23_vol-1_issue-7 _ financial statement effect_wipro

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ZENITH

International Journal of Multidisciplinary Research

Vol.1 Issue 7, November 2011, ISSN 2231 5780

www.zenithresearch.org.in

317

FINANCIAL STATEMENT EFFECTS ON CONVERGENCE TO IFRS

A CASE STUDY IN INDIA

SHOBANA SWAMYNATHAN**; DR. SINDHU ***

*Chartered Accountant, Research Scholar

School of Management Studies, Jawaharlal Nehru Technological University,Kukatpally, Hyderabad, Andhra Pradesh, India.

**Associate Professor, School of Management Studies,Jawaharlal Nehru Technological University,

Kukatpally, Hyderabad, Andhra Pradesh, India.

ABSTRACT

In the present era of globalization a number of multinational companies are establishing their

businesses in emerging economies and they are increasingly accessing the global markets to

fulfill their capital needs by getting their securities listed on the stock exchanges outside theirown country. Such environment requires uniform accounting standards for global business. To

emanate such issues, one global accounting standard for reporting financial statement i.e. IFRSwas developed. During the switch over phase from local GAAP to IFRS companies will have to

modify their accounting system and processes as well as provide comparative financial

information between their previous GAAP and their new IFRS compliant report. This article

examines the financial statement effects on convergence to IFRS from Indian GAAP. The resultconcluded that the IFRS is fair valuation approach and are more transparent disclosures and

Indian GAAP is conservative approach.

KEYWORDS: International Financial Reporting Standards, Indian Accounting standards,

Ind AS(carved out version of IFRS), Financial statement.______________________________________________________________________________

INTRODUCTION

Beginning from 1stApril 2011, Companies listed in National Stock Exchange(Nifty 50), Bombay

Stock Exchange(Sensex 30),Companies whose stocks are listed outside India and Companies

which are listed or not but which have their net worth exceeding Rs 1000 crores are required tocarry out the convergence of Indian Accounting Standard with IFRS. Reliable, consistent and

uniform financial reporting is important part of good corporate governance practices worldwide

in order to enhance the credibility of the businesses in the eyes of investors to take informed

investment decisions. In pursuance of G-20 commitment given by India, the process ofconvergence of Indian Accounting Standards with IFRS has been carried out in Ministry of

Corporate Affairs through wide ranging consultative exercise with all the stakeholders. Thirty

five Indian Accounting Standards converged with International Financial Reporting Standards

(henceforth called IND AS) was notified by the Ministry of Company Affairs of India.


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REVIEW OF LITERATURE

This section briefly reviews more recent empirical studies conducted to examine the impact of

IFRS on key financial aspects emanating from the financial statements of companies. Wong and

Wong(2005) examined to explore the impact of not amortizing goodwill and identifiableintangible assets with in definitive lives on some commonly used valuation multiples of NewZealand listed companies. Results indicated that these have a significant downward effect on

EV/EBIT and PE multiples. Hope et al.(2006) investigated the importance of IFRS in the context

of global accounting standards harmonization and to know what institutional factors influencecountries decision to voluntarily adopt IFRS. This study discerned a significant negative

association between the adoption of IFRS and investor protection.

Lantto (2007) examined whether IFRS improved the usefulness of accounting information in a

code law country that has a strong system of legal enforcement and high quality domestic

accounting standards. The result of this study indicated that IFRS have improved the relevanceof accounting information in Finland but they also highlighted the concern about reliability of

those financial statement items that are prepared using judgement. Capkun et al. (2008) analyzed

the impact of mandatory change in financial reporting standards in European Union and found

that the transition from local GAAP to IFRS had a small but statistically significant impact ontotal assets, equity, total liabilities and among assets the most pronounced impact on intangible

assets and property plant and equipment. It was examined by Ball (2008) whether an investor got

benefit from implementing IFRS or it is just like a mirror which makes him far from reality. Incase of direct benefit, IFRS offer increased comparability and hence reduced information costs

and information risk to investors. And in case of indirect benefit, IFRS lead to a reduction in

firms cost of equity capital, the researchers observed.

Extant literature generally makes comparisons between IAS and U.S. GAAP (e.g., Harris and

Muller 1999; Ashbaugh and Olsson 2002), non-U.S. and U.S. GAAP (e.g., Amir, Harris andVenuti 1993) and across different local standards including U.S. GAAP (Ali and Hwang 2000;

Ball, Kothari and Robin 2000). This literature, however, rarely compares IAS with local GAAP.

Prior literature examines this question based on cross-sectional comparisons across differentcountries and concludes that the shareholder-oriented model is generally more value relevant

than the stakeholder-oriented model (Ali and Hwang 2000; Ball et al. 2000).8 The literature,

however, is unable to disentangle whether this

finding is driven by the difference in accounting standards or other institutional factors such as

shareholder protection or market development.

