REPORT

ON

Changes in Accounting Policies and their Implications on Financial
Disclosures: A Study of Selected Indian Companies


By
Palak Goel



Submitted To
Dr Suveera Gill
University Business School
Punjab University






In partial fulfilment of the requirements
for the Degree of
Master of Business Administration
I

CERTIFICATE
This is to certify that Palak Goel, a student of Master of Business Administration Programme
at University Business School, Panjab University, Chandigarh, has undertaken a project on
Changes in Accounting Policies and their Implications on Financial Disclosures in partial
fulfilment of the requirement of Master of Business Administration (2010-2012).
The project has been completed under my supervision and guidance. This research project is
the original work of the student.




Dr. Suveera Gill Date: April 4, 2012
University Business School
Panjab University,
Chandigarh.










II

ACKNOWLEDGEMENT

A journey is easier when we travel together. Interdependence is certainly more important
than independence. I would like to express our heartiest gratitude to University Business
School, for giving me an opportunity to work with this project and important persons
associated with this project as without their guidance I would have never ever have got a
chance to know about wok on the intricacies of accounting policies. I am indebted to my
project guide, Dr. Suveera Gill, for her constant support and guidance. She assisted me with
time, patience and made my experience truly worthwhile.

My heartiest gratitude extends to my faculty who have helped me in every aspect of my
work.
The greatest credit goes to the blessings bestowed upon me by Almighty God without whose
yearning, I could not have even moved a step forward and to my parents who are always a
constant source of inspiration in all my endeavours.


Palak Goel

April 4, 2012
University Business School,
Panjab University,
Chandigarh.





III

EXECUTIVE SUMMARY
Accounting policies form the base of any business entity. All financial transactions of a
business are carried out in accordance with the accounting policies. An accounting
convention refers to common practices which are universally followed in recording and
presenting accounting information of the business entity. They are followed like customs,
tradition, etc. in a society. Accounting conventions are evolved through the regular and
consistent practice over the years to facilitate uniform recording in the books of accounts.
Accounting Conventions help in comparing accounting data of different business units or of
the same unit for different periods. These have been developed over the years.

One of the accounting principles is the Principle of Full Disclosure. In pursuance of this, an
entity is required to disclose all material facts about its workings to the stakeholders.
Different interpretations and different applications of these principles can significantly alter
the reports. Hence there can be variations in the reported profitability, liquidity and solvency.
These differences can also be on account of practising of different accounting standards
altogether (GAAP or IFRS).
To take note of the effect of these variations, changes in reported monetary measures of 30
different companies have been analysed to verify their link to their changes in accounting
policies.
Uniform accounting policies would reduce information asymmetry and would subsequently
smooth the communication between managers, shareholders, lenders and other interested
parties, resulting in lower agency costs. Lower information asymmetry would also lead to
lower costs of equity and debt financing. The benefits of this also include higher
comparability, lower transaction costs and greater international investment. This also assists
investors in making informed financial decisions and predictions of firm future financial
performance and gives a signal of higher quality accounting and transparency. Therefore,
uniformity would tend to reduce earnings manipulation and enhance stock market efficiency ,
while it would also tend to positively impact on firms stock returns and stock related
financial performance measures.

IV

TABLE OF CONTENTS
Chapter 1: Overview................................................................................................................ 1
1.1 Introduction ...................................................................................................................... 1
1.1.1 Definition ................................................................................................................... 1
1.1.2 Relevance of Accounting Standards .......................................................................... 1
1.1.3 Indian Scenario .......................................................................................................... 2
1.2 Review of Literature......................................................................................................... 6
1.3 Need and Significance of the Study ............................................................................... 10
1.4 Objectives of the Study .................................................................................................. 11
1.5 Research Design ............................................................................................................. 11
1.5.1 Population, Sample And Period Of Study: .............................................................. 11
1.5.2 Hypotheses: ............................................................................................................. 11
1.5.3 Sources Of Data: ...................................................................................................... 12
1.5.4 Tools For Analysis: ................................................................................................. 12
1.5.5 Limitations Of Study: .............................................................................................. 13
Chapter 2: An Introduction to Accounting Standards ....................................................... 14
2.1 Indian Accounting Standards ......................................................................................... 14
2.2 International Financial Reporting Standards: ................................................................. 17
2.3 Convergence of IndAS and IFRS ................................................................................... 24
2.3.1 Issues and challenges in adopting global accounting standards: ............................. 26
2.3.2 Grounds of Diversity between Indian Accounting Standards and IAS: .................. 27
2.3.3 Going Ahead ............................................................................................................ 29
2.3.4 Impact on Financial Statements ............................................................................... 29
2.4 Voluntary adoption of IFRS ........................................................................................... 33
2.5 Data ................................................................................................................................ 35
Chapter 3: Data Analysis ...................................................................................................... 37
References ............................................................................................................................... 48
Bibliography ........................................................................................................................... 49
Appendix 1 .............................................................................................................................. 50
Appendix 2 .............................................................................................................................. 52
Appendix 3 .............................................................................................................................. 66
Appendix 4 .............................................................................................................................. 68

V

LIST OF FIGURES

Figure 1: Stages of accounting standards adoption ........................................................................... 5
Figure 2: Number of Applicable Accounting Standards ................................................................. 17
Figure 3: IFRS Survey ........................................................................................................................ 21
Figure 4: IFRS Business Issues .......................................................................................................... 21
Figure 5: Forms of Harmonization................................................................................................... 28

LIST OF TABLES

Table 1: Accounting Values ................................................................................................................. 3
Table 2: Data Analysis.35
Table 3: Wald Statistic ....................................................................................................................... 37
Table 4: Coefficients ........................................................................................................................... 38
Table 5: EPS ........................................................................................................................................ 40
Table 6: Accounting Policies .............................................................................................................. 42
Table 7: AS v/s IAS ............................................................................................................................. 52
Table 8: Accounting Measures Used as Explanatory Variables: .................................................... 67


1

CHAPTER I
OVERVIEW
1.1 Introduction
1.1.1 Definition - Accounting Policies are specific principles, bases, conventions, rules and
practices adopted by an entity in preparing and presenting financial statements.
The term standard denotes a discipline, which provides both guidelines and yardsticks for
evaluation. As guidelines, accounting standard provides uniform practices and common
techniques of accounting. As a general rule, accounting standards are applicable to all
corporate enterprises. They are made operative from a date specified in the standard.

1.1.2 Relevance of Accounting Standards The basic purpose of accounting standards is to
facilitate the provision of financial information about entities to enable investors, analysts,
creditors and the entities themselves to make informed decisions about the allocation of
resources. Accounting standards are essentially about disclosure and, in many respects, are at
the heart of market efficiency. Clearly, while accounting standards assist preparers of
financial statements by providing a framework within which to construct the statements, their
prime importance is to assist users of the statements to make meaningful assessments about
the financial position of an entity. Users of financial statements range from directors to
investors, through to credit rating agencies. Effective financial reporting, which is essential to
investor confidence, can only be achieved if it is underpinned by relevant and well-designed
accounting standards. As the detail of financial reporting requirements is increasingly being
left by legislation to be filled in by accounting standards, the importance of accounting
standards is becoming accentuated. Accounting standards facilitate both the efficient day-to-
day operations of individual business entities and contribute to the efficient operation of
capital markets.
At the firm level, accounting standards improve the accountability of individual business
enterprises and their managements to investors and creditors. By promoting accurate
reporting, accounting standards assist the management of a business entity to maximise the
wealth of the entity and to put in place effective and efficient corporate governance
arrangements. At a broader level, accounting standards are central to the provision of
2

accurate, transparent and reliable information to the market as a whole. In this regard, a well -
informed market will generally be an efficient one.
Selection of Accounting Policy depends on:
i. Prudence
ii. Substance over Form
iii. Materiality

1.1.3 Indian Scenario The Institute of Chartered Accountants of India, being the premier
accounting body in the country, took upon itself the leadership role by establishing
Accounting Standards Board, more than twenty five years back, to fall in line with the
international and national expectations. Today, accounting standards issued by the Institute
have come a long way.
The paradigm shift in the economic environment in India during last few years has led to
increasing attention being devoted to accounting standards as a means towards ensuring
potent and transparent financial reporting by any corporate.
At present, the ASB of ICAI formulates the AS based on IFRS. However, these standards
remain sensitive to local conditions, including the legal and economic environment.
Accordingly, AS issued by ICAI depart from corresponding IFRS in order to ensure
consistency with legal, regulatory and economic environment of India. As the world
continues to globalize, discussion on convergence of Indian GAAP with IFRS has increased
significantly.
India Country Profile
The accounting ecology of India can be discussed as follows:
A. Social Environment
I. Power Distance:
According to Hofstede Index of Power Distance, India ranks 77 against the world average of
56.5. This means that the Power Distance in India is high. It is existent in the form of
hierarchy in organizations and society. In India, at the country-level, policy is shaped less and
3

less by representatives of people, and more and more by technocrats and corporate bosses,
Indian as well as foreign.
II. Individualism versus Collectivism:
India ranks 48 against world average of 40. The concept of an individual as a separate person
with the choice to make decisions about what is ethical and what is not is generally absent
among Indians. Rather an individual is perceived to be a part of a collective that decides
which behaviours are acceptable.
III. Masculinity versus Femininity:
India ranks 21
st
with respect to this measure. Indians are money minded. But on the other
hand they have a societal preference for heroism also.
IV. Strong versus Weak Uncertainty avoidance:
India has a score of 40 in contrast to the world average of 65. The working environment in
India is easy going.
V. Long Term Orientation:
India has a score of 61 which means that she has a strong long term orientation.
Keeping in mind these dimensions, the accounting values of Indians can be summarized as
follows in Table 1:
Table 1: Accounting Values
Accounting Values Measure
Professionalism Low
Uniformity High
Conservatism Low
Secrecy High

B. Non Cultural Elements
I. Demographic Element:
Every change that is incorporated should be made keeping the public at large in mind.
4

II. Structural element:
After 1991, Indian economy has become liberal in regard to industries and investments.
C. Organizational Environment
Elements such as organizational size, complexity, culture, human and capital resources have
their effect on organizational environment.
D. Professional Environment

I. Accounting Standards setting process:
i. The accounting standards needed to be formulated are first determined.
ii. Then a dialogue is held with the public sector, government and other organizations to
ascertain their views.
iii. Finally the accounting standards are issued.

II. Membership:
The accounting profession in India is organized on the basis of self-regulation.
III. Statutory Requirements:
In India, the regulatory framework governing corporate disclosures includes the Companies
Act 1956 and The Securities and Exchange Board Act of 1992.

1.1.4 Financial Implications of Changes in Accounting Policy- Changes in Accounting
Policy have an effect on the treatment of:
a) Depreciation
b) Inventory
c) Tax
d) Classification of Assets and Liabilities, etc.
As such they have an impact on the Profitability and Liquidity of firms.
A change in accounting policy means that a reporting entity has exchanged one accounting
principle for another. For e.g., a change in inventory costing from weighted-average to first-
5

in, first-out would be a change in accounting policy, as would a change in accounting for
borrowing costs from capitalization to immediate expensing. Transition to the IFRS norms
can also occur in stages as shown in Figure 1. A switch from one accepted accounting
principle to another accepted principle includes the methods of applying these principles.
Entities are only permitted to make such changes if:
1. It is required by a standard or interpretation, or
2. Making the change results in financial statements that are more reliable and provide
more relevant information about the effects of transactions, events or conditions on
the reporting entitys financial position, performance or cash flows.


