ashbaugh and Pincus

(2001) studied differences in countries' accounting disclosure and measurement


policies lelative to IFRS. and documented that gieatei diffeiences m accounting

standards lelative to IFRS are signiticantly and positively associated with the absolute

value of analyst earnings forecast eriors Foi most of the firms included in then

sample, IFRS adoption led to increased disclosure and / or restricted set of

measurement methods. Ashbaugh (2001) found that companies which used IAS

were traded in more foreign equity markets, issued more equity and provided more

standardised information Leuz and Verrecchia (2001) studied the listed German

firms which switched from German accounting standards to either IAS or US-GAAP

They found that the use of US-GAAP or IAS increased trading volume, suggesting

that mformation asymmetry between insiders and outsiders was mitigated by better

disclosure Leuz (2003) studied sample of firms listed in Germany's Neuer Market

Leuz found that IAS or US-GAAP were found to be equally informative Both

accounting systems were found to be associated with reduced information asymmetry

and increased market liquidity

The above studies provided evidence that the use of IAS or US-GAAP leads to

increases in the level of disclosure by companies in a number of countries, it also

leads to accounting numbers that are more predictable. It has also been claimed that

the use of IAS / US-GAAP reduces information asymmetry, increases market liquidity

and, consequently, is believed to be associated with a lower cost of capital It is

therefore necessary to study the US-GAAP and IFRS vis-a-vis selected Indian

accounting standards to know which prescriptions make them so effective Indian

accounting standards can be altered to incorporate provisions from IFRS / US-GAAP

to make them more effective Accordingly it is hypothesized that

H2 : Improvement in financial reporting in India is possible by improving

financial reporting requirements under AS-1, AS-3, AS-20 and AS-25.


3) disclosure compliance under each selected accounting standard is measured and

compared under different accounting regimes

Measuring disclosure compliance by calculating a self constructed Disclosure

Compliance Index (DCI) for selected accounting standards under I-GAAP, US-GAAP

and IFRS will be a tool to know which accounting regime is most effective.

Prior studies computed disclosure compliance index for comparing (i) performance

of domestic accounting standards with IAS [Ding et al. (2005)] (ii) performance in

different countries [Taplin et al. (2002)] (iii) performance of selected accounting

standards [Joshi and Al-Mudhahki (2001)] and (iv) IAS and US-GAAP compliance

in the same nation [Glaum and Street (2003)]. Some studies [Street and Gray

(2001)] measured compliance and established its link with company attribute.

Majldul Islam (2006) investigated the compliance with disclosure requirements

under national GAAP by some South Asian Association for Regional Cooperation

(SAARC) countries. As per this study disclosure compliance index for Sri-Lanka

was 89.83%, Pakistan was 72.79%, Bangladesh was 71.68%; and India's was the

lowest at 68.05%. Muhammad AH et al. (2004) too measured level of compliance

with disclosure requirements mandated by 14 national accounting standards in India,

Pakistan and Bangladesh. Total compliance Index as developed by these researchers

was for Bangladesh 77.77, for India 78.62 and for Pakistan 80.70. It should be noted

that Compliance Index scores under both these studies are very low for India.

A country might have best of the accounting standards set by the technically qualified

professional personnel; still there is no guarantee that standards would be used

effectively. Measuring compliance under I-GAAP and comparing it with US-GAAP

and IFRS will throw light on our monitoring systems. It is hypothesized that:


H3 : Improvement in financial reporting in India is possible by improving

disclosure compliance in India.

Three hypotheses have been developed to explore financial reporting in India.

Improvement in financial reporting is linked to improvement in (1) standard setting

institution and the standard setting process, (2) reporting requirements under

accounting standards in India, and (3) disclosure compliance in India.

4. Objectives of the Study

The objectives of the study are as follows :

1) to understand the work done by institutional standard setters viz. the Accounting

Standards Board (ASB) of India, the Financial Accounting Standards Board

(FASB) of US and the International Accounting Standards Board (lASB).

2) to make a comparative assessment of due process (standard setting process) of

the ASB, the FASB and the lASB.

3) to study Indian Accounting Standards (AS), AS-1 - Disclosure of Accounting

policies, AS-3 - Cash Flow Statements, AS-20 - Earnings Per Share and AS-

25 - Interim Financial Reporting in detail and to compare and contrast financial

reporting practices under corresponding US-GAAP and IFRS.

4) to measure the disclosure compliance under I-GAAP per standard, per year

over the period of the study i.e. from 2001-02 to 2006-07, and comparing the

trend (performance) over the period of the study.

5) to measure the disclosure compliance under US-GAAP and IFRS per standard,

per year; over the period of the study i.e. from 2001-02 to 2006-07, and to

compare the disclosure compliance under I-GAAP, US-GAAP and IFRS per

selected standard.

6) to measure the disclosure compliance for voluntary prescriptions under I-GAAP,

US-GAAP and IFRS per selected standard, over the period of the study i.e.

from 2001-02 to 2006-07, and to compare the disclosure compliance for

voluntary prescriptions under I-GAAP, US-GAAP and IFRS per selected


7) to suggest measures to improve the effectiveness of Indian accounting standards.

8) to suggest ways (measures) for harmonization / convergence of Indian

accounting standards with IFRS.

5. Scope of the Study

As stated earlier, this research involves a comparative study of standard setters,

standard setting process, accounting standards and disclosure compliances under

the selected accounting standards. This research studies Indian accounting standards

1, 3, 20 and 25 as applied or used by Indian Information Technology (IT) Companies.

These accounting standards are compared and contrasted with US-GAAP and IFRS.

(refer Table 3.1) Standards as applicable on 31-12-2006 are studied in this thesis.

Disclosure requirements under these accounting standards are identified and then

compliance with these requirements is measured by computing Disclosure

Compliance Index under all three accounting regimes.


Table 3.1 : Comparative Accounting Standards Studied











APB Opinion 22

SFAS- 95


APB Opinion 28






(Compiled by Researcher)

5.1 Reasons for Selecting These Accounting Standards

As on 31-12- 2006 there were 29 Indian accounting standards applicable. Out of

these 4 standards are selected for study for following reasons.

5.1.1 Direct Impact on Financial Statements

The selected accounting standards affect financial reporting directly by having effect

on the disclosures in the financial statements. AS-1 prescribes which accounting

policies should be disclosed, AS-3 mandates preparation of cash flow statement for
listed companies, AS-20 prescribes presentation of Earnings Per Share on the face

of the income statement and AS-25 regulates preparation of Interim Financial Reports.