Mingyi Hung and K.R.Subramanyam studied about the financial effects of IFRS in Germany .While

HGB is stakeholder-oriented and commonly viewed as a historical cost accounting model that

emphasizes income smoothing, IAS is shareholder-oriented and generally perceived as a fair-value accounting model that emphasizes balance sheet valuation. Consistent with these

perceptions, we find that total assets and book value of equity, as well as variability of book


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value and net income, are significantly higher under IAS than HGB. In addition, we find that

book value (net income) plays a greater (lesser) valuation role under IAS than under HGB.

There is no study carried out in India with regard to convergence effect of IFRS by Indian

companies and so the same has been taken for the study.

OBJECTIVES

This article has the following objectives:

1. To document the difference between Indian Accounting standards and IFRS

2. To examine the effects of voluntary convergence of IFRS on key accounting measures

A case study on Wipro

3. To examine the effects of voluntary convergence of IFRS on financial ratio A case

study on Wipro

SCOPE

The study is based on secondary data on selected variables sourced from the published annual

reports of Wipro for the year ended 31stMarch 2010. Wipro had voluntarily prepared its annual

report on the basis of Indian GAAP and IFRS for the year ended 31st March 2010, wherein

reconciliation of equity based on Indian GAAP and IFRS is presented for the opening Balance

Sheet as at 1stApril 2008 and for Balance Sheet ended 31

stMarch 2009.

HYPOTHESES

For achieving the above objectives the study has the following hypotheses:

1. There is no significant difference between financial statement items based on IndianGAAP and IFRS for the opening Balance Sheet as at 1

stApril 2008 by Wipro

2. There is no significant difference between financial statement items based on Indian

GAAP and IFRS for the opening Balance Sheet as at 31stMarch 2009 by Wipro

3. There is no significant difference between Indian GAAP and IFRS based accounting ratio

for the fiscal year 31stMarch 2009 by Wipro.

WHY IFRS NEED TO BE IMPLEMENTED IN INDIA?

IFRS increases comparability among different sectors, countries and companies, which

will lead to more transparent financial reporting benefiting investors, customers and other

stakeholder in India and overseas.

Convergence with IFRS enables Indian companies to access Global Capital Markets and

eliminate cross border listing and encourage more foreign capital flow to the country.


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Uniform Accounting Standard enables investors to understand better investment

opportunities as against to different set of national accounting standard.

Corporates would come to know its true worth has Fair valuation is mandated for many

balance sheet items.

Convergence to IFRS will increase the opportunities for Indian professionals abroad also.

Avoidance of multiple reporting such as Indian GAAP, US GAAP, IFRS

DIFFERENCE BETWEEN IFRS AND INDIAN GAAP

The difference between Indian GAAP and IFRS are highlighted as below:

FIRST TIME ADOPTION

IFRS 1 specifically deals with how to apply IFRS for the first time. Full retrospectiveapplication of IFRSs effective at the reporting date for an entity's first IFRS financial statementswith certain optional exemptions and mandatory exceptions. An entity shall explain how the

transition from previous GAAP to IFRSs affected its reported financial position, financial

performance and cash flow IFRS 1 specifically deals with how to apply IFRS for the first time.An entity shall explain how the transition from previous GAAP to IFRSs affected its reported

financial position, financial performance and cash flow

Indian Accounting Standards does not give specific guidance on first time adoption of the

standards by an entity.

PRESENTATION AND DISCLOSURE

In IFRS the following need to be presented

Statement of financial position (Balance sheet)

Statement of comprehensive income (Income statement

Statement of changes in equity

Cash flow statement,

Notes comprising a summary of significant accounting policies a n d o t h e r e x p l a n at o r y information.

An entity shall not present items of income or expenses as extraordinary items either on

the face of the statement of comprehensive income or the separate income statements inthe notes.

In Indian GAAP the following need to be presented and disclosed


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Balance sheet

Profit and Loss Account,

Cash flow statement

Accounting policies and Notes to financial statements.

An entity shall disclose statement of profit and loss any income or expenses that arise

from events or transactions that are clearly distinct from the ordinary activities of theenterprise and, therefore, are not expected to recur frequently or regularly as

extraordinary items.

INVENTORIES

In IFRS When arrangement contains f financing elements, IAS 2 specifically requires that where

inventory is acquired on deferred settlement terms, a difference between the purchase price fornormal credit terms and the amount paid is recognized as interest expense over the period of thefinancing

In Indian GAAP, there is no guidance for the treatment of inventories acquired on deferredsettlement terms.

CASH FLOW STATEMENTS

Under IFRS Bank borrowings are normally part of financing activities. Nonetheless, bankoverdrafts that are repayable on demand and that form an integral part of an entity's cash

management are included in cash equivalents. Interest paid or received is disclosed as operatingin case of financing entity. For other entities, the interest paid can be disclosed as operating orfinancing cash flow and interest received is usually disclosed as investing cash flow. Dividend

paid can be disclosed as operating or financing. Dividend received is disclosed as operating in

case of financing entity. For other entities, the same can be disclosed as operating or investing.