Figure 1: Stages of accounting standards adoption


IAS 8 does not regard the following as changes in accounting policies:
6

1. The adoption of an accounting policy for events and transactions that differ in
substance from previously occurring events or transactions; and
2. The adoption of a new accounting policy to account for events or transactions that did
not occur previously or that were immaterial in prior periods.
Two aspects of changes in accounting policies would be:
1. Harmonization of IndAS with IFRS:
IFRS are being increasingly used by companies throughout the world. There are more than
110 countries across the world where International Financial Reporting Standards (IFRS) is
permitted. IFRS came into prominence when EU decided to adopt it for all its members,
starting from 2005. The Institute of Chartered Accountants of India (ICAI) recently decided
that Indian Accounting Standards (Indian GAAP) will be fully in line with the IFRS from
April 2011 for listed companies and will be extended to other companies in a phased manner.
A comparative analysis of IFRS/IAS vies-a-vies IndAS has been exhibited in Appendix 2.
2. Voluntary changes in accounting policy:
A change in accounting policy other than one made pursuant to the promulgation of a new
standard or interpretation must, under revised IAS 8, be accounted for retrospectively.
Changes in accounting policies have significant impact on the financial results of a company.
Like, Change in Amortization Method Tangible or intangible long lived assets are subject
to depreciation or amortization, respectively. Changes in methods of amortization may be
implemented in order to more appropriately recognize amortization or depreciation as an
assets future economic benefits are consumed. For e.g. the straight line method of
amortization may be substituted for an accelerated method when it becomes clear that the
straight line method more accurately reports the consumption of the assets utility to the
reporting entity.
1.2 Review of Literature
Ramona (2011) offers an analysis of the international political dynamics of countries IFRS
harmonization decisions. The analysis is based on field studies in three jurisdictions: Canada,
China, and India. Across these jurisdictions, he first describes unique elements of domestic
7

political economies that are shaping IFRS policies. Then, he inductively isolates two
principal dimensions that can be used to characterize the jurisdictions IFRS responses:
proximity to existing political powers at the IASB; and own potential political power at the
IASB. Based on how countries are classified along these dimensions, he offers predictions,
ceteris paribus, on countries IFRS harmonization strategies. The analysis and framework in
this paper can help broaden the understanding of accountings globalization.

Intrudes (2010) in his research paper, IFRS adoption and Financial Statement effects: the
UK case investigates the impact of the implementation of the International Financial
Reporting Standards (IFRSs) on key financial measures of UK firms and the volatility effects
of IFRS adoption. The findings show that IFRS implementation has favourably affected the
financial performance (e.g. profitability and growth potential) of firms. The study also
demonstrates that following the fair value orientation of IFRSs the transition to IFRSs
appears to introduce volatility in income statement figures.

Das (2009) focuses on the issue of convergence of Indian GAAP with IFRS. It goes in for a
detailed analysis as to the current status of this convergence. The paper emphasis on a holistic
view, with a special reference to the Indian perspective.

Drawing on the academic literature in accounting, finance and economics; Hail, Luzi and
Wysocki (2009); analyse economic and policy factors related to the potential adoption of
International Financial Reporting Standards (IFRS) in the U.S. They highlight the unique
institutional features of U.S. markets to assess the potential impact of IFRS adoption on the
quality and comparability of U.S. reporting practices, the ensuing capital market effects, and
the potential costs of switching from U.S. GAAP to IFRS. They discuss the compatibility of
IFRS with the current U.S. regulatory and legal environment as well as the possible effects of
IFRS adoption on the U.S. economy as a whole. They also consider how a switch to IFRS
may affect worldwide competition among accounting standards and standard setters, and
discuss the political ramifications of such a decision on the standard setting process and on
the governance structure of the International Accounting Standards Board. Their analysis
shows that the decision to adopt IFRS mainly involves a cost-benefit trade-off between (1)
recurring, albeit modest, comparability benefits for investors, (2) recurring future cost savings
that will largely accrue to multinational companies, and (3) one-time transition costs borne by
all firms and the U.S. economy as a whole, including those from adjustments to U.S.
8

institutions. They conclude by outlining several possible scenarios for the future of U.S.
accounting standards, ranging from maintaining U.S. GAAP, letting firms decide whether
and when to adopt IFRS, to the creation of a competing U.S. GAAP based set of global
accounting standards that could serve as an alternative to IFRS.

Daske, Hail, Leuz and Verdi (2008) examine the economic consequences of mandatory IFRS
reporting around the world. They analyse the effects on market liquidity, cost of capital and
Tobin's q in 26 countries using a large sample of firms that are mandated to adopt IFRS. They
find that, on average, market liquidity increases around the time of the introduction of IFRS.
They also document a decrease in firms' cost of capital and an increase in equity valuations,
but only after accounting for the possibility that the effects occur prior to the official adoption
date. Partitioning their sample, they find that the capital-market benefits occur only in
countries where firms have incentives to be transparent and where legal enforcement is
strong, underscoring the central importance of firms' reporting incentives and countries'
enforcement regimes for the quality of financial reporting. Comparing mandatory and
voluntary adopters, they find that the capital market effects are most pronounced for firms
that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS
become mandatory. Many adopting countries have made concurrent efforts to improve
enforcement and governance regimes, which likely play into their findings. Consistent with
this interpretation, the estimated liquidity improvements are smaller in magnitude when they
analyse them on a monthly basis, which is more likely to isolate IFRS reporting effects.

Barth, Landsman and Lang (2005) examine whether application of International Accounting
Standards (IAS) is associated with higher accounting quality. The application of IAS reflects
combined effects of features of the financial reporting system, including standards, their
interpretation, enforcement, and litigation. They find that firms applying IAS from 21
countries generally evidence less earnings management, more timely loss recognition, and
more value relevance of accounting amounts than do matched sample firms applying non-
U.S. domestic standards. Differences in accounting quality between the two groups of firms
in the period before the IAS firms adopt IAS do not account for the post adoption differences.
Firms applying IAS generally evidence an improvement in accounting quality between the
pre- and post-adoption periods.

9

Leuz (1999) provides a comparison of IAS and US GAAP in terms of proxies for information
asymmetry and market liquidity two key constructs in securities regulation. It exploits that
firms trading in Germanys New Market must choose between IAS and US GAAP in
preparing their financial statements, but faces the same regulatory environment. That is,
institutional factors, such as listing requirements, market microstructure and standard
enforcement, are held constant in the comparison. The findings do not indicate that US
GAAP is of higher quality as frequently claimed.

Imhoff and Thomas (1986) document a significant change in the capital structure of lessee
firms in response to Statement of Financial Accounting Standard (SFAS) No. 13. While this
accounting standard essentially rearranged capital lease disclosures (from footnotes to the
balance sheet), mandated capitalization substantially altered key accounting ratios. Their
results document a systematic substitution from capital leases to operating leases and
nonlease sources of financing. In addition, lessees appear to reduce book leverage by
increasing equity and reducing conventional debt. The magnitudes of these responses are
cross-sectionally related to preadoption levels of footnoted capital leases. Before the
accounting rule change, most leases that were effectively purchases of assets (hereafter
capital leases) were reported in footnotes to the financial statements. SFAS No. 13 changed
the form of capital lease disclosures by requiring all capital leases to be reported as assets and
debt - effectively moving capital leases from the footnotes to the balance sheet. Lease
capitalization was expected to increase book leverage ratios and reduce accounting rates of
return. Firms employing relatively larger amounts of capital leases reported substantial
declines in capital leases and corresponding increases in operating leases around adoption of
the standard. We also find substitution towards nonlease financing, indicated by a decline in
total leasing (operating and capital combined). Finally, the standard is associated with
leverage-reducing changes within nonlease sources of financing, evidenced by increases in
equity and decreases in conventional long-term debt.

Watts and Zimmerman (1979) provide the beginning of a positive theory of accounting by
exploring those factors influencing managements attitudes on accounting standards which
are likely to affect corporate lobbying on accounting standards. Certain factors are expected
to affect a firms cash flows and in turn are affected by accounting standards. These factors
are taxes, regulation, management compensation plans, bookkeeping costs and political costs
10

and they are combined into a model which predicts that large firms which experience reduced
earnings due to changed accounting standards favour the change.


All in all the literature review brings forward the following observations:
Globalization of accounting
Volatility in income because of accounting changes
Positive consequences of uniform accounting reporting
Increase in accounting quality by positive accounting policy changes
Factors affecting managements attitudes towards accounting policy changes
Conservative and aggressive approach to accounting

1.3 Need and Significance of the Study
The idea of global harmonization of accounting standards stems from lack of comparability
of financial statement across the country. In particular, a company having presence in
different countries has to prepare financial reports as per generally accepted accounting
principle of the country of operation and then it is required to reconcile all such reports for
the purpose of consolidation as per GAAP of the country to which the parent belongs. This
increase the cost of preparing the financial report and also performance measurement across
the geographical region becomes difficult because of non-comparable accounting rules. As
global diversification of portfolio has become an important issue of fund management with
more and more countries accepting capital account convertibility or restricted fund flow on
capital account, a uniform GAAP throughout out the world would have helped to increase
understanding of financial statements. This would also help in cross border rising of funds.
The expanding globalization of business and investment is driving increase interest and as
well as pressure, to enhance the quality of financial reporting throughout the world, so that
effective evaluation between companies can be made.
There is hardly any work done in India regarding, Changes in Accounting Policy and their
Financial Implications, as evident from the review of extant literature. The present study
would fill the research gap by incorporating the financial impact of mandatory and voluntary
changes in accounting policy.
11

1.4 Objectives of the Study
The objectives of the study are as follows:
1. To analyse the change(s) in accounting policy made by the companies taken in the
sample, as reflected in their financial statements; and
2. To investigate the financial implications of such a change, whether on account of
convergence of Indian Accounting Standards with IFRS, or on voluntary basis.
1.5 Research Design
1.5.1 POPULATION, SAMPLE and PERIOD OF STUDY:
The population of the study consists of 9500 listed and unlisted companies existing in
Capitaline Database.
The Sample from among them has been chosen as that of 30 Mid Cap Companies. Mid
Cap Companies have been chosen for the sample as while many small cap stocks are
considered more speculative and large cap stocks more conservative, mid cap stocks can
often times be either or depending on what we are screening for. There is no classical
definition of mid-cap shares. The name mid-cap originates from the term medium
capitalised. It is based on the market capitalisation of the stock. Market capitalisation is
calculated by multiplying the current stock price with the number of shares outstanding or
issued by the company. The definition of mid-cap shares can vary from market to market
and from country to country. In case of India, the National Stock Exchange (NSE)
defines the mid-cap universe as stocks whose average six months market capitalisation is
between Rs 75 crore and Rs 750 crore. All companies are Mid Cap, and not a mixture of
large, mid and small capitalization companies to eliminate the size effect.
The Period of Study is spread over two financial years:
1. April 2009- March 2010
2. April 2010-March 2011

1.5.2 HYPOTHESES:
12

(H
0)
Changes in accounting policy have a favourable impact on the profitability of a
firm.
(H
1)
Changes in accounting policy have an unfavourable impact on the profitability of a
firm.

1.5.3 SOURCES OF DATA:
Data has been collected primarily from:
1. Annual Reports of Companies
2. www.moneycontrol.com

1.5.4 TOOLS FOR ANALYSIS:
1. Ratio Analysis It is a tool for measuring the:
a) Earning capacity or profitability of a firm
b) Comparative position of a firm in relation to other firms(comparison with 2 3
companies of same industry which havent made any changes)
c) Efficiency of management
d) Financial Strength
e) Solvency of the firm
Noting the changes in key ratios, an analysis as for the financial position of the firm over
a period of time can be seen.
2. Regression Analysis -
Here, the study compares the financial numbers reported in the financial year 2009-10,
with the financial numbers reported in 2010-11. The logistic regression that is employed
uses a dummy variable as the dependent variable, which is dichotomous and takes two
values, i.e. 1 for financial numbers in 2010-11 and 0 for (the same set of) firms reporting
their accounting figures in 2000-10. The study uses the following logit model:

RR
i,t
= a
0
+ a
1
Profitability
i,t
+ a
2
Growth
i,t
+ a
3
Leverage
i,t
+ a
4
Liquidity
i,t
+ a
5
Size
i,t

+ a
6
Investment
i,t
+ e
i,t

13

Where,
RR
i,t
is a dummy variable representing the regulatory regime.
RR
i,t
=1 for financial numbers reported under IFRSs and
RR
i,t
=0 for financial numbers reported under the UK GAAP,
Profitability
i,t
, Growth
i,t
, Leverage
i,t
, Liquidity
i,t
, Size
i,t
, Investment
i,t
are proxies used to
control for firm profitability, growth, leverage, liquidity, size and investment respectively
(Appendix 3).