These standards have a direct impact on preparation and presentation of financial

statements, hence they are selected for the study.

5.1.2 Directly Linked to Objectives of Financial Statements

Para 22 of the ICAI Conceptual Framework states that the objective of financial

statements is to provide information about financial position, performance and cash

flows of an enterprise.


Table 3.2 : Objectives of Financial Statements and Related

Accounting Standard Studied







Peifoimance Measurement

Cash Flows

Accounting Policies used

Periodic Performance


AS studied




AS related to

Earnings Per Share

Cash Flow Statements

Notes to Accounts

Interim Reporting

(Compiled by Researcher)

Study of AS- 1, 3 and 20 help in analysing annual financial statements and study of

AS-25 helps in analysing the interim financial statements, the recognition,

measurement and presentation prescriptions used therein Earnings Per Share is the

most important figure to measure performance of an organisation Cash Flow

Statement measures whether the profit earned is liquid or not, whether organisation

IS solvent or not Because of AS-1 all organisations disclose accounting policies

used m preparation of financial statements A study of these policies enables the

analysts and the investors to know whether increase or decrease in profits over the

years is due to changes in any accounting policies or not Thus, selected standards

aie directly linked to basic objectives of financial statements Better compliance

with these accounting standards will mean improvement in financial reporting, which

is the objective of this study

6. Period of the Study

This study covers the period 2001-02 to 2006-07 122 Annual reports of selected

companies, for the accounting years covered between these years aie analysed If an

accounting year for a company ends on Maich 31, the period coveied for those

companies is beginning with financial year 2001-02 and ending with financial yeai

2006 07 If an accounting yeai for selected company is a calendai yeai the peiiod

covered toi such companies is from calendar yeai 2002 to calendai yeai 2007

6.1 Reasons for Selecting This Period

AS 3 and AS 20 became applicable for listed companies in India from the year 2001

and AS 25 became applicable m India from the year 2002 To study compliances

with these accounting standards, annual reports only for the year ending 2002

onwards, have to be studied

7. Sample and Data Collection

In this comparative analysis, data has to be collected for the computation of disclosure

compliance index This comparative study is about those Indian Companies which

prepare financial statements using three different accounting regimes viz Indian

GAAP, US-GAAP and IFRS for producing their financial reports An Indian company

registered at New Yoik and London stock exchanges will have to prepare its financial

statements using Indian accounting standards, US - GAAP and IFRS The goal for

this study is to construct a sample of such cross-listed Indian companies Companies

from IT industry aie included in the sample foi leasons explained later

7.1 Cross-Listed Companies and Comparison Sample

As pel NASSCOM Strategic Review Report (2006), there are aiound 3000 IT and

IT - enabled business seivice (togethei lefened to as IT-ITES) companies in India

This IS potential univeise of the study NASSCOM report 2006 (pg 70-1) has also

published a list of top 20 (twenty) IT-ITES companies prepared on the basis of

expoits Annual lepoits of these companies aie downloaded from their websites and

manually inspected to venfy existence ot US GAAP and IFRS financial statements

11 companies from this list are selected. They prepare Indian GAAP and US-GAAP

financial statements. No company out of this list prepares financial statements using

IFRS. From this universe 3 more listed companies are selected randomly to study

reporting under Indian GAAP. They are not included in the list of Top-20.

7.2 Reasons for Selecting These IT Companies

As per the previous studies on disclosure compliance [viz. Cerf (1961); Singhvi

(1968); Zarreski (1996); Naseer (1998), etc.], company size is the most important

company attribute that is positively linked to higher disclosure compliance. Hence,

large (on the basis of exports) companies are selected to study the extent of


Another reason for this selection is; only big companies are cross-listed; and hence

they are likely to prepare financial statements under different accounting regimes.

7.3 Reasons for Selecting Companies from IT-ITES Industry

NASSCOM Strategic Review Report (2006) says Indian IT-ITES sector grew at

28% in 2005-06 and growth in future is estimated at 32% p.a. Worldwide spending

on IT-ITES grew by 7% in 2005 and major part of that spending has come Indian


In addition to the growth in scale, the portfolio of services sourced globally continued

to expand into higher-value, more complex activities. Export earnings accounted

for 64% of the total IT-ITES earnings in 2004-05. Strong fundamentals including a

large base of skilled talent, demonstrated quality and service delivery expertise at a

significant cost advantage and an enabling environment have ensured that India

attracts a disproportionately larger share of the global IT-ITES demand for off shored

growth, and continues to drive India's export-led growth. (NASSCOM 2006, p. 46)

Virtual Champions (2006) says by 2010 this industry would contribute 7% of GDP

and 17% of growth between 2004 and 2010 in India.

Srividya (2008) writes Indian IT-ITES sector primarily caters to the US market,

even the acquisition focus continues to be in the US (over 80% of the value in the

1st half of 2008). With slowdown of the US economy and weak dollar, IT-ITES

companies have successfully started diversifying their client portfolio to Europe,

West Asia and South-east Asia. These are digital ambassadors of the new corporate

India. It was but natural to expect most of the cross-listed companies to be IT-ITES


Exception for IFRS Reporting Companies: As seen earlier, none of the top 20

Indian IT companies prepared financial statements under IFRS. Indian Companies

listed at London Stock Exchange are preparing financial statements under Indian

GAAP and IFRS; however these companies are not from IT-ITES industry. The

relatively modest number of financial reports that have been prepared by Indian

Companies under IFRS limits empirical research in this area. This study includes 4

such companies, and sample size 100% of population size.

7.4 Data Collection

The main data source for measuring the level of disclosure compliance is the

companies' consolidated financial statements found in the annual reports and its

interim financial reports published every quarter.

Annual Reports of these 18 companies are studied over the period of the study.

Annual reports studied under US-GAAP are 30, annual reports studied under IFRS

are 12 and annual reports studied under I-GAAP are 80. Industry-wise distribution

of these 122 annual reports is given below.

Table 3.3 : Distribution of Sample Annual Reports according to Industry








Printing and Publishing



Coal and Gas Exploration














(Compiled by Researcher)

Table 3.4 : Distribution of Sample Annual Reports per Year of Study







Year Ending

















(Compiled by Reseaicher)

AS-25 on Interim financial reporting is applicable from the year 2002-03 onwards.

71 company-years aie coveied duung the peiiod of the study undei I-GAAP, 30

under US-GAAP and 12 under IFRS. Total 284 Inteiim Financial Reports are studied

for checking compliance with AS-25 under I-GAAP, 120 under US-GAAP and 48

under IFRS.