In Indian Accounting Standards.There is no stipulation in AS 3 for classification of bank

overdrafts.

Interest paid or received is disclosed as opera ting in case of financing entity. For other entities,

the interest paid should be disclosed as financing cash flow and interest received is usuallydisclosed as investing cash flow. Disclosure of dividend paid as financing. Dividend received is

disclosed as operating in case of financing entity. For other entities, the same is disclosed asinvesting Contingencies and events occurring after Balance Sheet date

Under IFRS, An entity shall adjust amounts recognized in the financial statements for events

that provide additional evidence of conditions that existed at the balance sheet date and shouldnot be adjusted for events that provide evidence of conditions that did not exist at the balance

sheet date.


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In Indian GAAP Under AS 4, non-adjusting events are required to b e disclosed in the report of

the approving authority, for example, the board report Change in accounting polic

In IFRS, an entity shall account for change in accounting policy retrospectively.Comparative

information to be restated and the amount of the adjustments relating to prior periods is adjustedagainst the opening balance of retained earnings of the earliest year presented. An exemptionapplies when it is impracticable to change comparative information

In Indian GAAP, the impact of change in the accounting policy to be adjusted against current

period profit and loss account. Policy changes made on the adoption of a new standard must be

accounted for in accordance with that standard's transitional provisions.

PRIOR PERIOD ITEMS

In IFRS, the definition of prior period items is much broader under IAS 8 as compared to AS 5.

Prior period errors covers all the items in the financial statements including assets and liabilities.

In Indian GAAP, The definition of prior period items is restricted to income and expenses in

current period occurring as a result of errors and omission in the preparations of financialstatements of prior period(s).

DEPRECIATION

Under IFRS, an entity is required to depreciate separately the significant parts of PPE if theyhave different useful life (Component Approach).Change in the method of depreciation is treated

as change in accounting estimates, reflected in the depreciation charge for the current and

prospective years. Depreciation on revalued portion cannot be recouped out of revaluation

reserve

Under Indian GAAP, Generally component approach is not required or followed. Change inmethod of treated as change in accounting policies and impact is determined by retrospectively

computing depreciation under new method and the impact is recorded in the period of change.

Depreciation on revalued portion can be recouped out of revaluation reserve.

PROPERTY PLANT AND EQUIPMENT

In IFRS, AS 16 requires an entity to choose either cost model or revaluation model as its

accounting policy. If an item of PPE is revalued, the entire class of PPE to which that asset

belongs shall be revalued. When entity applies revaluation model it requires regular revaluationsof all PPE. Management must consider at each year end whether fair value is materially different

from carrying value.

In Indian GAAP, As per AS 10 Fixed Assets are carried at cost less accumulated depreciation.

However revaluation of fixed assets is not required. When revaluation do not covers all assets of

the given class, it is appropriate that the selection of the asset to be revalued be made onsystematic basis, e.g. an entity may revalue a class of assets within one unit and ignore assets of


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the same class at another unit. There is no requirement to perform revaluations at regular

intervals

REVENUE RECOGNITION

In IFRS Revenue should be measured at the fair value of the consideration received or

receivable. Where the inflow of the cash or cash equivalent is deferred, discounting to a present

value is required to be done An entity shall apply IFRIC 13 and account for award credits as aseparately identifiable component of the sales transaction(s) in which they are granted (the 'initial

sale'). The fair value of the consideration received or receivable in respect of the initial sale shall

be allocated between the award credits and the other components of the sale. The considerationallocated to the award credits shall be measured by reference to their fair value, i.e. the amount

for which the award credits could be sold separately.

In Indian GAAP, Revenue is measured by the charges made to the customers or clients for goods

supplied or services rendered to them and by the charges and rewards arising from the use of

resources by them. In case of installment sales, discounting would be required. When the

consideration is receivable in installments, revenue attributable to the sales price exclusive ofinterest should be recognized at the date of sale. The interest element should be recognised as

revenue, proportionately to the unpaid balance due to the seller There is no specific guidelines of

credit points awarded.

INVESTMENT PROPERTY

Under IFRS, An investment property shall be measured initially at its cost. Transaction costs

shall be included in the initial measurement. For subsequent measurement an entity shall chooseas its accounting policy either the fair value model or cost model and shall apply that policy to all

its investment property

Under Indian GAAP, An enterprise holding investment properties should account for them as

long-term investments. Long-term investments are valued at cost less diminution in value

wherever the decline is other than a temporary decline.

FINANCIAL ASSETS

In IFRS, Financial assets are classified as four categories: financial asset at fair value through

profit or loss, held to maturity, loans and receivables, and available for sale IFRS 9 on Financialinstruments which is ma n d a t o r y f o r accounting period commencing on or after 1 January,

2013, classifies measurement category of financial assets in following categories: Amortizedcost and Fair value

In Indian GAAP, AS 30, 31, 32 which are re commendatory up to 31 March, 2011 provide for

classification of financial assets which are similar to IFRS.