The empirical analysis has used the binary logistic regression analysis. The logistic
regression is useful in analysing categorical data, where the dependent variable is
dichotomous and takes only two values, i.e. 0 and 1. The parameters of the logistic
regression are estimated based on the maximum likelihood method, while the
hypothesis testing is based on the Wald statistic.

The financial figures for year 2009-10 are without any accounting policy changes. 2010-
11 changes consider accounting policy changes, for making them more aligned with the
soon to be adopted IFRS.
For three companies which have already adopted IFRS, the financial figures have been
taken for the same year but the data for both as reported under GAAP and as under IFRS
has been taken.

1.5.5 LIMITATIONS OF STUDY:
1. 30 Mid Cap Companies have been chosen as sample. Large and Small Cap Companies
have been ignored and therefore the relevance of such companies has been ignored.
2. Changes in profitability of firms may be due to reasons other than changes in
accounting policy. For e.g. profitability may increase due to better marketing efforts,
more government assistance, etc. These factors have been taken as Ceteris Peribus.
Further research should extend the sample size and the time horizon of the study in order
to add to the findings reported here.


14

CHAPTER II
AN INTRODUCTION TO ACCOUNTING STANDARDS
2.1 Indian Accounting Standards
The Institute of Chartered Accountants of India (ICAI), which is the main regulatory body for
standardisation of accounting policies in the country has issued a number of accounting
standards from time to time to bring consistency in the accounting practices.
As guidelines, accounting standard provides uniform practices and common techniques of
accounting. As a general rule, accounting standards are applicable to all corporate enterprises.
They are made operative from a date specified in the standard. The Institute of Chartered
Accountants of India (ICAI) being a member body of the then IASC, constituted the
Accounting Standards Board (ASB) on 21st April, 1977, with a view to harmonise the
diverse accounting policies and practices in use in India.
Although the Accounting Standards Board is a body constituted by the Council of the
Institute of Chartered Accountants of India, it is independent in the formulation of accounting
standards since in case the Council considers it necessary that certain modifications be made
in the draft accounting standards formulated by the ASB, it can only be done in consultation
with the ASB.
The Accounting Standards Board is entrusted with the responsibility of formulating standards
on significant accounting matters keeping in view the international developments, and legal
requirements in India. The main function of the ASB is to identify areas in which uniformity
in standards is required and to develop draft standards after discussions with representatives
of the Government, public sector undertaking, industries and other agencies.
Till date, the IASC has brought out 40 accounting standards. However, the
ICAI has so far issued 32 accounting standards. Figure 2 shows the number of accounting
standards of various countries. The accounting standards followed in India are:

AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
15

AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in
Accounting Policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts (revised 2002)
AS 8 Accounting for Research and Development
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003),
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 (revised 2005) Employee Benefits
Limited Revision to Accounting Standard (AS) 15, Employee Benefits (revised
2005)
AS 15 (issued 1995)Accounting for Retirement Benefits in the Financial
Statement of Employers
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18, Related Party Disclosures
AS 19 Leases
AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income.
AS 23 Accounting for Investments in Associates in Consolidated Financial
Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
16

AS 27 Financial Reporting of Interests in J oint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent` Liabilities and Contingent Assets
AS 30 Financial Instruments: Recognition and Measurement and Limited
Revisions to AS 2, AS 11 (revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28
and AS 29
AS 31, Financial Instruments: Presentation
Accounting Standard (AS) 32, Financial Instruments: Disclosures, and limited
revision to Accounting Standard (AS) 19, Leases

Compliance with Accounting Standards

Accounting Standards issued by the ICAI had got legal recognition through insertion of
sections 211(3A), (3B) and (3C) in the Companies Act, 1956, which may be prescribed by
the Central Government in consultation with the National Advisory Committee on
Accounting Standards. Recent development in this regard is Accounting Standards 1to 7 and
9 to 29 as recommended by the ICAI, have been prescribed by Ministry of Company Affairs,
Government of India vide its notification dated December, 7, 2006, in the Gazette of India.
This notification provides that every company and its auditor(s) shall comply with the
notified Accounting Standards.
The Securities and Exchange Board of India (SEBI) through the listing agreement requires
that listed companies shall mandatorily comply with all the Accounting Standards issued by
ICAI from time to time.
Also, the Insurance Regulatory and Development Authority (IRDA) requires insurance
companies to follow the Accounting Standards issued by the ICAI.
Apart from the corporate bodies, the Council of the Institute of Chartered Accountants of
India has made various accounting standards mandatory in respect of certain non-corporate
entities such as partnership firms, sole-proprietary concerns/individuals, societies registered
under the Societies Registration Act, trusts, associations of persons, and Hindu Undivided
Families, where financial statements of such entities are statutorily required to be audited, for
example, under Section 44AB of the Income-tax, 1961. The Council has cast a duty on its
members to examine compliance with the Accounting Standards in the financial statements
17

covered by their audit in the event of any deviations therefrom, to make adequate disclosures
in their audit reports so that the users of the financial statements may be aware of such
deviations.


Figure 2: Number of Applicable Accounting Standards
2.2 International Financial Reporting Standards:
The term International Financial Reporting Standards (IFRSs) has both a narrow and a broad
meaning. Narrowly, IFRSs refers to the new numbered series of pronouncements that the
IASB is issuing, as distinct from the International Accounting Standards (IASs) series issued
by its predecessor. More broadly, IFRSs refers to the entire body of IASB pronouncements,
including standards and interpretations approved by the IASB and IASs and SIC
interpretations approved by the predecessor International Accounting Standards Committee.
IFRS is the Official Reporting Standard which was recently adapted by over 100 countries
around the world. Each and every country follows different types of accounting standard.
Like India follows the Indian accounting standard, U.S follows the US GAAP, Canada
follows the Canadian accounting standard, etc. But from 2011, we will be following
International financial reporting standard. The Institute of Chartered Accountants of India
41
28
32
21
31
158
0
20
40
60
80
100
120
140
160
180
USA Australia India Japan UK USA
Accounting Standards
18

(ICAI) has announced that IFRS will be mandatory in India for financials statement for the
periods beginning on or after 1 April 2011.
This will be done by revising existing accounting standards to make them compatible with
IFRS. About 109 countries presently require or permit use of IFRSs in preparation of
financial statements in their countries. By 2011, the number is expected to reach 150. The
reason for this is obvious - as the capital markets become increasingly global in nature, more
and more investors see the need for a common set of international accounting standards. If
every country follows the different types of accounting standard, Investors face difficulty
comparing companies.
IFRS is an accounting framework that establishes recognition, measurement, presentation and
disclosure requirements relating to transactions and events that are reflected in the financial
statements. IFRS was developed in the year 2001 by the International Accounting Standards
Board (IASB) in the public interest to provide a single set of high quality, understandable and
uniform accounting standards.
Scope of IFRSs
IFRSs apply to the general purpose financial statements and other financial reporting
by profit-oriented entities those engaged in commercial, industrial, financial, and
similar activities, regardless of their legal form.
Entities other than profit-oriented business entities may also find IFRSs appropriate.
General purpose financial statements are intended to meet the common needs of
shareholders, creditors, employees, and the public at large for information about an
entity's financial position, performance, and cash flows.
Other financial reporting includes information provided outside financial statements
that assists in the interpretation of a complete set of financial statements or improves
users' ability to make efficient economic decisions.
IFRS apply to individual company and consolidated financial statements.
A complete set of financial statements includes a statement of financial position, a
statement of comprehensive income, a statement of cash flows, a statement of changes
in equity, a summary of accounting policies, and explanatory notes. When a separate
income statement is presented in accordance with IAS 1(2007), it is part of that
complete set.
International Financial Reporting Standards
19

IFRS 1 First-time Adoption of International Financial Reporting Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration for and Evaluation of Mineral Assets
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Operating Segments
IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 J oint Arrangements
IFRS 12 Disclosure of Interests in Other Entities
IFRS 13 Fair Value Measurement
Need of IFRS:
o To make a common platform for better understanding of accounting, internationally.
o Synchronization of accounting standards across the globe.
o To create comparable, reliable, and transparent financial statements.
o To facilitate greater cross-border capital raising and trade.
o To having company-wide one accounting language which have subsidiaries in
different countries.

Objective of IFRS:
To develop, in the public interest, a single set of high quality, understandable and
enforceable global accounting standards that require high quality, transparent and
comparable information in financial statements and other financial reporting to help
participants in the world's capital markets and other users make economic decisions;
20

To take account of the special needs of small and medium-sized entities and emerging
economies.
To bring about convergence of national accounting standards and International
Accounting standards and IFRS to high quality solutions.

Who all will be required to follow IFRSs:
Keeping in view the complex nature of IFRSs, the ICAI in its Concept Paper has expressed
the view that IFRSs should be adopted for the public interest entities such as listed entities,
banks and insurance entities and large-sized entities from the accounting periods beginning
on or after 1 April 2011. The countries which have adopted IFRSs have done so for similar
types of entities. Figure 3 and 4 show results of a survey conducted on IFRS and certain
issues of IFRS respectively.
.
Advantages of IFRS:
1. IFRS provides much less overall detail than GAAP
2. IFRS contains relatively little industry-specific instructions as compared to GAAP.
3. IFRS use a single-step method for impairment write-downs rather than the two-step
method used in U.S. GAAP
4. IFRS does not permit Last in First out (LIFO)

Disadvantages of IFRS:
1. U.S. issuers without significant customers or operations outside the United States may
resist IFRS because they may not have a market incentive to prepare IFRS financial
statements.
2. Many people also believe that U.S. GAAP is the gold standard, and that something
will be lost with full acceptance of IFRS.