8. Computation of Disclosure Compliance Index (DCI)

A properly constructed compliance index is seen as a reliable measurement device

for corporate compliance Marston and Shrives (1991), Consequently, it has been

used by many prior compliance studies like Tower et al. (1999), Street and Bryant

(2000), Street and Gray (2001), Glaum and Street (2003).

Compliance Benchmark : All the disclosure and presentation requirements of the

selected accounting standards applicable at the year end 2006 are used as the

compliance benchmark.

Checklist Items: The initial step in constructing the compliance index is to develop

a check list. The checklist is based on 4 selected accounting standards as shown in

Table 3.5 .

Disclosure and presentation prescriptions under each of the selected accounting

standards are studied carefully. Those prescriptions which are important and which

can be checked independently are selected as Checklist Items. This resulted in a

total of 28 checklist items of information from the 4 Indian accounting standards

under I-GAAP. The number of checklist items per standard ranged from minimum 1

to maximum 10, with a mean of 7 per standard. Disclosure and presentation

prescriptions which are coinmon between I-GAAP and US-GAAP for the selected

accounting standards are selected as checklist items of study under US-GAAP and

disclosure and presentation prescriptions which are common between I-GAAP and

IFRS for the selected accounting standards are selected as checklist items of study

under IFRS. Common checklist items between I-GAAP and US-GAAP are 15 and

between I-GAAP and IFRS are 26.


Duplicate lequiiements weie identified and included only once Foi example,

disclosuie ot basic earning per shaie on the lace ot Income Statement toi the period

IS lequiied by both, paiagiaph 85 ot IAS 1 and paiagiaph 47 of IAS 33

Checklist Items are divided into 2 categories mandatory and voluntary 4 voluntary

and 24 mandatory checklist items aie studied under I-GAAP and under IFRS 3

voluntary and 23 mandatory checklist items are studied. All checklist items under

US-GAAP are mandatory

Table 3.5: Checklist items studied under selected accounting

standards per accounting regime




Accounting Standard














(Compiled by Reseaicher)

Scrutiny of Annual Reports: Annual repoits of selected companies, for selected

peiiod are sciutinised manually to maik compliance or non-compliance against every

checklist Item

Entry in Data-Tables: Every compliance is maiked as ' 1' and every non-compliance

IS maiked as '0' il the item obviously applied but was not disclosed, in data tables

Data tables are prepared per standard under each accounting regime

Rules for Marking Non-Disclosure and Non-Compliance- Non-Disclosure and

Non-Compliance have been recoided using the following rules


1 Checklist Items not applicable to the icporting entitv aie taken out of the

equation toi all indices e g lepoiting loss per shaie undei AS-20 was not

lelevant to ma|oiity of companies as they weie lepoiting piotits

2 All non-disclosures are interpreted in detail Full annual reports and not just

financial statements, are read before deciding about any non-disclosure The

purpose of reading the entire annual report before scoring is to enable the

researcher to understand the nature and complexity of each company's

operations and to form an opinion on whether undisclosed items obviously

applied to the company This is consistent with some prior studies Street et al.

(1999), Tower et al. (1999), Street and Bryant (2000) and Street and Gray


3 Current figures for each checklist item are compared with those of the previous

year in the company's annual repoit This check is also consistent with previous
studies Wallace et al. (1994), Wallace and Naseer (1995), Owusu-Ansah

(1998). This process is applied in all years for which annual repoits are studied

Only clearly relevant issues of non-disclosure aie marked as 'o', all other less clearly

delineated issues aie regarded as 'not applicable' In other words companies are

given the benefit of doubt about failure to disclose relevant checklist item

Equal Weight for Checklist Item : Each disclosure checklist item is given equal

weight in the index, consistent with piioi IAS compliance studies [Tower et al.

(1999); Street and Gray (2001); Glaum and Street (2003)] Checklist could have

been weighted based on their perceived impoitance, however, equal weightage is

pieferred foi the following reasons


1. Equal weightage avoids subjective. Judgmental rating of items that can arise

with unequal weightage [Wallace and Naseer (1995), Owusu-ansah (2000),

Owusuetal. (2005)|.

2. Equal weightage provides a neutral assessment of items as it is devoid of the

perceptual influences of a particular user group [Cooke (1989), (1991), Wallace

and Naseer (1995)).

3. Dhaliwal (1980), Owusu-Ansah (1998) argued that the relative importance

of items is dynamic and not static, because it depends on prevailing economic

conditions. Again, there is no available consensus on the relative importance

of each item among different user groups [Cerf (1961), Singhvi and Desai

(1971), Buzby (1975)].

Computation of DCI : The next stage is to complete Data Table from each annual

report to determine the extent of compliance, based on the checklist items. Data is

collected per standard, per accounting regime for computing DCI. DCI receive values
from data tables. DCI per standard, per year and per accounting regime is discussed

in detail in Chapter-6. The overall compliance index i.e. Composite Disclosure

Compliance Index per accounting regime is also discussed in the same chapter. The

indices are expressed as a percentage, ranging from 0 to 100.

Statistical Methods Used : Composite DCI is calculated under I-GAAP, US-GAAP

and under IFRS. Composite DCI represents compliance under all standards, for all

years under each accounting regime.

1. Computation of Composite DCI

Formula used for computing Composite DCI is as follows :

^ Total Followed By Items (Compliances) over the Years

Composite DCI = x 100

Total Applicable checklist items


2. Computation of DCI per Accounting Standard

Indices are also worked out standard wise, company wise, checklist item wise and

year wise per accounting regime.

Total Followed By Items per Standard over the years

DCI (per standard) = ^^ , , .—,. ., ., , . . ^ 1^0

^ ' Total Applicable Items per same standard

3. Computation of DCI per Checklist Item

Total Followed by Items per Checklist Item over years

DCI (per checklist item) = ~ ~ ~. ~~. x 100

Total Applicable Items

4. Computation of DCI per Year

DCI per year, is worked out using following formula.

Total Followed by Items per Year

DCI (per year) = Xotal Applicable Items per Year ^

5. Frequency Distribution Table

For comparison of compliance per checklist item, per accounting regime Frequency

Distribution Table is used. Frequency distribution table is used to analyse which

checklist items are in the highest and the lowest class- intervals or which accounting

regime has highest checklist items in the highest class-interval. Checklist items falling

in the lower range of class-intervals need to be worked on for improvement. An

accounting regime having many checklist items in the lower class intervals will

need to improve on compliance.