EMPLOYEE BENEFIT


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In IFRS, IAS 19 provides options to recognize actuarial gains or losses as All actuarial gains or

losses can be recognized immediately in profit or loss for the period or All actuarial gains or

losses can be recognized immediately in Other Comprehensive Income, Statement or Anactuarial gain or loss that exceed the greater of 10% of the present value of the defined benefit

obligation (before deducting plan assets) and 10% of the fair value of any plan assets at thebeginning of the year is amortized over expected remaining working lives of participatingemployees (the 'Corridor approach')

In Indian GAAP, Actuarial gains or losses should be recognized immediately in the Profit andLoss account under AS 15. Actuarial gains or losses should be recognized immediately in the

Profit and Loss account under AS 15.

BORROWING COST

Under IFRS, An entity is not required to apply IAS 23 to borrowing costs directly attributable to

the acquisition, construction or production of a qualifying asset, measured at fair value

In Indian GAAP, As per AS 16.there is no such exclusion under

LEASE

In IFRS, IAS 17 prescribes initial direct cost incurred by lessor to be included in lease receivableamount in case of finance lease and in the carrying amount of the asset in case of operating lease

recognized as an expense over the lease term on the same basis as the lease income. As per IAS

17, leases of land are classified as operating or finance leases in the same way as leases of otherassets. However, a characteristic of land is that it normally has an indefinite economic life and, if

title is not expected to pass to the lessee by the end of the lease term, the lessee normally does

not receive substantially all of the risks and rewards incidental to ownership, in which case thelease of land will be an operating lease.

In Indian GAAP, AS 19 prescribes initial direct cost i.e. commission and legal fees incurred bylessor with respect to finance lease to be either charged off at the time of incurrence or to be

amortized over the lease period.. There is no specific guidance available under Indian

Accounting Standards for share based payments Initial direct costs incurred specifically to earnrevenues from an operating lease are either deferred and allocated to income over the lease term

in proportion to the recognition of rent income, or are recognized as an expense in the statement

of profit and loss in the period in which they are incurred. AS 19 excludes lease of land from its

scope.

SEGMENT REPORTING

Under IFRS, if any entity changes the structure of its internal organization in a manner that

causes the composition of its reportable segments to change, the corresponding information forearlier periods, including interim periods, shall be restated unless the information is not

available.


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In Indian GAAP, Changes in accounting policies adopted for segment reporting that have a

material effect on segment information should be disclosed. Such disclosure should include a

description of the nature of the change, and the financial effect of the change if it is reasonablydeterminable. No restatement required for prior period figures.

RELATED PARTY DISCLOSURES

Under IFRS, IAS 24 requires disclosure of terms and conditions of outstanding items pertainingto related parties. Items of a similar nature may be disclosed in aggregate but there is no

provision for 10% materiality exists under IAS 24.

In Indian GAAP, There is no such disclosure requirement under AS 18. Ordinarily a related

party transaction the amount of which is in excess of 10% of the total related party transactions

of the same type is considered material and disclosed in aggregate

EARNINGS PER SHARE

As per IAS 33 an entity shall present basic and diluted EPS for profit or loss from continuing

operations as well as discontinued operations

As per AS 20 an entity shall present basic and diluted EPS for profit or loss from continuing

operations.

CONSOLIDATED FINANCIAL STATEMENTS

In IFRS, Non controlling interest are presented as a component of equity. The portion of income

statement attributable to non-controlling interest and to the parent is separately disclosed on the

face of the income statement as allocations of income statement for the period. In any casedifference between the reporting date of the subsidiary/ jointly controlled entity associates which

is consolidated and that of the parent shall not be more than three months If the acquirers interestin the net fair value of the identifiable assets, liabilities and contingent liabilities recognized

exceeds the cost of the business combination, the acquirer shall reassess the identification and

measurement of the acquiree's identifiable assets, liabilities and contingent liabilities and the

measurement of the cost of the business combination, the acquirer shall reassess theidentification and measurement of the acquiree's identifiable assets, liabilities and contingent

liabilities and the measurement of the cost of the combination; and recognize immediately in

profit or loss any excess remaining after that reassessment.

In Indian GAAP, Minority interests are presented separately from liabilities and equity. Amount

attributable to minority interest are presented as a component of net income or loss in Incomestatement

The difference between reporting dates should not be more than six months in case of subsidiary

and jointly controlled entity. In case of an associate, there is no limit of 3 months between

reporting dates. If the acquirers interest in the net fair value of the identifiable assets, liabilities

and contingent liabilities recognized exceeds the cost of the business combination the excessshall be disclosed as capital reserve.