21


Figure 3: IFRS Survey



Figure 4: IFRS Business Issue

22

Structure of IFRS:
IFRS are considered a "principles based" set of standards in that they establish broad rules as
well as dictating specific treatments.
International Financial Reporting Standards comprise:
International Financial Reporting Standards (IFRS)standards issued after 2001
International Accounting Standards (IAS)standards issued before 2001
Interpretations originated from the International Financial Reporting Interpretations
Committee (IFRIC)issued after 2001
Standing Interpretations Committee (SIC)issued before 2001
Conceptual Framework for the Preparation and Presentation of Financial Statements
(2010)
Underlying assumptions:
The following are the four underlying assumptions in IFRS:
1. Accrual basis: the effect of transactions and other events are recognized when they
occur, not as cash is gained or paid.
2. Going concern: an entity will continue for the foreseeable future.
3. Stable measuring unit assumption: financial capital maintenance in nominal
monetary units or traditional Historical cost accounting; i.e., accountants consider
changes in the purchasing power of the functional currency up to but excluding 26%
per annum for three years in a row (which would be 100% cumulative inflation over
three years or hyperinflation as defined in IFRS) as immaterial or not sufficiently
important for them to choose financial capital maintenance in units of constant
purchasing power during low inflation and deflation as authorized in IFRS in the
Framework, Par 104 (a).
Accountants implementing the stable measuring unit assumption (traditional
Historical Cost Accounting) during annual inflation of 25% for 3 years in a row
would destroy 100% of the real value of all constant real value non-monetary items
not maintained under the Historical Cost paradigm.
23

4. Units of constant purchasing power: financial capital maintenance in units of
constant purchasing power during low inflation and deflation; i.e. the rejection of the
stable measuring unit assumption. Measurement in units of constant purchasing power
(inflation-adjustment) under Constant Item Purchasing Power Accounting of only
constant real value non-monetary items (not variable items) remedies the destruction
caused by Historical Cost Accounting of the real values of constant real value non-
monetary items never maintained constant as a result of the implementation of the
stable measuring unit assumption during low inflation. It is not inflation doing the
destroying. It is the implementation of the stable measuring unit assumption, i.e.,
HCA. Only constant real value non-monetary items are inflation-adjusted during low
inflation and deflation. All non-monetary items (both variable real value non-
monetary items and constant real value non-monetary items) are inflation-adjusted
during hyperinflation as required in IAS 29 Financial Reporting in Hyperinflationary
Economies, i.e. under Constant Purchasing Power Accounting.
IFRS in India:
The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be
mandatory in India for financial statements for the periods beginning on or after 1 April 2011.
This will be done by revising existing accounting standards to make them compatible with
IFRS.
The ICAI has also stated that IFRS will be applied to companies above Rs.1000 crore from
April 2011. Phase wise applicability details for different companies in India:
Phase 1: Opening balance sheet as at 1 April 2011*
i. Companies which are part of NSE Index Nifty 50
ii. Companies which are part of BSE Sensex BSE 30
a. Companies whose shares or other securities are listed on a stock exchange outside India
b. Companies, whether listed or not, having net worth of more than INR1,000 crore
Phase 2: Opening balance sheet as at 1 April 2012*
-Companies not covered in phase 1 and having net worth exceeding INR 500 crore
24

Phase 3: Opening balance sheet as at 1 April 2014*
-Listed companies not covered in the earlier phases
* If the financial year of a company commences at a date other than 1 April, then it shall
prepare its opening balance sheet at the commencement of immediately following financial
year.
On J anuary 22, 2010 the Ministry of Corporate Affairs issued the road map for transition to
IFRS. It is clear that India has deferred transition to IFRS by a year.
2.3 Convergence of IndAS and IFRS
Convergence refers to the process of narrowing differences between IFRS and the accounting
standards of countries that retain their own standards.
J ust as the words connote, harmonization of accounting standards can be defined as the
continuous process of ensuring that the Generally Accepted Accounting Principles (GAAP)
are formulated, aligned and updated to international best practices (GAAPs in other
countries) with suitable modifications and fine tuning considering the domestic conditions.
Convergence with IFRS does not mean adoption of IFRS in toot, but adoption of IFRS
provisions. Hence, when the Indian standards will be converged to IFRS, the compliance with
Indian Accounting Standards would automatically ensure compliance with IFRS. The
Accounting Standards Board is however free to eliminate any optional treatments provided in
IFRS or provide for any additional disclosure requirements in the road to convergence

Relevance of global convergence of accounting standards:

There are several standard setting bodies and organizations that are now actively involved in
the process of convergenceof accounting standards. There are some rationales behind that.
1. Firstly, the rapid growth of international trade and internationalization of firms, the
developments of new communication technologies, and the emergence of
international competitive forces is perturbing the financial environment largely. Under
this global business scenario, the residents of the business community are badly in
need of a common accounting language that should be spoken by all of them across
the globe. A financial reporting system of global standard is a prerequisite for
attracting foreign as well as present and prospective investors at home alike that
25

should be achieved through convergence of accounting standards. ICAI president K.
S. Vikamsey (2001) is of opinion that People who invest overseas naturally want to
be able to keep track of the financial health of the securities issuers. Convergence of
accounting standards is the only means to achieve this. Only by talking the same
language one can understand each other across borders.
2. Secondly, on many stock exchanges, currently, foreign listings are a large percentage
of total listings. As per ICAI estimates, 20% of total listing on New York Stock
Exchange (NYSE) is of foreign origin. In case of London Stock Exchange, this is
16% and in Luxembourg, the percentage is 82%.
3. Thirdly, divergence in accounting standards not only means additional cost of
financial reporting but also causes difficulties to multinational groups in the manner in
which they undertake transactions. It is quite possible for a transaction to give rise to a
profit under one accounting standard, whereas it may require a deferral under another
standard. When a multinational company (MNC) has to report under the standards of
both of the countries it might lead to some extremely odd results.
4. Fourthly, convergence is not an end by itself, but it is a means to an end. Adoption of
different accounting standards causes difficulties in making relative evaluation of
performance of companies. This phenomenon hinders the valuation and consequently
the decision making process. There are numerous instances in India and around the
world of bad accounting practices leading to corporate failures. Corporations wish
non-recurrence of another Enron and like.
5. Another significant benefit that is expected to accrue from global convergence of
accounting standards relates to facilitating crossborder mergers and acquisitions.
6. It provides for systematic review and evaluation of the performance of the
multinational company having subsidiaries and associates in various countries
wherein each country has its own set of GAAP.
7. It provides a level playing field where no country is advantaged or disadvantaged
because of its GAAP.
8. It improves the quality of financial reporting throughout the globe.
9. The greatest benefit that would flow from harmonization would be the comparability
of international financial information. Such comparability would eliminate the current
misunderstandings about the reliability of foreign financial statements and would
remove one of the most important impediments to the flow of international
investment.
26

10. Harmonization would save time and money that is currently spent to consolidate
divergent financial information when more than one set of reports is required to
comply with the different national laws or practice. It will also improve the tendency
for accounting standards throughout the world to be raised to the highest possible
level and to be consistent with local economic, legal and social conditions.
11. The harmonization would be beneficial to those countries, which do not have
adequate codified standards of accounting and auditing, and to international
accountancy firms with clients of firms, which have at least one foreign subsidiary.
12. The benefit of International Accounting firms regarding the harmonization of
accounting practices will be the movement of staff across national boundaries will
become easier and it will be less expensive to provide training to their staff.
13. It would also help in raising foreign capital as investors, financial analysts and foreign
lenders will be able to understand the financial statements of foreign companies and
they would be able to compare the investment opportunities which will help them to
make the right investment decision.
14. As taxes are levied on the total global income of an organization, it would be of great
assistance to the national tax authorities around the world if net income was computed
on similar accounting principles and practices.
15. International accounting and disclosure standards would make it easier to conduct the
competitive and operational analyses needed to run businesses. It will also make it
easier for financial executives to manage critical relationships with customers,
suppliers and others.
16. The group that would benefit the most out of the harmonization of accounting
standard would be the Multi-national companies as the communication of financial
information within the groups would become easier. With the harmonization of
reporting standards it would be easier for multinational companies to fulfil the
disclosure requirement for stock exchanges around the world.

2.3.1 Issues and challenges in adopting global accounting standards:
In spite of all, achieving global convergence in accounting standards is not an easy task.
There are a number of issues to overcome.
1. First of all, accounting standards have been developed in different countries under
different legal, economic, social and cultural environments. For this reason there
exists such diversity in accounting standards among the countries through the globe.
27

If convergence is to be achieved, it is first necessary to arrive at an agreement as to
the central objective of financial reporting. The IASB standards are oriented to serve
the needs of investors and capital markets. Countries that have a different financial
reporting philosophy would find it extremely difficult to converge their domestic
standards with International Financial Reporting Standards.
2. Secondly, the quality of financial reporting depends on the quality of accounting
standards as well as the effectiveness of the process by which those standards are
implemented. Adequate regulatory and other supports are necessary to ensure proper
implementation of standards. Implementation of accounting standards is not an easy
task. In spite of convergence, there is no assurance that they will be implemented with
same amount of vigour in every jurisdiction.
3. Third, convergence of accounting standards with international approach will
inevitably raise the questions of rules versus principles. IASB standards are
principles-based. Thus the countries that have rules-based standards are expected to
experience considerable difficulty in converging their standards with IFRS.
4. There are challenges that IASB and nations adopting IFRS need to address in the
coming days. One big challenge for countries adopting IFRS is the shortage of
resources and more particularly, IFRS-trained resources.