9. Significance of the Study

Indian companies report different amounts of profits for the same year under different

accounting regimes (refer Table 1.1). It is proved from these illustrations that there

are major differences in financial reporting around the world, resulting into different

figures of profits or shareholders' equity for the same years. Investors and financial

analysts need to understand these financial statements, hence the importance of

comparative analysis of financial reporting. Following discussion explains the

significance of the present study.

9.1 Globalisation of Capital Markets

Table 3.6 : Foreign Company Listings on Major Stock Exchanges, 2007

Sr. No.








New York


National Stock Exchange



No. of Foreign Co.







As % of Total Listing





(Source : World Federation of Exchanges)

Table 3.6 illustrates first measure of the globalisation i.e. foreign company listings

on major stock exchanges. These stock exchanges have their rules about financial

reporting for the companies listed with them. London Stock Exchange requires use

of IFRS, New York Stock Exchange requires US-GAAP to be used for the preparation

of financial statements. 22 % of the companies listed at LSE and 20% of the

companies listed at Euronext prepare financial statements using Domestic GAAP


and IFRS. 728 companies listed either at New York or Nasdaq stock exchanges

prepare financial statements using Domestic and US GAAP.

As a result, foreign (hidian) companies listed there have to produce two sets of

financial statements; one using domestic (Indian) standards and other using foreign

accounting standards. Investors who wish to buy shares of these companies need to

be clear about the nature and magnitude of differences. Present study is a first step

towards analysing such differences.

Capital market effects of International accounting differences are studied by Choi

and Levich (1990). Davis et al. (2003) examined the international nature of stock

markets from 19th century onwards, and charted the rise in listing requirements on

the London, Berlin, Paris and New York exchanges. Higher the listing requirements,

greater will be the need for comparative analysis of financial reporting.

9.2 Foreign Direct Investment (FDI)

FDI is equity interest in a foreign enterprise held with the intention of acquiring

control or significant influence. FDI inflows in India in 2006 as per Report by

UNCTAD (2006) were $ 7 billion. Those who invest in foreign enterprises will take

decisions about investment only after studying financial statements of many foreign

enterprises. Understanding financial reporting requirements of different countries is

essential for taking a right decision.

9.3 International Credit Agencies

International Credit grantors such as World Bank, and International Monetary Fund

must also face the difficulties of comparison. Comparative analysis helps them while

allotting financial help.


9.4 Indian Growth Story

Ken Livingston, writes in liis article 'Britain As India's Colony' in Times of India,

Mumbai on 19-11-2007 - 'Today, the greatest sources of world growth and capital

are India, Russia and China.' In 2006, India incorporations' 147 cross-border

acquisitions aggregated to $ 20 billion' - Raghu Dayal in Times of India, Mumbai -

dated 3-4-2008. 'Still a laggard.'

Indian growth story does not end at IT, it is joined by manufacturing. India's

merchandise exports grew by 25% last year. Indian companies like TATA Motors

Ltd, Tata Steel Ltd. and, Bharat Forge are now expanding abroad. R. Cohen (2008)

writes globalisation is now a two-way street; in fact it's an Indian street with traffic

weaving in all directions.

As global business interest in India keeps growing, so does the expectation that

Indian Companies must play and be seen to play-by rules that are clear to the

international investors. Present study is important in this context.

10. Limitations of the Study

1. Only Four Accounting Standards Studied

Accounting Standards Board of India has issued 29 accounting standards till 2006.

Out of these only four accounting standards have been studied in this research.

2. DCI Relationship with Company Attributes not Studied

This study computes compliance index to measure disclosures prescribed under

selected accounting standards. Finding a relation between compliance index and the

company attributes has not been attempted, in this study. Previous studies [Cerf


(1961), Firth (1979), Cooke (1989), Naseer (1998)] have analysed this aspect.

Disclosure requirements studied under this research are prescribed by accounting

standards which are mandatory in their application. As a result, compliance does

not depend on company's size, earnings or any other attribute of the company.

3. DCI Constructed Using Equal Weights

Disclosure index is computed giving equal weight to all checklist items. Checklist

could have been weighted based on their perceived importance; however equal

weightage is preferred as several prior studies have argued that the results of the

equal weighting procedure tend to be similar to those of other weighting procedures

[Firth, (1979); Chow and Wong-Boren (1987); Zarreski (1996); Prenciple (2004)].

4. Only IT-ITES Industry Studied

This study covers only IT-ITES industry which does not represent entire Indian Industrial

scene. However, for the period of the study this was the only industry with many crosslisted


11. Summary

Three hypotheses were developed for comparative analysis of financial reporting

under I-GAAP, US-GAAP and IFRS in this chapter. Improvement in financial

reporting in India is predicated to (1) improvement in standard setting in India,

(2) improvement in accounting standards of India, and (3) improvement in disclosure

compliance with accounting standards in India. This chapter also discussed research

methodology used to test these hypotheses.

The next chapter discusses comparative analysis of accounting standard setters and

the standard setting process.



Chapter 3

REVIEW OF LITERATURE Review of literature plays vital role in research methodology. Through review
of literature, a researcher remove limitations of existing work or may assist to extend prevailing study.
Also, it helps in validating the results of study when compared with previous results. Many studies have
been conducted by researchers both in India and abroad about corporate disclosure practices prevalent
in different countries. It is but natural that their findings have paved the way for further studies and
research. It is a known fact that education is a social activity and no research whatsoever can be
conducted in isolation. Every scholar is, therefore, deeply indebted to his predecessors in the field.
Consequently, a number of books and research papers have been studied and the same have been
reviewed briefly here: N. Dass Gupta (1977) in his published Ph.D. thesis entitled “Financial Reporting in
India” has critically examined the financial reporting practices prevalent in India. For the purpose of
observing and analyzing the trends in the reporting practices in India, he has studied the annual reports
at random. In his study, he has suggested that the statements of highlights, summarized balance sheets
and profit and loss accounts, narrating statements, statistical records, diagrams and charts should be
included in the annual reports to make them more informative and to serve the increasing needs of
their users. He has concluded that the present reports are insufficient for modern business conditions
and do not disclose the necessary information required in these days of complex trading conditions.