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INVESTMENT IN ASSOCIATES

In IFRS, Goodwill recognized with the cost investment need not be disclosed separately

Under Indian GAAP, Goodwill or capital reserves within the cost of the investments are requiredto be separately identified.

INCOME TAX

Under IAS, deferred tax is r recognized for all taxable Under IAS, deferred tax is r recognizedfor all taxable temporary differences. Temporary differences are differences between the

carrying amount of an asset or liability in the statement of financial position and its tax base. A

deferred tax asset shall be recognized for the carry forward of unused tax losses and unused tax

credits to the extent that it is probable that future taxable profit will be available against whichthe unused tax losses and unused tax credits can be utilized. When tax reporting currency is not

the functional currency deferred tax is recognized on the difference between the carrying

amount determined using the historical rate of exchange and the tax base determined using thebalance sheet date exchange rate

Under AS 22, deferred tax is recognized for all the timing differences. Timing differences are

the differences between taxable income and accounting income for a period that originate in one

period and are capable of reversal in one or more subsequent periods Deferred tax assets should

be recognized and carried forward only to the extent that there is a reasonable certainty thatsufficient future taxable income will be available against which such deferred tax assets can be

realized. Where an enterprise has unabsorbed depreciation or carry forward of losses under tax

laws, deferred tax assets should be recognized only to the extent that there is virtual certaintysupported by convincing evidence that sufficient future taxable income will be available against

which such deferred tax assets can be realized. No deferred tax is recognized when tax reportingcurrency is not the functional currency

INTANGIBLE ASSET

In IFRS, In accordance with IFRS 3 Business Combinations, if an intangible asset is acquired in

a business combination, the cost of that intangible asset is its fair value at the acquisition date.The intangible assets is recorded by the acquirer irrespective of whether the asset had been

recognized by the acquiree before the business combination The depreciable amount of an

intangible asset with a finite useful life shall be allocated on a systematic basis over its useful

life.

In Indian GAAP, f an intangible asset is acquired in an amalgamation in the nature of purchase,

the same should be accounted at cost or fair value if the cost/fair value can be reliably measured.If the same is not reliably measurable it is included as a part of goodwill. Intangible

asset acquired in an amalgamation in the nature of merger, or acquisition of a subsidiary is

recorded at book value Intangible asset acquired in an amalgamation in the nature of purchase isrecorded even if that intangible asset had not been recognized in the financial statements of the

transferor however, in case of amalgamation in the nature of merger if the intangible asset was


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not recognized by the acquiree, the acquirer would not be able to record the same. Amortization

is based on allocation of depreciable amount on a systematic basis done over best estimate of

useful life but should not exceed 10 years, unless there is persuasive evidence for amortizingover a longer period. Both finite life and indefinite life intangibles are required to be amortized.

PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES

As per IFRS, The amount recognized as provision should be the best estimate of the expenditurerequired to settle the present obligation at the balance sheet date, detailed guidance is available

on measurement A contingent asset is disclosed in financial statements where an inflow of

economic benefits is probable.

In Indian GAAP, Provisions are based on the best estimate. No detailed guidance is available. A

contingent asset is not disclosed in financial statements.

DIVIDEND

In IFRS, Presented as a deduction in the statement of changes in shareholders equity in the period

w h e n a u t h o r i s e d b y shareholders. Dividends are accounted in the year when paid.

Under Indian GAAP, Presented as an appropriation to the income statement. Dividends are

accounted in the year for which it is proposed

SHARE BASED PAYMENTS

Under IFRS, The IFRS requires an entity to recognize share-based payment transactions in its

financial statements, including transactions with employees or other parties to be settled in cash,

other assets, equity instruments of the entity.

Under Indian GAAP, The IFRS requires an entity to recognize share-based payment transactions

in its financial statements, including transactions with employees or other parties to be settled in

cash, other asset or equity instruments of the entity.

EFFECTS OF CONVERGENCE TO IFRS ON FINANCIAL STATEMENTS

We have considered the Annual report of Wipro prepared for the year ended 31stMarch 2010

where in the reconciliation of the equity as per IFRS and Indian GAAP were reported for the

year beginning 2008 and for the year ended 2009.

Wipro Limited is amongst the largest global IT services, BPO and Product Engineeringcomapanies in India. In addition to Information Technology business Wipro also has leadershipposition in niche market segments of consumer products and lighting solutions. The company

has been listed since 1945 and started its technology business in 1980. Its equity shares are listed

in India on the Bombay Stock Exchange and the National Stock Exchange; as well as on theNew York Stock Exchange in US. The 2009-2010 Annual Report of Wipro presented the

consolidated financial statement in both Indian GAAP and IFRS. Reconciliation of equity as per


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IFRS and Indian GAAP was reported for the year beginning 2008 and for the year ended 2009,

which is considered in this study for examination.