2.3.2 Grounds of Diversity between Indian Accounting Standards and IAS:

India is slowly entering into the arena of accounting standards. But the progress of
formulation of accounting standards has been very slow as compared with the developments
at international levels. However, some of the accounting standards in India conform to the
International Accounting Standards. Still there are significant variations between these two.
For India, the multiplicity of standard setters leads to delay and lack of direction. The
increased complexity of the fair valuation models as prescribed by international
standards requires extensive valuation/objective professional judgments, integrity and
uniformity of approach, which may not be easily achievable across all countries
particularly in the emerging economies like India.
It may be noted that in several important areas, when the Indian Standards are
implemented, the accounting treatment in these areas could lead to differences in the
restatement of accounts in accordance with IAS. Some of these areas include:
No Company Parti cul ars
Operati ng
Profi t Margi n
Net
Profi t
Margi n
EPS Market Value of
equity/Book
Value of equity
Di vi dend
per Share
Cash fl ow/share
Free
reserves/shar
e
Total Asset Turnover
Rati o
Return on Assets i ncl udi ng
Reval uati on
Interest Cover = EBIT/Int
Long Term Li abi l i ti es to sharehol ders'
funds
Total Li abi l i ti es
to Capi tal
Empl oyed
2009-10 0.21 0.15 5.71 114.38 1.5 0.78 16.22 1.52 0.18 12.9 0.43 0.3
2010-11 0.2 0.13 6 149.24 1.75 1.86 20.12 1.77 0.23 16.5 0.25 0.2
2009-10 0.14 0.14 74.78 48.05 16.5 103.99 199.76 0.08 40.13 1.24 16.06 0.94
2010-11 0.13 0.13 81.44 37.95 20 28.53 253.46 0.88 4.82 1.24 16.36 0.95
2009-10 0.28 0.12 243.66 25.07 4 -3.55 190.08 0.46 2.2 2.48 1.36 0.86
2010-11 0.27 0.09 37.08 39.33 4 126.74 204.42 0.57 2.52 3.26 0.84 0.78
2009-10 0.12 0.15 43.25 60.24 16 12.12 251.37 1.05 2.69 116.55 0.38
2010-11 0.11 0.14 47.94 81.56 18 4.35 278.38 1.11 2.96 103 0.41
6
2009-10 0.2 0.11 19.56 80.14 2.9 -0.92 6165 2.33 0.64 37.19 0.17 0.16
2010-11 0.15 0.08 17.34 103.41 4.6 -2.6 73.63 2.38 0.76 152.91 0.12 0.14
2010-11 0.23 0.08 11.3 15.37 1 1.43 141.74 0.66 1.54 3.51 0.95 0.57
2009-10 0.7 0.42 50 88.02 17 6.73 199.6 1.34 2.1 0.37
2010-11 0.53 0.32 44.91 83.2 17 -77.62 224.83 1.39 2.42 0.44
2009-10 0.81 0.05 2.62 91.37 1 2.61 82.15 0.38 0.84 7.18 0.66 0.57
2010-11 0.12 0.05 4.24 61.33 1.2 4.45 80.81 0.35 0.83 2.2 1.18 0.75
2009-10 0.4 0.26 2.35 67.23 1 0.06 78.15 0.16 0.84 1.67 2.8 0.79
2010-11 0.47 1.5 13.02 90.87 1.25 -0.09 87.44 0.2 0.96 1.98 4.94 0.89
2009-10 0.12 0.4 3.77 25.9 0.6 -2.15 37.5 1.78 0.42 10.04 0.37 0.3
2010-11 0.85 0.04 5.67 17.6 0.7 -4.22 2.11 0.47 9.1 0.32 0.27
2009-10 0.17 0.01 4.77 51.87 2.5 -19.71 40.39 0.84 0.54 1.28 6.3 0.89
2010-11 0.12 0.01 5.28 39.95 3.5 -3.05 65.68 1.22 2.72 1.27 3.18 0.52
2009-10 0.79 0.14 4.56 2.53 10 1.27 16.56 0.11 1.74 1.41 0.72 0.66
2010-11 0.83 0.13 0.78 27.97 0.6 -0.27 169.23 0.05 0.18 1.24 0.08 1.18
2009-10 0.32 0.08 1.46 7.4 0.24 101.74 0.1 1.18 1.45 0.41 0.31
2010-11 0.22 0.04 0.51 6.09 0.49 55.27 0.13 0.67 0.67 0.38 0.23
2009-10 0.47 0.17 46.9 40.84 2.5 -3.55 180.7 0.3 2.77 3.71 2.25 0.76
2010-11 0.44 0.12 27.32 9.07 2.5 2.61 201.86 0.21 3.05 1.56 2.48 0.82
2009-10 0.94 0.41 7.36 8.78 1 1.36 17.78 0.35 0.28 7.67 0.8 0.71
2010-11 0.93 0.47 9 7.89 1 1.15 25.63 0.3 0.36 8.72 0.74 0.6
2009-10 0.16 0.09 2.58 Not Applicable No dividend 4.69 2.39 0.78 0.13 9.81 1.79 0.75
2010-11 0.17 0.1 7.3 11.61 1 1.56 41.31 1.31 0.52 20.8 0.05 0.37
2009-10 -0.13 -0.58 -3.19 Not Applicable -0.32 -3.81 0.16 0.06 -0.69 3.53 0.85
2010-11 0.48 -0.1 -1.71 0.57 0.53 2.3 0.62 0.12 -0.22 0.89 0.55
2009-10 0.3 0.22 20.86 87.38 0.75 2.54 128.99 0.59 1.39 1735.46 0.38
2009-11 0.34 0.26 25.38 56.22 0.75 100 74.25 0.61 0.84 1572.13 0.24
2009-10 0.08 0.07 12.47 12 4 25.74 43.49 0.09 1.37 1.11 12.95 0.95
2010-11 0.86 0.08 10.87 7.74 3 9.59 54.53 0.09 1.29 1.13 11.25 0.95
149.55
Negligible
No dividend
No dividend
No dividend
0.97
0.18
-0.23
-0.13
-2.46
65.54 8.47 -0.41 1.35 Negiligible
79.5 1.62 1.9
-0.26
16.55
4.59
-2.09
2.77 2.29
-1.78
2
1
3
10 Bajaj Finserv
Arshiya
International
9
Allahabad
Bank
ABGShipyard
5
Akzo Nobel
IndiaLimited
Pidilite
Industries
Corporation
Bank
ICRA Ltd 8
4
7
Andhra
PradeshPaper
Mills
AmaraRaja
No longtermliabilities
0.75
0.65
12
18.02
17.26
Not applicable No longtermliabilities
Bombay
Dyeing&
11 Finolex Cables
1.01
1.51
1.79
1.22
1.21
5.5
6
74.68
91.46
0.09
0.09
-1.31 0.6
0.12
0.12
27.01
29.88
0.66
0.13
0.12
62.12 0.88
53.16
39.04 13.94
59.83
2009-10 0.18 0.03
16 Great Offshore
18
19 Indosolar
2009-10
2010-11
Hindustan
Media
VenturesLtd
20
Info
Edge(India)
21
Karnataka
Bank
DishTV 13
2009-10
2010-11
2.5 Data Analysis
0.04 -1.2 0.51
0.5
15 Essar Ports
0.72
14
Edelweiss
Capital
17
Gujarat State
Petronet
2009-10 0.15 -0.32 -61.95 4.68 -0.07 -166.01 1.27 -1.56 0.17 17.58 1.37
2010-11 0.15 -0.16 -20.64 1.12 -0.09 -82.99 1.54 -0.72 0.8 2.94 1.19
2009-10 0.31 0.18 9.99 57.81 0.7 -6.25 48.84 0.84 0.49 43.43 0.29 0.39
2010-11 0.22 0.13 7.91 73.71 0.7 9.54 62.16 0.77 0.66 168.01 0.05 0.31
2009-10 0.08 0.07 3.15 7.7 2.5 -4.88 25.82 0.1 0.93 1.13 16.22
2010-11 0.05 0.03 10.37 8.72 0.6 19.77 35.98 0.1 0.76 1.07 12.28
2009-10 0.61 0.09 27.77 28.2 2 31.9 113.02 0.16 1.6 2.06 5.06 0.99
2010-11 0.61 0.13 8.08 42.7 0.6 2.76 33.11 0.16 0.43 3.15 3.39 0.95
2009-10 0.21 0.13 2.85 25.6 1 0.19 10.62 1.47 0.13 56.65 0.05 0.28
2010-11 0.23 0.14 3.26 27.43 1.4 -0.02 12.24 1.41 0.14 41.19 0.03 0.3
2009-10 -0.02 -0.13 -8.65 34.78 -20.64 64.28 0.43 0.76 -0.45 0.75 0.68
2010-11 -0.28 -0.35 -19.58 26.63 -11.99 44.7 0.39 0.56 -1.63 0.89 0.83
Infosys GAAP 0.33 0.24 112.22 436.11 60 67.7 420.79 1.03 0.26 3.23 0.18
(Comparison
of GAAP and
IFRS
statements,
bothof year
endedMarch
2011)
IFRS 0.29 0.25 119.43 436.11 60 67.7 420.79 1.11 0.28 7.59 0.18
WIPRO GAAP 0.22 0.18 17.74 200.75 4 2.02 84.28 1.02 0.87 99.37 No longtermliabilities 0.31
(Comparison
of GAAP and
IFRS
statements,
bothof year
endedMarch
2011)
IFRS 0.19 0.17 21.61 200.75 6.4 -1.31 84.28 0.84 0.14 91.57 0.13 0.35
TataMotors GAAP 0.01 0.04 144.83 43.55 20 43.7 287.53 1.35 3.15 2.64 0.52 1.92
(Comparison
of GAAP and
IFRS
statements,
bothof year
endedMarch
2011)
IFRS 0.02 0.06 122.7 43.55 15 44.56 83.85 1.17 0.07 7.62 0.95 0.8
30
27
OrissaSponge
Iron& Steel
26
Navneet
Publications
29
22
Kingfisher
Airlines
23
KPIT
Cummins
Infosystems
28
Negligible
No longtermliabilities
24
Lakshmi Vilas
Bank
No dividend
No dividend
25
Magma
Fincorp
37

CHAPTER III
DATA ANALYSIS

Having gone through the financial data for the two years of the companies included in the
sample, it becomes sequential now to analyse the same in respect of the research objectives.
As mentioned in the Research Design, Logistic Regression will be used to analyse the data.
Accordingly some key variables have been found out to assist in the analysis.
a) Logistic Regression
Wald Statistic:
As in linear regression, it is necessary to know how well the model fits the data overall as
well as that for individual contribution of predictors. The Wald test can be used to test the
true value of the parameter based on the sample estimate.

Table 3: Wald Statistic
Variable Wald
Step 1
a

Operating Profit Margin .387
Net Profit Margin 1.127
EPS .455
Market Value of equity/Book Value of equity .815
Dividend per Share .399
Cash flow/share 1.075
Free reserves/share .519
Total Asset Turnover Ratio .275
Return on Assets including Revaluation .643
Interest Cover .152
Long Term Liabilities to shareholders funds .280
Total Liabilities to Capital Employed .192
38

Constant .367

The Wald statistic given in Table 3 tells us that the b-coefficient is significantly different
from the zero. Hence, we can assume that all the predictors are making significant
contribution to the prediction of the independent outcome.

R
2
=model chi-square/original-2LL
=5.756/36.018
=.15

So the model can account for 15% variance in results.

Table 4: Value of Beta
VARIABLES
Without accounting
policy changes
With accounting
policy changes
Operating Profit Margin -.732 .481
Net Profit Margin 1.409 4.093
EPS -.007 .993
Market Value of equity/Book Value of equity -.006 .994
Dividend per Share -.032 1.033
Cash flow/share .013 -1.013
Free reserves/share -.001 .999
Total Asset Turnover Ratio .3 1.350
Return on Assets -.09 .914
Interest Cover .0 1.000
39

Long Term Liabilities to shareholders funds -.033 .968
Total Liabilities to Capital Employed -.398 .672
Constant .603 1.828


Table 4 compares the financial numbers reported in 2009-10 and the restated financial
numbers reported in 2010-11. The results provide evidence that H0 holds, implying that
accounting policy changes are more likely to exhibit a favourable impact on the financial
measures of firms.
The transition in accounting policies does not appear to adversely affect firm profitability.
Under the new financial year, firms tend to exhibit higher values on a number of profitability
measures, such as operating profit margin (OPM), net profit margin (NPM) and earnings per
share (EPS), compared to the old regime. The higher profitability that is reported enables
firms to distribute higher dividends to their shareholders as shown by the positive coefficient
of dividend per share (DIVSH). Whether, the higher profitability observed under is volatile or
not can be known by following the fair value orientation of IFRSs. The fair value orientation
of IFRSs has led to a higher market to book value ratio (MVBV) under IFRSs. The
transformation of firm accounts should reinforce firms growth prospects. The table also
shows that, under the new regime, firms tend to display higher leverage measures, i.e. long-
term liabilities to capital employed (LTLCE), total liabilities to shareholders funds (TLSFU)
and interest cover (INTCOV). The higher quality of financial reporting would enhance the
credibility of firm financial statements, and would in turn provide lenders with more certainty
and information about the ability of firms to timely meet their financial obligations, leading
thus to better borrowing terms. Following the higher leverage measures and financial
obligations that are reported for the new era, the Table displays that firms consequently tend
to exhibit lower liquidity, as shown by the negative coefficient of cash flow per share
(CFSH).



40

b) Ratio Analysis
The level or degree of harmonization of the financial statements of different companies can
be compared by using Index of Conservatism: It is commonly known as the C-Index and can
be calculated by using the formula shown hereunder:
C-Index=1-[(RA-RD)/RA]
Where RA=Earnings under the changed accounting policy {mandatory or voluntary IFRS
convergence}
RD=Earnings under local GAAP {without accounting policy changes}
If C-Index>1: Old accounting policy is less conservative than the New accounting policy
C-Index=1: No difference
C-Index<1: Old accounting policy is more conservative than the New accounting policy


Table 5: EPS of Companies
No Company EPS New EPS Old
1 Pidilite Industries 6 5.71
2 Corporation Bank 81.44 74.78
3 ABG Shipyard 37.08 243.66
4 Akzo Nobel India Limited 47.94 43.25
5 Allahabad Bank 29.88 27.01
6 Amara Raja 17.34 19.56
7 Andhra Pradesh Paper Mills 11.3 16.55
8 ICRA Ltd 44.91 50
9 Arshiya International 4.24 2.62
10 Bajaj Finserv 13.02 2.35
11 Finolex Cables 5.67 3.77
12 Bombay Dyeing and Manufacturing Company 5.28 4.77
13 Dish TV -1.78 -2.46
14 Edelweiss Capital
0.78
4.56
15 Essar Ports 0.51 1.46
16 Great Offshore 27.32 46.9
17 Gujarat State Petronet 9 7.36
41

18 Hindustan Media Ventures Ltd 7.3 2.58
19 Indosolar -1.71 -3.19
20 Info Edge(India) 25.38 20.86
21 Karnataka Bank 10.87 12.47
22 Kingfisher Airlines -20.64 -61.95
23 KPIT Cummins Infosystems 7.91 9.99
24 Lakshmi Vilas Bank 10.37 3.15
25 Magma Fincorp 8.08 27.77
26 Navneet Publications 3.26 2.85
27 Orissa Sponge Iron and Steel -19.58 -8.65
28 Infosys 119.43 112.22
29 WIPRO 21.61 17.74
30 Tata Motors 122.7 144.83
Total 634.91 832.52

Therefore,
CI =1 [{832.52-534.91}/832.42] =.64
As C-Index is less than 1, therefore, the old accounting policies are more conservative
than the new accounting policies.