D.R. Singh & B.N. Gupta (1977) in their study “Corporate Financial Disclosure in Indian Companies” have
observed that the public sector companies have been disclosing more information than the private
sector companies in their reports. They have also found that the number of shareholders, the age of the
company and the ownership pattern also influence


the quality of disclosure and the larger companies disclose more than the smaller companies. They have
suggested that the management of a company should take more interest in this area. Important
information regarding price level adjustments, methods of depreciation, change in the accounting
practices and broad policies of the management etc. should be reported by the companies voluntarily. If
they fail to do so, the government should take suitable measures in this respect. They further suggest
that the professional auditors can also influence the quality of disclosures by emphasizing some
minimum standard of disclosure. D.R. Singh and S.K. Bhargava (1978) in their study “Quality of
Disclosure in the Public Sector Enterprises” have examined the annual reports of 40 public sector
enterprises for the year 1972-73. They have concluded that the quality of disclosure varies from
enterprise to enterprise. However, when a comparison is made between disclosable information and
the actual disclosure of information by public sector enterprises, their performance is not satisfactory,
considering the importance of public sector enterprises in the national economy and their influences on
different segments of society. They have suggested that the quality of disclosure of information in the
annual reports should be improved. Better information may improve the transparency and image of the
public sector enterprises. The managements must take proper interest in the quality of disclosure of
information. The government should also prescribe a minimum standard of disclosure for the
enterprises for meeting the growing needs of the various interested groups.
Jawahar Lal (1985) in his published thesis entitled “Corporate Annual Reports - Theory and Practice” has
examined the disclosure practices of manufacturing companies in the private sector. Dr. Lal has
considered fifty items for measuring the extent of the quality of disclosure in the annual reports of 180
companies selected for the study. He has examined mainly the impact of four company characteristics,
namely - asset size, earning margin, nature of industry and association with a large industrial house - on
the quality of


disclosure. He has concluded that there has been a considerable improvement in disclosure quality
during the period under study. He has discovered that of the four characteristics, the size of the
company has better association with the extent of disclosure than any of the other three variables.
Subhash Chander (1992) in his study of “Corporate Disclosure Practices” compared the disclosure
practices of public and private sector giants in India from the year 1980-81 to 1984-85. The study was
conducted by taking 50 public sector companies and 50 private sector companies. He analysed 98 items
applicable to public sector companies and private sector companies in his index of disclosure. Besides
this the author examined the influence of company characteristics such as size, profitability, age and
nature of industry on the disclosure of information in the annual reports of the companies. Timeliness in
corporate disclosure and study of some contemporary issues such as price level accounting, human
resources accounting, social accounting etc. in corporate disclosure were also analyzed by the author.
He used measures of dispersion, t-test, chi-square test, F-test, U-test, regression analyses and rank
correlation for the analysis of his study. On the basis of the findings of his study he concluded that
―item wise disclosure‖ and ―company wise disclosure‖ was significantly better in public sector giants
as compared to private sector giants and considerable improvements were seen in the disclosure
practices of public and private sector companies over the period of analyses. Company attributes such
as size of the company measured in terms of net tangible assets had a positive and statistically
significant association with the disclosure score in the years 1982-83 to 1984-85 in case of public sector
and in the years 1982-83 to 1984-85 in case of private sector. Age of the company had a positive and
statistically significant association with the disclosure score in both the sectors in all the five years of the

On timeliness of corporate disclosure he found that public sector companies take comparatively more
time in finalizing their annual accounts as compared


to private companies and the contemporary issues were reported by very few companies in both the
sectors. The author visualised that the impact of C & A.G. audit on disclosure practices of public sector
companies was the major reason of better disclosure in public sector companies. Bhattar (1994) in his
published Ph.D. thesis, “Corporate Published Accounting Information and Investors” made an attempt to
examine the corporate disclosure practices and the information needs of the individual investors. He
prepared a questionnaire for his research topic-corporate published accounting information-relevance
and use and distributed it to 450 individual investors residing in different parts of the country. The
author divided the investors into three categories viz. investors of major cities, investors of small cities
and investors of towns. The findings of the study revealed that there existed a wide gap between the
disclosure of information in the annual reports of the companies and the information needs of the
individual investors. He concluded that the majority of Indian companies disclosed only the statutory
information in their annual reports and non-statutory information found very little place in the annual
reports of the companies. He also concluded that the Indian corporate management was less inclined to
disclose the necessary information to the investing public. He suggested that the company management
should be broad based and must emphasize on incorporation of statutory and non-statutory
information in the corporate reports in a manner which was adequate both substance wise and format
wise. This would certainly enhance the credibility of the company as well as create confidence among
the present and potential shareholders.

D.D. Meena (1995) in his published Ph.D. thesis entitled, “Corporate Reporting Practices in Public
Enterprises” has evaluated the reporting practices of the state level public enterprises in Madhya
Pradesh. He has revealed that the management of MPSLPE (Madhya Pradesh State Level Public
Enterprises) has been concerned more with the compulsory disclosure requirements of information
than with those aspects of corporate disclosure


which are not mandatory in nature. He opines that the SLPE's have not been able to keep pace with the
rising public expectations in the sphere of corporate reporting practices. There are yawning gaps
between what they have been disclosing and what they ought to disclose with regard to the extent of
reporting, the quantum of reporting, various time lags and the readability aspect. He has made a
number of suggestions to the SLPE's, the Bureau of State Enterprises, Bhopal, the professional bodies &
the government of the state to effect improvements in reporting practices. Ramsay and Hoad (1997)
analyzed the extent to which Australian companies disclose their corporate governance practices by
examining the annual reports of 268 listed companies. They used content analysis method for the study.
They found that the extent and quality of disclosure are typically better for larger companies as
compared to small companies. Vasal (1997) in his paper “Interim Reporting - An Emperical Analysis”
analysed 226 interim financial reports and 33 responses from security analysts. The main objective of
the study was to analyse the degree of compliance by the Indian companies with the reporting
requirements under the existing listing agreements. On the basis of the findings of his study he
concluded that most of the Indian companies did prepare interim results in time but they did not release
such information for publication within the prescribed time. He suggested that SEBI should exercise its
powers as statutory body and implements the proposal to hold board meetings at weekends and release
interim information before the first trading day of the next week. He further suggested that the amount
of penalty should increase aggressively for each day by which the release of interim results was delayed.
He finally concluded that the overall scenario was far from satisfactory and it would need concentrated
efforts on the part of law enactment and law enforcement agencies to develop a voluntary disclosure
for the overall improvement in the financial reporting practices of the country.