TABLE 1: OPENING BALANCE SHEET OF WIPRO-2008 COMPARISON OF IFRS

AND INDIAN GAAP STATEMENT

INFERENCES

Analyzing the opening financial statement of Wipro for the year 1.4.2008 it is observed there is

1.37% increase in the Total assets value as per IFRS when compared with the total assets valueas per Indian Accounting standards.

There is increase in the value of Net tax asset including deferred taxes in IFRS reporting by 23%

when compared with the amount reported under Indian Accounting Standard. The reason being

as per IAS 12, A deferred tax asset should be recognized for deductible temporary differences,unused tax losses and unused tax credits to the extent that is probable that taxable profit will be

available in the future to realize the tax benefits and Balance sheet approach is followed in

opening balance April 2008 (Rupees in millions)

Particulars IGAAP IFRS Difference % of change

Goodwill 42209 42635 -426 -1.01

PPE and Intangibles 41583 41344 239 0.57

Available for Sale investment 14679 15247 -568 -3.87

Investment in equity accounted 1343 1343 0 0

Inventories 6664 6664 0 0

Trade receivables 40453 40353 100 0.25

Unbilled revenue 8514 8514 0 0

Cash and cash equivalents 39270 39270 0 0

Net tax assets 3632 4486 -854 -23.51

Other assets 13980 15379 -1399 -10.01

Total Assets 212327 215235 -2908 -1.37

Share capital and share premium 28296 28296 0 0

Share application money pending allotment 40 0 40 100

Retained earnings 87908 94728 -6820 -7.76

Cash flow hedging reserve -1097 -1097 0 0

Other reserves 1807 3658 -1851 -102.43

Total Equity 116954 125585 -8631 -7.38

Minority Interest 116 0 116 100

Loan and Borrowings 44850 44850 0 0

Trade Payables 27873 27873 0 0

Unearned revenues 4269 4269 0 0

Other liabilities and provisions 18265 12658 5607 30.7

Total Liabilities 95373 89650 5723 6

Total liabilities and equity 212327 215235 -2908 -1.37

Source:Annual Report of Wipro 2010


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recognizing deferred taxes . Whereas in Indian Accounting standards the deferred tax asset in

respect of carry forward losses is recognized if it is virtually certain that sufficient future taxable

income would be available in the future to realize the tax benefits and Income statementapproach is followed in recognizing deferred taxes.

There is 10% increase in Other assets in IFRS reporting compared to Indian Accountingstandards. The reasons are because of IAS 17 Leases, IAS 18(revenue), IAS 39(Financial

instruments: Recognition and Measurement), IAS 37(Provisions, contingent liabilities and

contingent assets) and IFRS 2 (Share based payment).

Under IAS 17 Leases, leases of land are classified as operating leases unless the title to theleasehold land is expected to be transferred to the company at the end of lease term. So, there is a

reclassification of land from Property Plant and equipment to other assets under IFRS reporting

resulting in this no impact on equity. Under IAS 18 Revenue, in respect of multiple element

arrangement comprising delivered products and installation services, the Company defers andrecognizes revenue relating to installation services when those services are rendered. Earlier in

Indian Accounting standard the entire revenue is recognized when the products are delivered in

accordance with the contractual terms and the expected cost of installation is also accrued. This

has a impact on the income statement.

Under IAS 39(Financial instruments: Recognition and Measurement),loans and receivables arerecognized at amortized cost, which is carried at historical cost under Indian Accounting

standards. This has impact on the equity. Under IAS 37 (Provisions, contingent liabilities and

contingent assets) recovery of fringe benefit tax from the employees was accounted as areimbursement right as it was virtually certain that the company would recover the FBT from the

employees. Under IFRS 2 Share based payment, the FBT paid to the tax authorities is recorded

as a liability over the period that the employee renders services. In the earlier Indian accounting

standards FBT liability and the related FBT recovery from the employee is recorded at the timeof exercise of stock option by the employee. This adjustment had no impact on equity.

The total equity has increased by nearly 7% in IFRS when compared to the Indian accounting

standards. IFRS 2 share based payment each tranche of vesting interest is treated as a separate

reward and the stock compensation expense relating to that tranche is amortized over the vesting

period of the underlying tranche. Earlier Indian standard permits an entity to recognize the stockcompensation expense, relating to share option which vest in a graded manner on the straight line

basis over the requisite vesting period for the entire award. Under IFRS minority interest is

reported as a separate item within equity whereas under Indian standards minority interest is tobe presented separately from equity.