42

CHAPTER IV
FINDINGS AND RECOMMENDATIONS
Objective 1: To analyse the change(s) in accounting policy made by the companies
taken in the sample, as reflected in their financial statements:
Substantial changes in the accounting policy of different firms were studied. All of these
firms have made the changes as to make the financial statements more compatible with that
of the requirements of IFRS.
Table 6: Accounting Policies
No Company Accounting Policies
1 Pidilite Industries 1. Dividend Treatment
2. Foreign Exchange difference related to depreciable assets
2 Corporation Bank 1. Income from liquid mutual funds treatment
2. The financial statements have been prepared and presented
under the historical cost convention on accrual basis of
accounting unless otherwise stated and except for items
recognized on cash basis, as per guidelines issued by the
Reserve Bank of India [RBI] and comply with the Accounting
standards issued by the Institute of Chartered Accountants of
India and relevant requirements prescribed under the Banking
Regulation Act, 1949 and Companies Act, 1956, and current
practices prevailing within the banking industry in India
3 ABG Shipyard 1. Foreign exchange commitments for receivables and payables
2. Insurance of damaged inventory already billed to customer
4 Akzo Nobel India
Limited
1. Income tax refund
5 Allahabad Bank 1. Excess floating provision on gross non-performing assets
2. Old and New Pension
3. Impairment of assets
4. Contingent Liabilities
6 Amara Raja 1. Inclusion of translation loss or gain due to the rupee
43

movement against foreign assets and liabilities in exceptional
items
7 Andhra Pradesh
Paper Mills
1. Adoption of amended AS 11
2. Current Investments are stated at lower of cost or market
price in contrast with the earlier practice of stating them at cost
price.
3. Difference in Inventory Valuation
8 ICRA Ltd 1. Long term investments are valued at lower of cost or fair
market value
9 Arshiya
International
1. Depreciation method changed from the written down value
method to straight-line method.
2. Ancillary cost of arrangement of long term borrowings
amortised over the tenure of borrowings as against the earlier
practice of expensing out in the year of incurrence.
10 Bajaj Finserv 1. Fixed income securities are now stated at cost less
amortization of premium/discount as the case may be.
2. In order to reflect the contracted yield as interest income, the
premium/discount on fixed income securities is amortized with
reference to the yield to maturity prevailing on acquisition.
The impact of this change in the accounting policy on the profit
for the year is not material considering the consequential release
of the provision for diminution in the value of investment made
in earlier years.
11 Finolex Cables 1. Revaluation of foreign currency loan against value of fixed
assets purchased out of such loan.
12 Bombay Dyeing
and
Manufacturing
Company
1. Converted part of its freehold land under real estate
development from fixed assets to stock in trade at market value
in 2010-11.
2. No separate accounting for fringe benefit tax
13 Dish TV 1. Fixed assets taken at net of Cenvat Credit now
2. Incidental expenses related to installation, a part of fixed
assets instead being treated as capital work in progress
44

3. Softwares amortized over the useful life, instead of taking the
shorter of useful life and license period
4. Leasehold improvements amortized over shorter of useful life
and lease period, instead of on the primary lease period
5. Assets costing upto Rs 5,000 are fully depreciated in the year
of purchase
6. Subscription and other service revenues are recognized on an
accrual basis on the rendering of service rather than on the
completion of service.
7. Non recognition of deferred tax assets in view of the
substantial tax losses and no virtual certainty of future taxable
income.
14 Edelweiss Capital 1. Changed its policy on accounting for benchmark linked non-
convertible debentures and exchange traded derivatives by
applying fair valuation as against the earlier policy of ignoring
unrealized gains
2. No separate accounting for fringe benefit tax
15 Essar Ports 1. Adoption of revised AS 11
16 Great Offshore 1. Brought in accounting policy for expenses of spares, stores
and consumables in line with AS-2 on valuation of inventories
17 Gujarat State
Petronet
1. Changed the depreciation rate on gas transmission pipelines
from 4.75% straight-line method to 3.17%.
2. Changed its accounting policy for treatment of 'right of use of
land compensation' and 'right of way payments' from plant and
machinery to non-depreciable intangible assets with
retrospective effect.
18 Hindustan Media
Ventures Ltd
1. Depreciation of fixed assets now on straight-line method,
instead of written down value method
19 Indosolar 1. The stock of diesel, a consumable item, accounted for as
inventory in 2010-11. Until 31st March 2010, the accounting
policy was to charge consumable stores to the PandL account at
the point of purchase.
45

2. Share issue expenses were earlier amortized over a period of
5 years. Now the balance of the unamortized share issue
expenses have been adjusted against the securities premium
account.
20 Info Edge(India) 1. Follows the intrinsic value method for the employee stock
option-based compensation, instead of the fair value method.
21 Karnataka Bank 1. Changed its estimate of charging provisions for non-
performing advances at rates higher than that prescribed by the
RBI with effect from 1October 2010. Due to this change, net
profit was higher by Rs 26.3 crore in 2010-11.
22 Kingfisher
Airlines
1. Adopted the exposure draft on AS 10(revised) on tangible
fixed assets. Which allows costs on major repairs and
maintenance incurred to be amortized over the incremental life
of the asset. Extended the same treatment to costs incurred on
major repairs and maintenance of engines of aircraft acquired
on operating lease.
23 KPIT Cummins
Infosystems
1. Adopted AS-30 for forward exchange derivative contracts.
24 Lakshmi Vilas
Bank
1. Adoption of revised AS 15
25 Magma Fincorp 1. Provision of .25% made against standard assets, with
immediate effect from J anuary 2011. This is in accordance with
the RBI notifications for NBFC's. Accordingly made provision
of Rs 11.4 crore including Rs 58 lakh for subsidiary in 2010-11.
26 Navneet
Publications
1. Standardized the accounting policy on amortization of
intangibles other than trademarks
27 Orissa Sponge
Iron and Steel
1. Deferred tax assets for the March 2011 quarter not
recognized as a matter of prudence.
28 Infosys 1. Prepares audited financial statements both under GAAP and
IFRS (Comparison of
GAAP and IFRS
statements, both
of year ended
46

March 2011)
29 WIPRO 1. Prepares consolidated financial statements both under GAAP
and IFRS (Comparison of
GAAP and IFRS
statements, both
of year ended
March 2011)
30 Tata Motors 1. Prepares consolidated financial statements both under GAAP
and IFRS (Comparison of
GAAP and IFRS
statements, both
of year ended
March 2011)

Objective 2: To investigate the financial implications of changes in accounting policy:
As observed from Table 6, accounting policy changes whether made partially or in
complete compliance with the IFRS have been proved to be beneficial for financial
disclosures. Therefore, firms should adopt IFRS as early as possible, even voluntarily,
before the adoption of the same is made mandatory.

RECOMMENDATIONS
Accounting changes should be made after keeping the following questions in mind:
Time, effort and costs involved in training, planning and implementing of new
standards.
Effects such as conflict with tax or regulatory reporting requirements.
Transition method (i.e., limited or fully retrospective; or prospective)
Single date (big bang) or sequential implementation
47

In principle, the best quality and most comparable information for users of accounts would be
obtained if:
a) All new or amended standards are brought into effect on the same date.
b) Are fully retrospective
c) The standards are brought in quickly
But it may not be feasible for many companies that would need to re-write software and
generate new data.










48

REFERENCES
Das Bhagaban; Convergence of Accounting Standards: Internationalization of Accounting;
International J ournal of Business and Management, Vol 4, No 1, Page No 78-84, (2009).
Imhoff Eugene, Thomas J acob, Economic Consequences Of Accounting Standards: The
Lease Disclosure Rule Change; J ournal of Accounting and Economics, Page No 277-310,
(1986).
Hail Luzi, Leuz Christian, and Wysocki Peter, Global Accounting Convergence and the
Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy
Factors; US FASB Report, (2009).
Leuz Christian, IAS versus US GAAP: A (New) Market Based Comparison, Accounting
Standards Indian Scenario; Page 6, (1999).

Barth Mary, Landsman Wayner, Lang Mark, International Accounting Standards and
Accounting Quality; J ournal of Accounting Research; Vol 46, No 3, Page No 467-498,
(2005).
Muthupandian K.S, International Financial Reporting Standards Changing Fundamentals;
The Chartered Accountant; Page No 983-987, (2006).
Indian Accounting Standards and IFRSs: A Comparative Study, The Chartered Accountant,
(2005).
Saini A.L., International Financial Reporting Standards; Snow white Publications, 5
th

Edition; Page No 3,25,233,237,239; (2010).
International Financial Reporting Standards in Indian Context, www.bdoindia.co.in.
Daske Holger, Mandatory IFRS Reporting around the World: Early Evidence of Economic
Consequences, (2008).
Watts Ross, Towards a positive theory of determination of accounting standards;
Accounting Review; Vol 53, No 1; (1979)
Ramona Karthik, The International politics of IFRS harmonization; Page 11-132, Harvard
Business Review; Page 11-132, (2011).
49

BIBLIOGRAPHY

Analysis of the LIFO inventory valuation method during the onset of IFRS - By J oseph Louis
Romeo, University of Connecticut Storrs. October 2009.

Experience of other Nations in Convergence to IFRS By K.S.Muthupandian

Figuring it Out By Sachin Khedekar. Capital Market J ournal, J une 27-J uly 10 2011
Global Convergence of Financial Reporting Standards: Implications for India By Bikram
Chatterjee, Indian Accounting Review, Vol 9 No 1, J une 2005.

Harmonization of Accounting Standards By Samir S. Mogul. Chartered Accountant, 2003.

How IFRS will impact financial statements By Dolphy DSouza. livemint.com. Wall Street
J ournal.

IFRS - the next accounting Revaluation By Dr Bateshwar Singh. E-srujan, The J ournal of
Innovative Thinkers.

IFRS and Indian GAAP A Comparison. Deloitte.

IFRS Implementation in India: Opportunities and Challenges By Pawan J ain. World
J ournal of Social Sciences, March 2011.

The Dating Game, ACCOUNTANCYMAGAZINE.COM, February 2011.



ID
1
2
3
4
5
6
7
8
9
10
Synopsis
PPT of Synopsis
4 days
Indian Accounting Standards
15 days
IFRS
17 days
Convergence of Ind AS &
33 days
17
M M M M M M M M M M M M M M M
22 Aug '11 29 Aug '11 05 Sep '11 12 Sep '11 19 Sep '11 26 Sep '11 03 Oct '11 10 Oct '11 17 Oct '11 24 Oct '11 31 Oct '11 07 Nov '11 14 Nov '11 21 Nov '11 28 Nov '11
September 2011 October 2011 November 2011 Decemb
Task
Critical Task
Progress
Milestone
Summary
Rolled Up Task
Rolled Up Critical Task
Rolled Up Milestone
Rolled Up Progress
Split
External Tasks
Project Summary
Group By Summary
Deadline
Page 1
Project: Timeline
Date: Sat 10-09-11
APPENDIX 1
IFRS
Voluntarily changes in Accounting Policy
20 days
Data Collection
17 days
Data Analysis
29 days
Conclusion
23 days
Final Review
1 day
M M M M M M M M M M M M M M M M
05 Dec '11 12 Dec '11 19 Dec '11 26 Dec '11 02 J an '12 09 J an '12 16 J an '12 23 J an '12 30 J an '12 06 Feb '12 13 Feb '12 20 Feb '12 27 Feb '12 05 Mar '12 12 Mar '12 19 Mar '12
r 2011 J anuary 2012 February 2012 March 2012
Task
Critical Task
Progress
Milestone
Summary
Rolled Up Task
Rolled Up Critical Task
Rolled Up Milestone
Rolled Up Progress
Split
External Tasks
Project Summary
Group By Summary
Deadline
Page 2
Project: Timeline
Date: Sat 10-09-11
52

APPENDIX 2
Accounting Standards issued by ICAI v/s recent version of IFRS/IAS: A Comparative
Study
Table 7: AS v/s IAS
AS by
ICAI
IFRS /
IAS
Position under IAS / IFRS
After considering recent changes
Position as per Indian GAAP
AS-1 IAS 1 Disclosure of Accounting Policies

IAS 1 prescribed minimum structure of
financial statements and contains
guidance on related issues viz. current
liabilities etc.