Pooja Kohli (1998) in her Ph.D. thesis “Corporate Disclosure Practices - A Comprehensive” attempt to
compare the current status of disclosure level of Indian and US companies for the years 1990-91 to
1994-1995. The study was conducted by taking top 100 Indian and top 100 US companies. The
researcher also examined the influence of certain corporate attributes like size, profitability, age, nature
of industry and auditing firms on the disclosure level of Indian as well as US companies. The study of
timeliness of Indian and US corporate annual reports was another objective of the study. She prepared a
comprehensive index of disclosure consisting 212 important items of both mandatory and voluntary
nature and score 1 was assigned to items found disclosed on the annual reports. Simple linear
regression and multiple linear regression analysis were used to study the relationship of corporate
disclosure and timeliness along with other corporate attributes. A temporal comparison of the
disclosure levels of the Indian companies over the period under study revealed an upward trend in the
corporate disclosure level. The mean disclosure score of Indian companies had improved to 45.57 in
1994-95 from 33.12 in 1990-01. A cross national comparison of the disclosure level of the Indian and US
companies fir the year 1994-95 revealed a wide divergence in the corporate disclosure level of two
companies. The mean disclosure score of the Indian companies‘ for 1994-95 was 45.57 whereas it was
76.77 in case of US companies, which meant that Indian companies legged behind in the matter of
disclosure of corporate information. The findings of the study indicated that the total assets, turnover,
profits, age of the company and auditing firms had a positive and significant impact on the disclosure
score. In the end she suggested that corporate annual reports must provide detailed futuristic
information relating to various future plans and policies of the organisation in order to make the annual
reports more informative and decision oriented.

Ubha (2001) in his published Ph.D. thesis entitled “Corporate Disclosure Practices” studied the
disclosure practices of top 50 Indian companies and


examine the level of concordance among the expectations and the needs of the investors‘ vis-à-vis the
information disclosure in the annual reports of the selected companies. This study confined to the years
1989-1990 and 1993-1994. The author took a sample of 50 companies from the list of 500 companies
prepared by the Institute of Chartered Accountants of India and investigated 250 investors for his study.
He prepared an index of disclosure of 17 major items of information and studied the disclosure level of
such information in the annual reports of the companies. The investors under study were having
different educational qualifications, investment experience, equity level and residing in various towns
and cities of the country. The data were analysed by various measures of dispersion, rank correlation
and Kendell‘s coefficient of concordance. The findings of the study indicated that there existed a wide
variation in the reporting of statutory and non-statutory items of information in the annual reports of
the companies. All the companies under study disclosed the statutory information like profit and loss
account, balance sheet, director‘s report and auditor‘s report, etc. and a few companies reported non-
statutory items like chairman‘s speech, use of diagrams and ratios, etc. the author concluded that the
annual report which was considered the most important and significant media of disclosure had been
used by very less number of investors while making their investment decisions and a wide variation
existed between the needs and expectations of the investors and disclosure of the information in the
annual reports of the companies. He suggested that a few pages of relevant information should be given
in the annual reports of the companies in a non-technical style to meet the information needs of the
non-technical investors.

Narasimhan (2001) in his analytical paper “Corporate Disclosure And Agency Problem- Role of New
International Accounting Standards” discussed the demand and needs of corporate disclosure, benefits
from better disclosure and impact of Accounting Standards 17 to Accounting Standards 23 on various
aspects of corporate disclosure practices in India such as segment reporting,


related part disclosure, lease accounting earning per share, consolidated financial statements,
accounting for taxes on income and accounting for investments in associates. Narasimhan concluded
that the demand for information from investors and other stakeholders have increased over the years
mainly on account of increased complexity in the business units operate and also cross border
investment and lending. He stated that the accounting bodies of the country develop new standards to
bring uniformity in measurement and disclosure and with the addition of seven new Standards (AS-17 to
AS-23) of ICAI, the disclosure status of Indian companies was expected to improve substantially and
might reach close to International Standards. He suggested that SEBI and ICAI need to address issues like
accounting and reporting of derivative transactions of the companies, mergers and acquisitions, stock
option scheme, etc., in the near future in order to bridge the gap between Accounting Standards and
disclosure practices with the rest of the world. Gupta, Nair and Gogula (2003) analyzed the CG reporting
practices of 30 selected Indian companies listed in BSE. The CG section of the annual reports for the
years 2001-02 and 2002-03 had been analyzed by using the content analysis, and least square regression
technique was used for data analysis. The study found “Variations in the Reporting Practices of the
Companies, and in certain cases, Omission of Mandatory Requirements as per Clause 49”.

Kannan (2003) on his analytical paper “Financial Reporting” by Banks: Areas of improvement‖, stated
that the Banks‘ financial statements should not be confined to the fiction section of the library. He also
stated in his paper that the Banks‘ failure to disclose the true picture of its financial position was the
main factor for the South East Asian Countries recent crises. He felt the need for a safe and sound
financial system and all the bank regulators insist for more transparency and disclosure based on
Internationally Accepted Accounting Standards. He further said that with the advent of corporate
governance as a mode of product discipline, proper financial reporting and disclosure of various critical
areas was required.


He suggested in his paper about compliance of international standards of financial applicable to banks
by all the banks operating in India. He conclude hi paper by saying that better financial reporting would
bring for good corporate governance. Anna Grandori (2004) in his book entitled “Corporate Governance
and Firm Organization: Micro foundations and Structural Forms” has evaluate the two major approaches
in the field-The so called shareholders and stakeholders perspectives as well as the theories behind
them and the governance solutions that are usually derived from them. In particular, agency theory and
the associated property right approach have provided some useful core ideas for conceptualizing
corporate governance issue. However, it has been criticized on various grounds, especially its use as a
normative theory of shareholder value maximization. This book posits some new specific and
differentiated challenges to agency theory on the one hand and to the shareholder value application of
it on the other. Huq (2004) in her study “Accounting and Financial Reporting Practices in Certain Bank of
Bangladesh” shared major problems involved in the existing accounting and financial reporting practices
of the sample banks of Bangladesh. The researcher observed in her study that the existing accounting
practices in banks based on historical cost, going concern, consistency, money measurement and
conservatism were not in conformity with the Islamic principles. Another important observation with
the Islamic principles. Another important observation was failure of the banks to fulfill significant
qualitative characteristics of financial reporting viz. relevance, understandability, reliability, faithful
presentation and accountability.