The total liability has decreased by 6% in IFRS when compared to Indian accounting standards.Under IAS 10 Events after the Balanced sheet date, the liability for dividend is recognized only

when it is approved by shareholders. Under Indian accounting standards the liability is

recognized in respect of proposed dividend on company's equity share even though the dividendis expected to be approved by the shareholders subsequent to the reporting date. Under IAS 1

Presentation of financial statement, share application money received and pending allotment is


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TABLE 2: BALANCE SHEET OF WIPRO 31ST

MARCH 2009 COMPARISON OF IFRS

AND INDIAN GAAP STATEMENT

INFERENCES

Analyzing the closing financial statement of Wipro for the year 31.3.2009 it is observed there is1.94% increase in the Total assets value as per IFRS when compared with the total assets value

as per Indian Accounting standards.

opening balance April 2009 (Rupees in millions)

Particulars IGAAP IFRS Change % of changeGoodwill 56521 56143 378 0.67

PPE and Intangibles 52563 53287 -724 -1.38

Available for Sale investment 16426 16293 133 0.81

Investment in equity accounted 1670 1670 0 0

Inventories 7587 7587 0 0

Trade receivables 50370 50123 247 0.49

Unbilled revenue 14108 14108 0 0

Cash and cash equivalents 49117 49117 0 0Net tax assets 2672 5759 -3087 -115.53

Other assets 20984 23203 -2219 -10.57

Total Assets 272018 277290 -5272 -1.94

Share capital and share premium 29667 29667 0 0

Share application money pending allotment 15 0 15 100

Retained earnings 119957 126646 -6689 -5.58

Cash flow hedging reserve -16886 -14533 -2353 13.93

Other reserves 3546 5601 -2055 -57.95

Total Equity 136299 147381 -11082 -8.13

Minority Interest 237 0 237 100

Loan and Borrowings 56892 56892 0 0

Trade Payable s 40191 40191 0 0

Unearned revenues 8734 8734 0 0

Other liabilities and provisions 29665 24092 5573 18.79

Total Liabilities 135719 129909 5810 4.28


iGAAP

IFRS


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There is increase in the value of Net tax asset including deferred taxes in IFRS reporting by

115.53% when compared with the amount reported under Indian Accounting Standard. The

reason being as per IAS 12, A deferred tax asset should be recognized for deductible temporarydifferences, unused tax losses and unused tax credits to the extent that is probable that taxable

profit will be available in the future to realize the tax benefits and Balance sheet approach isfollowed in recognizing deferred taxes . Whereas in Indian Accounting standards the deferredtax asset in respect of carry forward losses is recognized if it is virtually certain that sufficient

future taxable income would be available in the future to realize the tax benefits and Income

statement approach is followed in recognizing deferred taxes.

There is 10.57% increase in Other assets in IFRS reporting compared to Indian Accounting

standards. The reasons are because of IAS 17 Leases, IAS 18(revenue), IAS 39(Financial

instruments:Recognition and Measurement), IAS 37(Provisions, contingent liabilities andcontingent assets) and IFRS 2 (Share based payment). Under IAS 17 Leases, leases of land are

classified as operating leases unless the title to the leasehold land is expected to be transferred to

the company at the end of lease term. So, there is a reclassification of land from Property Plantand equipment to other assets under IFRS reporting resulting in this no impact on equity. Under

IAS 18 Revenue, in respect of multiple element arrangement comprising delivered products and

installation services, the Company defers and recognizes revenue relating to installation serviceswhen those services are rendered. Earlier in Indian Accounting standard the entire revenue is

recognized when the products are delivered in accordance with the contractual terms and the

expected cost of installation is also accrued. This has a impact on the income statement. Under

IAS 39(Financial instruments:Recognition and Measu rement),loans and receivables arerecognized at amortized cost, which is carried at historical cost under Indian Accounting

standards. This has impact on the equity.

Under IAS 37 (Provisions, contingent liabilities and contingent assets) recovery of fringe benefit

tax from the employees was accounted as a reimbursement right as it was virtually certain that

the company would recover the FBT from the employees. Under IFRS 2 Share based payment,the FBT paid to the tax authorities is recorded as a liability over the period that the employee

renders services. In the earlier Indian accounting standards FBT liability and the related FBT

recovery from the employee is recorded at the time of exercise of stock option by the employee.This adjustment had no impact on equity.

The total equity has increased by nearly 8.13% in IFRS when compared to the Indian accountingstandards. IFRS 2 share based payment each tranche of vesting interest is treated as a separate

reward and the stock compensation expense relating to that tranche is amortized over the vesting

period of the underlying tranche. Earlier Indian standard permits an entity to recognize the stock

compensation expense, relating to share option which vest in a graded manner on the straight linebasis over the requisite vesting period for the entire award. Under IFRS minority interest is

reported as a separate item within equity whereas under Indian standards minority interest is to

be presented separately from equity.

The total liability has decreased by 4.28% in IFRS when compared to Indian accountingstandards. Under IAS 10 Events after the Balanced sheet date, the liability for dividend is

recognized only when it is approved by shareholders. Under Indian accounting standards the


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liability is recognized in respect of proposed dividend on company's equity share even though

the dividend is expected to be approved by the shareholders subsequent to the reporting date.