Under IAS 1, financial statements
includes Statement showing changes in
equity

Under IAS 1, there is a presumption that
application of IFRS would lead to fair
presentation



IAS 1 prohibits any items to be disclosed
as extraordinary items.


AS 1 does not prescribe any
minimum structure.



AS 1 does not prescribe any such
statement to be prepared.


There is no such presumption
under AS 1.




AS 5 specifically requires
disclosure of certain items as
Extra-ordinary items.
AS 2 IAS 2 Valuation of Inventories:
IAS 2 prescribes same cost formula to be
used for all inventories having a similar
nature and use to the entity.
There are certain additional requirement
in IAS 2 which are not contained in AS 2

AS 2 requires that the formula
used in determining the cost of an
item of inventory needs to be
selected with a view to providing
the fairest possible approximation
53

which are as under:
1. Purchase of inventory on deferred
settlement terms -excess over
normal price is to be accounted as
interest over the period of
financing.
2. Measurement criteria are not
applicable to commodity broker-
traders.
to the cost incurred in bringing
the item to its present location
and condition. However, there is
no stipulation for use of same
cost formula in AS 2 as compared
to IFRS
AS 3 IAS 3 Cash Flow Statements:
Bank overdrafts are to be treated as a
component of cash/ cash equivalents
under IAS 7.

IAS 7 allows interest and dividend paid
to be classified either under Operating
Activities or Financing Activities.

IAS 7 requires additional disclosure of
cash payments by a lessee relating to
finance lease under Financing Activities.

IAS 7 deals with issues relating to
disclosure in cash flow statement in
consolidated financial statements viz.
Undistributed profits of associate and
minority interests, Forex cash flows of
foreign subsidiary etc.
.
IAS 7 prohibits separate disclosure of
extraordinary items in Cash Flow
Statements.


AS 3 has no such stipulation



AS 3 mandates disclosure of
interest and dividend paid under
Financial Activities only.

No such disclosures required
under AS 3.


AS 3 was issued prior to AS 21,
hence issues relating to
consolidate financial statements
are not dealt with.



AS 3 mandates such disclosure.



54

In case of acquisition of subsidiary, IAS 7
requires two Additional disclosures on
acquisitions viz. Cash/ cash equivalents
of acquired subsidiary and all other assets
acquired.
No such provision in AS 3
AS 4 IAS 10 Contingencies and Events occurring
after the Balance Sheet Date:
IAS 10 provides that proposed dividend
should not be shown as liability.



IAS 10 requires date of authorization for
issue of financial statements to be
specifically mentioned in the financial
statements itself.

IAS 10 also requires disclosure of
contingent liability to be updated in the
light of new information received after
the balance sheet date.


AS 4 specifically requires such
disclosure as the same is
mandated by statutory
requirement.

AS 4 has no such stipulation.




AS 4 requires adjustments to
figures stated in financial
statements for events occurring
after the balance sheet date, if
such events relate to conditions
existing at the balance sheet date.
AS 5 IAS 8 Prior Period Items and Changes in
Accounting Policies:

The definition of prior period Items is
broader under IAS 8 as compared to AS 5
since IAS 8 covers all the items in the
financial statements.


IAS 8 requires disclosure of any



AS 5 covers only incomes and
expenses in the definition of prior
period items.



AS 5 does not require such
55

impending change in accounting policy
viz. change mandated by a new
accounting standard which is yet to come
into effect.
disclosure


AS-6 No
correspo
nding
IAS
(covered
by
IAS
which
discusses
about
assets)
Depreciation Accounting (AS 6):
In case of change in method of
depreciation, IAS 16 requires effect to be
given prospectively.





Change in method of depreciation is
treated as change in accounting estimate
under IAS 16.

IAS 16 requires estimation of Residual
value without considering inflation
effects i.e., residual value has to be
estimated assuming that the asset were
already of the age and in the condition
expected at the end of its useful life

AS 6 requires retrospectively re-
computation of depreciation and
any excess or deficit on such re-
computation is required to be
adjusted in the period in which
such change is affected.


AS 6 considers this as change in
accounting policy


There is no such stipulation in AS
6 although it prescribes use of
realisable value of similar assets,
which have reached the end of
their useful lives and have
operated under conditions similar
to the asset as one of the basis of
estimating residual value.
AS-7
(Revis
ed)
IAS 11 Construction Contract (AS 7):
Contract Revenue under IAS 11 is
measured at the fair value of the
consideration received or receivable.
AS 7 does not refer to fair value
and states that Contract revenue is
measured at the consideration
received or receivable
AS-9 IAS-18 Revenue Recognition (AS 9):
Under IAS 18, revenue from sale of
goods cannot be recognised when entity
retains continuing managerial ownership

AS 9 does not contain any such
stipulation.

56

or effective control over the goods sold.

In case of revenue from rendering of
services, IAS 18 allows only percentage
of completion method.



AS 9 allows completed service
contract method or proportionate
completion method.

AS-10 IAS 16 Accounting for Fixed Assets:
Under IAS 16, if subsequent costs are
incurred for replacement of a part of an
item of fixed assets, such costs are
required to be capitalized and
simultaneously the replaced part has to be
de-capitalized.

AS 10 provides that only that
expenditure which increases the
future benefits from the existing
asset beyond its previously
assessed standard of performance
is included in the gross book
value, e.g., an increase in
capacity.
AS 11
(Revis
ed)
IAS 21 Effects of changes in Foreign Exchange
Rates:
The revised IAS 21 makes no distinction
between an integral foreign operation and
non-integral foreign operation as done in
AS 11. In fact, the factors of distinction
between an integral operation and a non-
integral operation are incorporated as
considerations for determining functional
currency.


AS 11 provides separate
treatment for integral operations
and non-integral operations.





AS-12 IAS 20 Government Grants:
In case of non-monetary assets acquired
at nominal / concessional rate, IAS 20
permits accounting either at fair value or
at acquisition cost

In respect of grant related to a specific
fixed asset becoming refundable, IAS 20

AS 12 requires accounting at
acquisition cost.



AS 12 requires enterprise to
compute depreciation
57

requires retrospective re-computation of
depreciation and prescribes charging off
the deficit in the period in which such
grant becomes refundable.

IAS 20 requires separate disclosure of
unfulfilled conditions and other
contingencies if grant has been
recognised.
prospectively as a result of which
the revised book value is
provided over the residual useful
life.

AS 12 has no such disclosure
requirement.
AS-14 IFRS 3
(IFRS 3
supersed
es
IAS 22)
Accounting for Amalgamations:
IFRS 3 allows only purchase method.
Option of pooling method given under
IAS 22 has been withdrawn.

IFRS 3 requires valuation of assets and
liabilities at Fair Value.

IFRS 3 requires Goodwill to be tested for
impairment.

IFRS 3 requires recognition of negative
goodwill immediately in PandL A/c.

AS 14 allows both Pooling of
Interest Method and Purchase
Method
.
AS 14 requires valuation at
carrying value.

AS 14 requires amortization of
Goodwill

AS 14 requires it to be credited to
Capital Reserve

Exposu
re
Draft
issued
on AS-
15
IAS 19 Employee Benefits:

Under IAS 19, the discount rate used to
discount postemployment benefit
obligations should be determined by
reference to market yields of high quality
corporate bonds or, in case there is no
deep market in such bonds,
on the basis of market yields of Govt.
bonds.


Exposure draft on revised AS 15
allows use of only market yields
on Govt. bonds.





58

IAS 19 provides a choice to recognize the
incremental liability on first time
application either immediately in PandL
or over a period of five years on SLM
basis.
AS 15 ED requires adjustment
against opening balance of
revenue reserves.
AS-16 IAS 23 Borrowing Costs :
IAS 23 prescribes borrowing costs to be
recognized as expense as benchmark
treatment. It requires capitalization as an
allowed alternative.

IAS 23 requires disclosure of
capitalization rate used to determine the
amount of borrowing costs.

AS 16 mandates capitalization of
borrowing costs.



AS 16 does not require such
disclosure.
AS-17 IAS 14 Segment Reporting:
IAS 14 prescribes treatment of revenue,
expenses, profit/loss, assets and liabilities
in relation to Associates and J oint
Ventures in consolidated financial
statements.

IAS 14 encourages reporting of vertically
integrated activities as separate segments
but does not mandate the disclosure.


IAS 14 provides that a business segment
can be treated as reportable segment only
if, inter alia, majority of its revenue is
earned from sales to external customers.

Under IAS 14, if a reportable segment
ceases to meet threshold requirements,

AS 17 is silent on the aspect of
treatment in consolidated
financial statements.



AS 17 does not make any
distinction between vertically
integrated segment and other
segments

AS 17 does not contain any such
stipulation.



Under AS 17, this is mandatory
irrespective of the judgment of
59

then also it remains reportable for one
year if the Management judges the
segment to be
of continuing significance.
Management


AS-18 IAS 24 Related Party Disclosures:
The definition of related party under IAS
24 includes Post employment benefit
plans (e.g. gratuity fund, pension fund) of
the enterprise or of any other entity,
which is a related party of the enterprise.

AS 18 does not include this
relationship.



AS-19 IAS 17 Leases
Under IAS-17 it has been clarified that
land and buildings elements of a lease of
land and buildings need to be considered
separately. The land element is normally
an operating lease unless title passes to
the lessee at the end of the lease term.
The buildings element is classified as an
operating or finance lease by applying the
classification criteria.





The definition of residual value is not
included in IAS 17.

IAS 17 specifically excludes lease
accounting for investment property and
biological assets.

IAS 17 does not prohibit upward revision

AS-19 - Accounting for Leases"
at it stands at present does not
deal with lease agreements to use
lands. Hence, the classification
criteria are applicable only to
buildings as a separate asset. To
be in line with IAS-17, a suitable
modification is required in AS-19
to bring lease agreements for use
of land within the purview and
prescribe separate classification
criteria for land as stated in
revised IAS-17.

AS 19 defines residual value.


There is no such exclusion under
AS 19.


AS 19 permits only downward
60

in value of un-guaranteed residual value
during the term of lease.

In case of sale and lease back, IAS 17
requires excess of sale proceeds over the
carrying amount to be deferred and
amortised over lease term.

IAS 17 does not require any separate
disclosure for assets acquired under
finance lease segregated from assets
owned.

IAS 17 prescribes initial direct costs
incurred by lessor to be included in lease
receivable amount in case of finance
lease and in the carrying amount of the
asset in case of
operating lease and does not mandate any
accounting policy related disclosure.



IAS 17 requires assets given on operating
leases to be presented in the Balance
Sheet according to the nature of the asset.
revision


AS 19 requires excess or
deficiency both to be deferred and
amortised over the lease term in
proportion to the depreciation of
the leased asset.