The researcher further observed that the presentation of profit and loss account and the balance sheet
lacked the classification of incomes and expenditure by nature and grouping of assets and liabilities by
nature, which was required by


the International Accounting Standards (IAS) - 30. In addition to this, she stated that Islamic principles
were not adhered to in the matters of foreign trade and other business practices. In the end, she
suggested that accounting and financial reporting practices of the banks should be fully Islamic and
informative and communicative. The forgoing review of the existing literature on financial reporting
reveals that the number of empirical studies has been conducted on corporate financial reporting in
India and abroad. Though the researchers have made commendable efforts to highlight the various
aspects of corporate financial reporting. Collett and Hrasky (2005) analyzed the relationships between
voluntary disclosure of CG information by the companies and their intention to raise capital in the
financial market. A sample of 299 companies listed on Australian stock exchange had been taken for the
year 1994 and Connect-four database had been used for collection of annual reports of companies. The
study found out that “Only 29 Australian companies made voluntary CG disclosure, and the degree of
disclosures were varied from company to company”. Similarly, Barako et al. (2006) examined the extent
of voluntary disclosure by the Kenyan companies over and above the mandatory requirements. This
study covered a period of 10 years from 1992 to 2001. The results revealed that “The audit committee
was a significant factor associated with level of voluntary disclosure, while the proportion of non-
executive directors on the board was negatively associated”. Bhattacharyya and Rao (2005) examined
whether adoption of Clause 49 predicts lower volatility and returns for large Indian firms, they compare
a one-year period after adoption (starting June 1, 2001) to a similar period before adoption (starting
June 1, 1998). The logic is that Clause 49 should improve disclosure and thus reduce information
asymmetry and thereby reduce share price volatility. The authors find insignificant results for volatility
and mixed results for returns.

Subramanian (2006) identified in his study that the differences in disclosure pattern of financial
information and governance attributes. A sample of 90 companies from BSE 100 index, NSE Nifty had
been taken. The data with respect to disclosure score had been collected from the annual reports of the
companies for the financial year 2003-04. The study used the Standard & Poor‘s “Transparency and
Disclosure Survey Questionnaire” for collection of data. The study finally concluded that “There were no
differences in disclosure pattern of public/private sector companies, as far as financial transparency and
information disclosure were concerned”. Arcot & Bruno (2006) examined the effectiveness of „comply
or explain‟ with respect to corporate governance in the U.K. For the study, they used database of non
financial companies. They made a detailed analysis of both the degree of compliance with the provisions
of corporate governance code of best practices as well as explanations given in case of noncompliance.
The study revealed an increase in the trend for compliance as well as use of uninformative explanations
in case of non-compliance. K. C. Gupta (2006) in his study traced out the differences in CG practices of
few local companies of an automobile industry. The data with respect to governance practices had been
collected from the annual report of the companies for the year 2004-05. The study “did not observe
significant deviations of actual governance practices from Clause 49”. Kashmir Singh (2005) made a
comprehensive attempt to compare the financial reporting practices of the public and the private sector
banking companies in India for the year 1996-97 to 2001-02. For the purpose of the study, he has
selected 29 public sector banks and 23 private sector banks assessed best as per the survey conducted
by www.infoline.com. He prepared an index of 31 major items and in relation to these items financial
reporting level of the selected banking companies has been studied. Study reveals that most of the
public sector and private sector banking companies are disclosing only that information which is
statutory in nature. He further said that there


does not exist a significant difference in the variation of majority of items of financial ratios in both the
sectors. He concluded his study by suggesting that banking companies should incorporate more
voluntary information in their annual reports and also private sector banks should prepare their annual
reports in bi-languidity to reach to the masses. Javed & Iqbal (2007) analyzed as to whether difference in
the quality of firm-level corporate governance has an effect on the firm-level performance of the
companies listed in the Karachi Stock Exchange. They used Tobin‘s Q and total Corporate Governance
Index (CGI) for the study. They analyzed 50 firms for the study. They found that ownership, shareholding
& board composition enhanced firm performance while transparency & disclosure have no significant
effect on firm performance. The literature review reveals that relatively less attention has been paid to
the concept of corporate governance in India as compared to the rest of the world & this created the
need for this study. Vishnu and Gurprasad (2007) highlight the role of auditors in financial reporting and
role of CEO, CFO and other board members. Also the paper discussed the trends of reporting in Indian
corporate. Holder Webb et al (2009) examined a sample of 50 US firms & their public disclosure
packages from 2004. They found that smaller firms provided fewer disclosures pertaining to board
selection procedure, oversight of management & independence as compared to larger firms who
provided more disclosures relating to audit committee matters, board selection procedure,
independence standards & whistle blowing procedure. They also found that boards that were of lesser
independence provided less information relating to management oversight & independence matters.

From review of literature various gaps are found in the previous studies i.e. scope of study. Before this
none of the study is done on such a large sample size and none of the researcher before tried to
investigate the facts on BSE500 companies.

1. Financial statements are prepared primarily for decision-making. They play a

dominant role-in setting the framework of management decisions. But the

information provided in financial statements is not an end itself as no

meaningful conclusions can be drawn from these statements alone. The

information provided in the financial statements is of immense use in making

decisions through financial analysis. Financial analysis is "the process of

identifying the financial strengths and weakness of a firm by properly

establishing relationship between the items of the balance sheet and the profit

and loss account". There are various methods or techniques used-in-financial

analysis such as comparative balance sheets statements, trend analysis,

common size statements, schedule of changes in working capital, funds flow

and cash flow analysis, cost volume-profit analysis, and particularly in

banking sector, the financial analysis is very much essential as they deal with

public money, ratio analysis is one that methodically classifies the data of

banks income statement and Balance sheet by establishing the relationship

among various items of those statements, wherefrom many performance

indicators can be received by the mangers and can understand well about the

functioning and financial performance of a bank. It is very vivid that the

financial performance of individual banks differ from one to another, however,

the performance as discussed is also distinguishable between public sector

banks and private sector banks.

2. The main objective of the study is to analyze and compare the financial

performance of select banks in terms of Deposits mobilization, Lending and

Recovery Performance and Investment, Management efficiency and


profitability of public and private sector banks through select financial ratios.

Thus the present study focuses on a critical evaluation of financial

performance of select public sector and private sector banks through financial,

fiscal, Investment, Management efficiency and profitability ratios. It also

compares the financial performance of SBI and HDFC over select parameters,

namely, trends of Deposits, Lending, and Recovery Performance.

3. The study is a case method of Research and comparative analysis in nature.

The study used only secondary data that was collected from research articles,

books related and thesis works already done on the topic and particularly from

annual reports of SBI and HDFC Bank. State Bank of India (SBI) and Housing

Development Finance Corporation Limited (HDFC) are selected as sample

banks for the study as they are top banks in the domain of public and private

sectors. The total time period of the study is 5 years, i.e. 2008-2012. To prove

the authenticity of the findings, t-Test and Test of difference between

proportions are employed.