Under IAS 1 Presentation of financial statement, share application money received and pending

allotment is reported under other liabilities whereas in Indian Accounting standards shareapplication money pending allotment to be presented as a separate item within equity.

FINDINGS

The total assets under IFRS is more than the Indian accounting standards by 1.94% which showsthat Indian accounting is more conservative. The most probable reasons are its fair value

measurement, difference in the basis of interest capitalization,deferred tax asset recognition and

difference in accounting for foreign currency forward contracts. It shows that the Indian

accounting standards are conservative.

The equity under IFRS has increased by 8.13% when compared to Indian accounting standard.

Minority interest are treated as part of equity and under IFRS 1 First time adoption, adjustmentsrequired to move from previous GAAP to IFRS should be recognized directly in retained or if

appropriate another category of equity at the date of transition to IFRS.

The total liabilities under IFRS is decreased by 6% when compared to the Indian accounting

standards. The provision for proposed dividend is recognized in IFRS only when it is approved

by shareholders which resulted in reduction of provision.

On analyzing the Total assets has increased by 1.18% when compared to Indian accountingreporting for the year ended 31.3.2010. The most probable reasons are its fair value

measurement, difference in the basis of interest capitalization,deferred tax asset recognition and

difference in accounting for foreign currency forward contracts. It shows that the Indianaccounting standards are conservative.

The equity under IFRS has increased by 7.73% when compared to Indian accounting standard.Minority interest are treated as part of equity and under IFRS 1 First time adoption, adjustments

required to move from previous GAAP to IFRS should be recognized directly in retained or if

appropriate another category of equity at the date of transition to IFRS as a result last yeardifference in Indian Accounting standard and IFRS continue to be the difference.

The total liabilities under IFRS is decreased by 7.14% when compared to the Indian accountingstandards. The provision for proposed dividend is recognized in IFRS only when it is approved

by shareholders which resulted in reduction of provision.


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CHART 2:COMPARISON OF IGAAP AND IFRS ON FINANCIAL POSITION AS AT

31ST

MARCH 2009

EFFECTS OF CONVERGENCE TO IFRS ON FINANCIAL RATIOS

We have examined five ratio that rely on financial statements for the year as at March 31, 2009

(1)Return on Equity defined as net income divided by book value of equity;

(2)

Return on Assets, defined as net income divided by total assets;

(3)Total Asset Turnover, defined as sales revenue divided by total assets;

(4)Leverage, defined as total liabilities divided by book value of equity

(5)Net Profit ratio defined as Net income divided by sales revenue.

TABLE 3:FINANCIAL RATIOS FOR THE YEAR ENDED 31ST

MARCH 2009 OF

WIPRO

Ratios As per IGAAP As per IFRSReturn on Equity 0.29 0.26

Return on Asset 0.14 0.14

Total asset turnover 0.94 0.93

Leverage 1 0.88

Net Profit Ratio 0.15 0.15


IGAAP

IFRS


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We examine that the Return on Equity and Net profit ratio as reported under IGAAP and IFRS

remains the same. There is a decrease in the leverage or debt equity ratio in IFRS accounting

when compared to IGAAP accounting. The reduction in this ratio in IFRS is due to increase invalue of Equity by 8.13% in IFRS accounting and reduction in value of Total Liabilities by about

4.28% in IFRS accounting when compared with IGAAP accounting.

There is reduction in return on equity mainly because of increase in the equity value by about

8.13% and decrease in Net profit by about 0.61% in IFRS reporting when compared to IGAAP

reporting.

There is reduction in Total asset Turnover mainly because of increase in Total assets by about1.94% and decrease in turnover by about 0.04% in IFRS reporting when compared with IGAAP

reporting.

CONCLUSION

The study investigates the financial statement implications of adopting IFRS by Wipro. It isobserved that the net income position in IFRS reporting and Indian GAAP is not much varied.

But there are differences in the Total liability and Equity position which is mainly because of

reclassification between Equity and Total liability. The provision under IFRS is reduced mainlybecause dividend provision is not recognized in IFRS. Fair value measurement of Available for

sale investment and the share compensation expense recognized in IFRS is higher, as in IFRS

reporting accelerated amortization of stock compensation expense in the initial years followingthe grant of options, whereas in Indian GAAP reporting recognizes the stock compensation

expenses in graded manner on a straight line basis over the requisite vesting period for the entire

award which resulted in increase in share based payment reserve. Overall the return on equity,

return on asset, total asset turnover and net profit ration are not significantly affected by

converging to IFRS but the leverage ratio shows significant change on converging with IFRS.There is also significant changes in the Total Equity and total liability position on convergence to

IFRS but not prominent changes in the Total Asset Position. All these observations make usconclude that IFRS is fair value oriented and Balance Sheet oriented accounting where there are

more transparent disclosures and Indian GAAP is conservative approach.

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3. Ball R.(2008) What is the Actual Economic Role of Financial Reporting available at

http://ssrn.com/ abstract=1091538

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