AS 19 mandates such separate
disclosure.


AS 19 requires initial direct cost
incurred by lessor to be either
charged off at the time of
incurrence
or to be amortised over the lease
period and requires disclosure for
accounting policy relating thereto
in the financial statements of
lessor
.
AS 19 requires assets given on
operating lease to be presented in
Balance Sheet under Fixed
Assets.
AS-20 IAS 33 Earnings per Share (EPS):
IAS 33 requires separate disclosure of
basic and diluted EPS for continuing
operations and discontinued operations.

IAS 33 deals with computation of EPS in

AS 20 does not requires any such
separate computation or
disclosure.

AS 20 does not contain any such
61

case of Share based payment transactions.

IAS 33 prescribes treatment of written
put options and forward purchase
contracts in computing EPS.

IAS 33 requires changes in accounting
policy to be given retrospective effect for
computing EPS, which means EPS to be
adjusted for prior periods presented
.
IAS 23 does not require disclosure of
EPS with and without extra-ordinary item



IAS 33 does not deal with the treatment
of application money held pending
allotment.



IAS 33 requires disclosure of anti-
dilutive instruments even though they are
ignored for the purpose of computing
dilutive EPS.

IAS 33 does not require disclosure of
normal face value of share
provision.

AS 20 is silent on this aspect.



AS 20 does not prescribe such
treatment.



AS 20 requires EPS / DPS with
and without extra-ordinary items
to be disclosed separately.


Under AS 20, application money
held pending allotment should be
included in the computation of
diluted EPS.


AS 20 does not mandate such
disclosure.



Disclosure of normal face value is
required under AS 20.
AS-21 IAS 21 Consolidated Financial Statements
(CFS):
Under IAS 27, it is mandatory to prepare
CFS and an entity should prepare


Under AS 21, it is not mandatory
to prepare CFS.
62

separate financial statements in addition
to CFS only if local regulations so
require.

Under IAS 27, exemption from
preparation from CFS if certain
conditions are fulfilled.

Under IAS 27, a subsidiary cannot be
excluded from consolidation under any
circumstances.





There is no such exemption under
AS 21.


Under AS 21, a subsidiary can be
excluded from consolidation if
(1) the subsidiary is acquired and
held with an intention to dispose;
or (2) the subsidiary operates
under
severe long term restrictions
impairing its ability to transfer
funds to parent.
AS-22 IAS 12 Accounting for Taxes on Income:
IAS 12 is based on Balance Sheet
approach and therefore temporary
difference (for e.g. Difference on any
upward revaluation of assets, leads to
creation of deferred tax liability)

Under IAS 12, deferred tax liability for
differences associated with investments
in subsidiaries, associates and J oint
Ventures may not be provided, if the
parent is able to control the timing of
reversal and it is probable that difference
will not reverse in foreseeable future.

AS 22 is based on income
statement
approach and only timing
differences leads to creation of
deferred tax asset or liability.

AS 22 provides no such exception
as it does not deal with temporary
differences
AS-23 IAS 28 Accounting for Associate in
Consolidated Financial Statement:


63

Under IAS-28, Potential voting rights
currently exercisable to be considered in
assessing significant influence.

As per IAS 28, difference between
Balance sheet date of investor and
associate cannot be more than three
month.

In case uniform accounting policies are
not followed by investor and Investee,
necessary adjustments have to be made
while preparing consolidated financial
statements of investor.

While recognizing losses of associates /
joint ventures under IAS 28, carrying
amount of investment in equity and other
long term interests to be considered


For identification of goodwill / capital
reserve , IAS-28 envisages net fair value
basis on acquisition

Under IAS 28 it is necessary to subject
the investments in associates / joint
ventures to the test of impairment.

AS-23 is silent on this.



Under AS 23, no period is
specified. Only consistency is
mandated


Under AS 23, if it is not
practicable to make such
adjustments, exemption is given,
provided
appropriate disclosures are made.

Under AS 23, losses are to be
recognised to the extent of
investment plus incurred
obligations plus payments made
towards guaranteed obligations.

AS-23 prescribes historical cost
basis on acquisition, for
computation of goodwill.

If decline in value of investment
in an associate is permanent,
provision for diminution to be
made. Impairment testing is not
required under AS23.
AS 25 IAS 34 Interim Financial Reporting:
Under IAS 34, minimum components of
Interim Financial Report includes -

No such disclosure is required
under AS 25.
64

Statement showing changes in Equity

Under IAS 34, in case of any change in
accounting policy, figures of prior interim
periods of the current financial year and
comparable figures of corresponding
previous periods to be restated.

Under IAS 34, separate guidance is
available for treatment of Provision for
Leave encashment, Interim Period
Manufacturing Cost Variances, Foreign
Currency Translation Gains and Losses.


AS 25 requires restatement of
figures of prior interim periods of
the current financial year only



AS 25 does not address these
issues specifically.
AS- 26 IAS 38 Intangible Assets:

There is no presumption under IAS 38 as
regards useful life of an intangible asset


IAS 38 does not exclude intangible assets
arising in insurance enterprise from
contract with policy holder


Under IAS 38, intangible assets having
"Indefinite useful life" cannot be
amortized. Indefinite useful life means
where, based on analysis, there is no
foreseeable limit to the period over which
the asset is expected to generate net cash
inflow for the entity. Indefinite is not
equal to Infinite. Such assets should be
tested for impairment at each Balance


Under AS 26, there is a rebuttable
presumption that the useful life of
intangible assets will not exceed
10 years.
Intangible assets arising in
insurance enterprise from contract
with policyholder are excluded
from scope of AS-26.

There is no such restriction in AS
26







65

sheet date and separately disclosed

IAS 38 does not require any impairment
testing if there are no indications of
impairment.






Under IAS 38, if Intangible Asset is 'held
for sale' then amortization should be
stopped.


AS 26 requires test of impairment
to be applied even if there is no
indication of that the asset is
impaired for following assets:
-Intangible asset not yet available
for use
-Intangible asset amortised over >
10 years.

There is no such stipulation under
AS 26.
AS-27 IAS 31 Financial Reporting of Interests in
Joint Ventures:

Under IAS 31, when the investments are
made by venture capital organization,
mutual funds, unit trusts and similar
entities when those investments are
classified as held for
trading and accounted for as per IAS 39.

IAS 31 not to apply if parent is exempt
from preparing CFS under IAS 27.
Similar exemption for investor satisfying
same conditions as parent.

IAS 31 permits both proportionate
consolidation method and equity method
for recognizing interest in a jointly
controlled entity in CFS. Equity method



There is no such provision under
AS 27.





There is no such specific
provision under AS 27.



AS 27 permits only proportionate
consolidation method.
66

prescribed in IAS 31 is similar to that
prescribed in AS 23.
AS- 28 IAS 36 Impairment of Assets:

Under IAS 36, for determining net selling
price, cost of disposal to be reduced only
in cases where asset is intended to be
disposed off.

IAS 36 does not permit reversal of
impairment losses.


IAS 36 suggests only bottom-up
approach for allocation of goodwill in
case of a cash-generating unit.


AS 28: For determining net
selling price, cost of disposal to
be reduced from fair value of
assets in all cases.

AS 28 permits reversal of
impairment losses.


AS 28 allows both bottom up and
top down Methods

AS- 29 IAS 37 Provisions, Contingent Assets and
Contingent Liabilities

IAS 37 permits discounting of provisions.




AS 29 does not permit any
discounting.









67

APPENDIX 3

Table 8: Accounting Measures Used as Explanatory Variables:
Growth
MVBV Market value to book value
Profitability
OPM
NPM
EPS
DIVSR

Operating profit margin
Net profit margin
Earnings/share
Dividend/share

Liquidity
CFSH Cash flow per share
Leverage
LTLCE
TLSFU

Long-term liabilities to capital employed
Total liabilities to shareholders funds

Size
TATR Total Asset Turnover Ratio
Investment

FRPS Free Reserves per Share











68

APPENDIX 4

Logistic Regression:
Case Processing Summary
Unweighted Cases
a
N Percent
Selected Cases Included in
Analysis
59 96.7
Missing Cases 2 3.3
Total 61 100.0
Unselected Cases 0 .0
Total 61 100.0
a. If weight is in effect, see classification table for the
total number of cases.

Dependent Variable Encoding
Original Value Internal Value
2009-10 0
2010-11 1


Block 0: Beginning Block

69

Classification Table
a,b


Observed
Predicted
Particulars
Percentage
Correct 0 1
Step 0 Particulars 0 30 0 100.0
1 29 0 .0
Overall Percentage 50.8
a. Constant is included in the model.
b. The cut value is .500

Variables in the Equation
B S.E. Wald Df Sig. Exp(B)
Step 0 Constant -.034 .260 .017 1 .896 .967

Variables not in the Equation
Score df Sig.
Step 0 Variables Operating Profit Margin .078 1 .780
Net Profit Margin .466 1 .495
EPS .260 1 .610
70

Market Value of equity/ Book Value
of equity
.001 1 .974
Dividend per Share .000 1 .997
Cash flow/share .103 1 .748
Free reserves/share .921 1 .337
Total Asset Turnover Ratio .161 1 .688
Return on Assets .857 1 .354
Interest Cover .003 1 .956
Long Term Liabilities to
shareholders funds
.208 1 .648
Total Liabilities to Capital
Employed
.280 1 .597
Overall Statistics 5.208 12 .951

Block 1: Method = Enter
Omnibus Tests of Model Coefficients
Chi-square df Sig.
Step 1 Step 5.756 12 .928
Block 5.756 12 .928
Model 5.756 12 .928

71

Model Summary
Step
-2 Log
likelihood
Cox and Snell
R Square
Nagelkerke R
Square
1 36.018
a
.093 .124
a. Estimation terminated at iteration number 5
because parameter estimates changed by less than
.001.

Classification Table
a


Observed
Predicted
Particulars
Percentage
Correct 0 1
Step 1 Particulars 0 18 12 60.0
1 10 19 65.5
Overall Percentage 62.7
a. The cut value is .500

Variables in the Equation
B S.E. Wald df
Step 1
a
Operating Profit Margin -.732 1.178 .387 1
Net Profit Margin 1.409 1.327 1.127 1
72

EPS -.007 .010 .455 1
Market Value of
equity/Book Value of
equity
-.006 .006 .815 1
Dividend per Share .032 .051 .399 1
Cash flow/share .013 .012 1.075 1
Free reserves/share -.001 .001 .519 1
Total Asset Turnover
Ratio
.300 .572 .275 1
Return on Assets
including Revaluation
-.090 .112 .643 1
Interest Cover .000 .001 .152 1
Long Term Liabilities
to shareholders funds
-.033 .062 .280 1
Total Liabilities to
Capital Employed
-.398 .909 .192 1
Constant .603 .996 .367 1
a. Variable(s) entered on step 1: Operating Profit Margin, Net Profit
Margin, EPS, Market Value of equity/Book Value of equity, Dividend per
Share, Cash flow/share, Free reserves share, Total Asset Turnover Ratio,
Return on Assets including Revaluation, Interest Cover, Long Term
Liabilities to shareholders funds, Total Liabilities to Capital Employed.


73

Variables in the Equation
Sig. Exp(B)
Step 1
a
Operating Profit Margin .534 .481
Net Profit Margin .288 4.093
EPS .500 .993
Market Value of equity/Book
Value of equity
.367 .994
Dividend per Share .528 1.033
Cash flow/share .300 1.013
Free reserves/share .471 .999
Total Asset Turnover Ratio .600 1.350
Return on Assets including
Revaluation
.423 .914
Interest Cover .696 1.000
Long Term Liabilities to
shareholders funds
.597 .968
Total Liabilities to Capital
Employed
.662 .672
Constant .545 1.828