4. It is found that the deposits of SBI are superior to HDFC Bank. This is

because of the confidence of the people in SBI as it is the largest public sector

bank in India. The volumes of Demand Deposits of SBI and HDFC Bank are

almost similar, but the volume of savings and term Deposits are significantly


5. It is found that loans and advances, term loans, and short term loans of SBI are

greater than HDFC Bank as SBI is having a greater network and customer


6. The recovery performance of SBI is almost averagely 22 percent over the

study period and HDFC registered a highest recovery rate in 2008 and 2009


and from 2010 onwards it reported a lower rate of recovery. It is inferred that

there is no significant difference in Recovery Performance between SBI and

HDFC Bank.

7. The dividend per share of SBI is highest in all the years to equity shareholders

on a per share basis in comparison to HDFC.

8. The operating profit per share of SBI and HDFC reported a mixed trend. It is

due to dynamics in the business profits of the individual banks.

9. The net operating profit per share of SBI is found declining whereas, HDFC

Bank reported very least growth as the operating profits of SBI differed

significantly from HDFC bank.

10. It is found that the Free Reserves per Share, the Net Profit Margin and

Adjusted Cash Margin of both banks registered a low level of volatility.

11. The Return on net Worth (RNW) and Adjusted Return on Net worth (ARNW)

of SBI and HDFC was found almost with similar trend. It is also proved

through t-Test that the financial performance in terms of RNW of SBI does

not differ significantly from HDFC Bank.

12. Interest Expended/Interest Earned of HDFC followed a declining trend,

whereas, the SBI reported a gradual increase in the same over the study


13. It is found that the Operating Expense/Total Income of SBI & HDFC followed

a mixed trend and has shown a significant impact on the financial performance

of SBI, which does not differ significantly from HDFC bank.

14. It is found that Other Income over the Total Income of SBI is very high in
percent when compared to HDFC. It can be concluded that the private banks


concentrate on real core bank activities for generating the income to the

possible extent, whereas, the public sector banks are not.

15. Capital Adequacy Ratio (CAR) of SBI is very considerable, whereas, HDFC

reports a significant level of ratio, which is higher than the rule of thumb as

per the Banking Rules. It indicates that the private banks are very much

concerned with the standards to be complied.

16. In the case of Advances/Loan Funds ratio SBI reported a poor performance,

whereas, HDFC Bank experienced an opposite trend.

17. It is found that Net Interest Income/Total Funds and Operating Expense/Total

Funds, Total Income/Capital Employed and Loans Turnover Ratios of SBI and

HDFC followed a mixed trend over the study period.

18. Total Assets Turnover Ratio and Asset Turnover Ratio of SBI and HDFC were

completely volatile due to the dynamics in the volume of profits of both banks.

19. Interest Expended/Total Funds and Interest Expended/Capital Employed, Non

Interest Income/Total Funds of SBI reported a significant increase from 2009

onwards, whereas, HDFC bank, reported completely a mixed trend.

20. It is found that Profit before Provisions to Total Funds ratio of SBI and HDFC

Bank moved in negative direction over the study period.

21. Net Profit/Total Funds of SBI and HDFC registered a declining and in some

years increasing trend. With the help of t-test, it is examined that the financial

performance of SBI does not differ significantly from HDFC Bank in terms of

Net Profit to Total Funds Ratio.

22. Investment Deposit Ratio of SBI is the least in the year 2008, then it is
increased very significantly, whereas in the case if HDFC, a mixed trend was



23. It is found that Cash Deposit Ratio of SBI and HDFC followed a mixed trend.

24. The Credit Deposit Ratio of SBI and HDFC found at similar rate, i.e., 70 per

cent averagely.

25. It can be concluded that SBI is very strong in generating the non interest

income through various commercial activities, whereas the HDFC Bank could

not significantly generate the income from other sources like SBI. On the

other hand, SBI experienced a gradual increase in non-interest income over

the years whereas HDFC registered a considerable decline in such income

over the study period.

26. SBI and HDFC Banks witnessed a meager percentage of interest expenditure

over total funds. All most all the average ratios of the both banks were found

same and one. This ratio was found to grow in 2010 and 2011 very

significantly and decline considerably in 2009 and 2012. It indicates that the

total interest expenditure of the both banks was under control.

27. The volume of profits of SBI and HDFC Banks are very satisfactory as they

are more than degree of 1. But comparatively, the profits before provisions

are very significant in the case of HDFC bank.

28. Net Profit to Total Funds ratio of SBI declined initially then increased in 2010

and 2011 and again declined during the rest of the years, whereas HDFC,

reported a considerable decrease in the growth of that ratio from 2009-2011

and finally in the year 2012 reported no growth.

29. It is also found from the analysis that the volume of net profits of HDFC is
very significant over the study period when compared to SBI. It is due to the

spread and encompassment of various commercial activities being extended

by HDFC as per the demand of the market.


30. SBI and HDFC banks witnessed a lower turnover over the sales and also

reported a negative growth rate in the loans turnover in 2009 and 2012 and

there was a positive growth in the loans turnover in 2010 and 2011. It can be

inferred that the turnover of the loans of the both banks is very considerable,

hence, comparatively the loans turnover position of HDFC Bank is very


31. SBI and HDFC experienced very lower rate of income over the capital

employed. Particularly the income on capital employed of SBI is very

minimum over the study period, whereas this ratio of HDFC is very

considerable over the study period. Not only that, even the growth of this ratio

was found to decline in 2009 and 2012 and increase in 2010 and 2011

respectively for both banks.

32. SBI and HDFC experienced a lower turnover of their total assets as the ratio is

very poor. But comparatively, the performance of HDFC is very considerable

in this regard. In the total assets turnover ratio of SBI it is found that there

was a decline in growth in 2009 and then a gradual increase in 2010. However,

a zero growth rate in 2011 and 2012 was also found, whereas, HDFC Bank

reported a mixed trend in the growth of such ratio.



In order to improve their financial performance, the SBI and HDFC banks are
advised the following based on the analysis.

The minimum balance for Savings Account in HDFC Bank should be reduced

from Rs. 10,000 to Rs. 1,000, so that people who are not financially strong

enough can maintain their account properly.

The banks should motivate and impart right knowledge about banking to their


The banks should bring new products/services based on the aspirations of


The banks have to fundamentally reorient its business models by moving from

product centric silos to customer centric strategies.

The banks must become more clients centric by leveraging sophisticated

insights to improve risk management pricing, channel performance and client